How to Fund Business Growth

Growth usually costs money before it makes money. New staff, premises, equipment, stock and marketing tend to be paid for upfront, while the extra revenue builds over time. Funding can bridge that gap, but only if it fits the plan and the business can afford to repay it.

This guide sets out a practical way to plan growth funding, from defining what you want to achieve to choosing the right type of finance for each part of the plan.

Define the growth plan first

Funding should follow the plan, not the other way round. Start by writing down:

• what the growth is, such as a new contract, product line, location or market
• what it requires, including people, equipment, premises, stock and systems
• when each cost will fall due
• when the extra income is expected to arrive and how confident you are in it
• what could delay the plan or increase its cost

A clear plan helps you work out how much funding you need. It also helps a finance provider understand the request.

Forecast the cash you need and when

A profit forecast shows whether growth will pay off. A cash-flow forecast shows whether the business can survive getting there. You need both.

Build a monthly cash-flow forecast covering the growth period. Include the timing of customer payments, supplier payments, wages, VAT, existing loan repayments and the new costs from the plan. The forecast usually shows a funding gap that peaks at a particular point and then narrows as the new revenue comes through.

Test the forecast against less favourable assumptions. What happens if a key customer pays late, sales build more slowly or costs come in higher? A buffer for these scenarios is often the difference between growth that works and growth that strains the business.

Match the funding to the purpose

Different parts of a growth plan suit different types of finance. Using one facility for everything can leave the business with the wrong repayment profile.

Investment with a longer payback. A business loan can fund investments such as fitting out premises, recruitment, marketing or mobilising a new contract, with repayments spread over a term.

Equipment and vehicles. Asset finance spreads the cost of an asset over an agreement, often secured on the asset itself. This can preserve cash for other parts of the plan.

Growing sales on credit terms. As turnover grows, so do unpaid invoices. Invoice finance is linked to the sales ledger, so the funding available can grow as invoicing grows, subject to the provider's terms.

Stock, suppliers and running costs. Working capital finance can help cover the day-to-day costs of trading at a higher level. Our guide to working capital finance vs a business loan explains how these differ.

A useful principle is to match the length of the funding to the life of what it pays for. Short-term needs suit short-term facilities, and long-life assets suit longer agreements.

Watch for overtrading

Overtrading happens when a business takes on more work than its cash and working capital can support. Sales rise, but cash is tied up in stock, work in progress and unpaid invoices, and the business struggles to pay suppliers, staff or tax on time.

Warning signs can include relying on the overdraft more each month, stretching supplier payments, falling behind on tax payments or turning down work because you cannot fund the costs. A cash-flow forecast helps you spot this early, and the right working capital facility can help prevent it.

Borrow what the business can service

Growth funding has to be repaid from the business's cash flow, including in a slower month. Before committing, check that the repayments fit within the forecast under cautious assumptions, not just the expected case. Consider existing commitments and any personal guarantees directors are asked to give.

Borrowing more than the plan needs adds cost and risk. Borrowing too little can stall the plan halfway. A commercial finance intermediary such as Emirex Finance can help you assess the requirement and explore options that may fit. Our guide on how much a limited company can borrow covers how providers approach affordability.

Key points

• Define the growth plan and its costs before deciding how to fund it.
• Use a monthly cash-flow forecast to find the funding gap and test it against less favourable assumptions.
• Match the funding type and term to each purpose in the plan.
• Watch for overtrading and only take on repayments the business can comfortably service.

This guide is general information, not financial, legal or tax advice. Finance is subject to status, eligibility and approval by the relevant finance provider. Emirex Finance works with UK limited companies only and is not authorised or regulated by the FCA.