Securing funding to get a start-up off the ground is often the entrepreneur’s introduction to business financing. It doesn’t stop there, though. Financing continues as a normal part of doing business as long as a company continues growing and expanding. What an entrepreneur learns in the early stages of funding a start-up should benefit him as he tries to raise money for expansion.
Funding options for business expansion are as plentiful as those available to new start-ups. As such, company management has to be equally diligent about researching every option. Most companies will look at the four options described in this post. If none of them work out, there are others.
Where do you go when you need money? A bank, of course. We live in a culture that tends to first turn to banks when we have financial needs. It is no different in business. Companies looking to expand contact banks to inquire about small business loans. Then they go through that same application process we are all so familiar with.
Lest you think commercial banks are only for small businesses, they are not. Even large corporations take their business to commercial banks. The big downside is that this option is often limited. Commercial banks only offer a small range of products that don’t necessarily leave a lot of room for flexibility. They also have longer application processes and tighter lending restrictions.
Not all business financing has to run through big commercial banks. Private lenders are another option. Lenders like the UK’s Nationwide Corporate Finance tend to offer a wider range of loan products that are more flexible to the needs of the customer.
One of the big differences between private lenders and commercial banks is that private lenders loan their own money. By contrast, banks loan the money they receive from depositors. Just this one difference alone gives private lenders more freedom to tailor their loan products to businesses. They tend to offer a less complicated application process, higher approval rates, and very competitive interest rates and terms.
Private equity investment is another option for business expansion, but it does come with certain strings attached. Where banks and private lenders loan money in exchange for interest payments, private equity investors tend to want partial ownership of the company commensurate with the size of their investment. So while private equity investors can be more flexible, their investment does give them a real interest in the company they are investing in.
The other thing to know about private equity is that it can be difficult to get investors on board for expansion projects. Any such project will undergo careful scrutiny by investors who are very shrewd about their investments. Any decision to invest will be fuelled by a desire to use the expansion project to make more money which could, in some cases, lead to clashes between investors and owners.
The least utilised of the four options is peer-to-peer lending. When it first came onto the scene a few years back, peer-to-peer lending was the hottest thing going in financial circles. It has since cooled off to a certain degree. But it’s still an option for obtaining business financing for expansion.
Peer-to-peer lending is a scenario in which a number of investors pool their financial resources through a central platform. Borrowers go to that platform in search of financing, just as they would if approaching a private lender or commercial bank. The borrower’s application is reviewed and then a decision rendered.
Because peer-to-peer platforms are neither banks nor private lending institutions, they are free to conduct business in a slightly different way. Peer-to-peer lenders don’t have brick-and-mortar offices you can visit. They don’t have loan underwriters involved in the approval process. Peer-to-peer lending is pretty much a direct transaction between lenders and borrowers, on their own terms.
Weighing All of the Options
Your average business should be able to obtain financing for expansion using one of the four options described here. It’s up to business owners to weigh all of the options against their particular situation. Banks are the most traditional solution, but they also tend to be the most difficult option.
Private lenders are known to be more flexible and more willing to work with borrowers to find the best possible solution. They have some of the highest acceptance rates in the industry.
As for private equity and peer-to-peer lending, they are great options for companies that either cannot obtain financing from banks and private lenders or choose not to do so. Both connect businesses directly with those who will finance expansion in a manner that is surprisingly free of red tape and bureaucracy.