Most often, the decision to expand is followed by the need for access to capital which can be obtained from financing or liquidating assets. Both options favour sound business operations.
According to RBC‘s Starting a Business Guide, when you developed your business plan, you likely created cash flow projections and financial statements which helped you to think about the amount of cash needed to cover the monthly operating expenses of running the business. As you get ready to expand, it is important to update projections to include the expected change in cash in and out. Successful business owners know that having an accurate financial snapshot of how the company is doing today, what it will look like following an expansion and how targets will be met, is necessary preparation for raising capital.
Other ways to prepare include the use of basic management tools or accounting software (the fundamental building blocks to keeping you informed of your company’s financial status) to keep track of cash flow. This will help to ensure your company has sufficient funds to meet current and new obligations, and still make a profit. Also, make sure you have a solid credit rating and ask for credit when things are going well. Ask for credit when you don’t need it, so it is there when you do.
Connect Legal suggests you ask yourself:
- What is the true cost of each type of financing? Credit cards and loans can be very expensive. Check the interest rate: is it fixed or can it be raised? If borrowing money from family and friends, when do you need to pay them back and will you owe interest?
- Do you have a business plan? Some lenders and investors will require it.
- If you sell part of your business to an investor, what rights will the investor have in the business?
Connect Legal also recommends you have a clearly written agreement with lenders or investors (even if they are family) outlining the terms attached to the money. Talk to your bank or local micro-lender to learn how you can become a borrower. This may be a good time to attend a financial literacy class.
This is intended as general information only and is not to be relied upon as constituting legal or other professional advice.