Blog>Trade>Growing your trade business>How to finance business growth
Last updated: 9 October 2023
How to finance business growth
Financing business growth is an essential step to success for tradespeople. In this article, we look at how to start and what to look for.
Every tradesperson has an eye on the future and how they can grow their business. There often comes a point when their thinking turns to how to finance business expansion.
There are various options for financing business growth. The first thing to get started is to answer some key questions.
These will help steer you to the type of financing for business growth that best suits your ambitions.
Getting started
As a tradesperson, you may be thinking about how to finance business growth. First off, you need a plan. Start by preparing a checklist to help you decide how best to finance business expansion.
This can be part of thinking widely about your future. Writing a business plan or creating a business development strategy are both good starting points.
Questions to ask about how to finance business expansion include:
Why do you need finance?
What will you use it for? Typically, financing for business growth is for:
Buying business assets, such as plant, tools and equipment
Moving into larger premises so your business can keep growing
Taking on more work and larger contracts. You might need money to cover additional expenses, like materials or vehicles. There are lots of ways you can grow your business by increasing sales
Growing your business by entering new markets or regions which requires financing for for things like marketing activities
Expanding your business by entering a partnership with another business or by acquiring another business
Helping with the day-to-day running of your business. A regular flow of income provides a foundation for building a business, especially when cash flow is uneven
How much finance do you need?
Make sure you consider everything you need to finance your growth. It can be time-consuming and expensive to keep applying for additional financing.
How quickly do you need the money?
If you are in quick need of cash, this could affect where you obtain financing for business growth. When your cash flow is weak, it could cost you more to borrow.
If you can, it’s better to give yourself plenty of time to go through the process of obtaining finance.
How will you repay it?
You need to be careful not to overstretch yourself in financing business growth. Think about things like how you will repay the amount you borrow. This needs to include interest that might be charged on the business finance**.**
How long will you need to repay it?
This is another important affordability consideration. Depending on the method you choose, financing for business growth can be spread over the short term or for much longer.
Short-term financing for business growth
This focuses on day-to-day finance for business expansion over shorter periods, probably up to a year. It includes typical business financing like:
Bank overdrafts
Business debit and credit cards
It could be a practical option if you win a large contract. You might need cash to buy materials before you get paid for the work. It might be handy if you want to buy a capital asset and plan to repay the borrowing quickly.
The interest charged on these types of finance is very high, so you should have a clear idea about how quickly you can pay it back.
Get help managing your company finances
Checkatrade members get an exclusive deal with Powered Now
Long-term financing for business growth
Most financing for business growth is made on a long-term basis. This is usually anything from three to five years and often longer.
Loan financing incurs interest and is repaid over an agreed period. You need to be comfortable with affording the repayments and the length of the loan.
Having sufficient cash flow is important. A benefit of loan finance is that you can include loan interest as a business expense. This reduces your taxable profits.
Here are some examples of how to finance business expansion:
Bank loans
These are usually either unsecured or secured. An unsecured loan is one of the most common types of bank loan. The lender will need carry out various checks on you and your business before they provide financing.
A secured loan is secured against business assets. This means that if you fail to keep up payments then the lender can repossess the assets.
Think of a secured loan as being like a mortgage, which comes with the warning that ‘your property may be at risk if you don’t keep up repayments’.
Secured loans tend to be at lower rates compared with unsecured versions. Lenders know they can repossess the secured asset if needed so are happy to lend at a lower rate.
Asset-backed finance
This is a type of secured loan where finance is secured against assets. This kind of financing is usually only available to businesses with a well-proven trading track record.
The ‘security’ can be business assets, like plant and equipment or premises.
Government loans
There are plenty of sources of finance for business growth that are government-backed or government-supported.
One option is a government Start Up Loan. These are available for £500 to £25,000 to start or grow a business.
The loans are unsecured and you will need to go through a credit check first. There is a fixed interest rate of 6% per year on start-up loans and they have to be repaid over one to five years.
Along with the loan, the government also provides free support and mentoring. Loans are provided by various sources, including the government-owned British Business Bank.
Finance for buying capital assets
Business expansion often requires buying new plant, equipment and machinery. There are specific types of financing for business growth that covers this. Examples include:
Hire purchase – you usually own the asset at the end of the contract period
Lease finance – you don’t own the asset at the end of the contract
Personal sources of finance
Tradespeople often put their own money into their business. If you don’t have personal savings, family and friends can often be enthusiastic financial backers.
The key thing here is to agree on the finance arrangements in advance. That way, you are less likely to disappoint or upset those you rely on.
Make sure everyone understands:
How much finance they will give you
What they will get in return – for example, you might agree to pay them interest on their loan
When their loan will be repaid
What happens if you can’t repay their loan
Bringing in outside investors
Tradespeople whose business is a limited company can access finance in other ways. It usually involves offering shares in your company in return for finance. This type of funding is called equity finance.
It means you are giving up ownership of some of your business in return for finance. You could also be giving up some of the control of your business.
Sometimes that meYou may be required to report regularly to outside shareholders. You might also have to pay shareholders dividends from your profits.
Usually, investors are there for the long term. However, you should make sure you know what to do if they want to withdraw their investment.
Get help managing your company finances
Checkatrade members get an exclusive deal with Powered Now
New financing trends: crowdfunding
The internet and social media have opened the door to new types of finance for business growth. One of these is crowdfunding.
It’s an increasingly popular way for businesses to raise financing. The finance is usually provided by lots of individuals.
With crowdfunding, you ask people for finance by making a compelling case for them to lend. Crowdfunding platforms include GoFundMe, Crowdcube, Crowdfunder and Seedrs.
There are a lot of steps to go through so the online crowdfunding platform can make sure your business is suitable. You have to pay fees to the crowdfunding platform.
Two examples are:
Crowdfunding made between businesses is called ‘peer-to-peer’ lending. Interest rates can be lower than those charged by banks or other lenders
If your business is a limited company, you can offer shares (equity) in your business in exchange for finance. This is called equity crowdfunding
FAQs
Why would I need to finance the growth of my business?
Tradespeople use finance to make major steps in their business expansion. This includes taking on bigger contracts, buying business assets and entering new markets
How do you finance business growth?
There are lots of ways to finance business expansion. Tradespeople should carefully assess which type best suits them and make sure the finance is affordable
Do you always have to repay the money you borrow to finance business growth?
Usually, yes. Loans and similar types of finance charge interest and are repaid over an agreed period. Finance from family and friends or by selling a stake in your limited company may have different repayment requirements
Ready to take your business to the next level?
We can help you get there
