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How to Avoid the Perils of Business Growth

Growth is usually a sign of business success, but it requires planning to keep your cash flow, debt and expenses in balance.

Growth can be a double-edged sword for small and mid-sized businesses. Growth represents progress, and it’s certainly preferable to the alternatives: stagnation and decline. It also offers rewards and new opportunities for the company’s leaders and employees.
Unplanned growth, especially if very rapid, can lead to significant financial and operational problems and, in a worst-case scenario, business bankruptcy.
To avoid such dangers, owners should plan their business growth strategically instead of growing for the sake of growth.
If you’ve hit a plateau and are wondering if you should take steps to grow your business, consider the following carefully.


Managing Business Cash Flow

Small business success is all about managing cash flow and working capital. This means the first step in planning for growth requires a thorough understanding of how growth will impact cash flow, debt and expenses.
You don’t want to carry too much debt relative to income, and you don’t want fixed costs to become too high. Both situations are warning signs that growth is hurting your company.
Instead, project the costs involved in the expansion and decide if those costs can be covered by your current cash flow. If you don’t accurately project your cash flow needs, expansion may result in undercapitalization and jeopardize your business.
By planning for growth, a company can build a firm foundation to support the expanding business. For instance, a business might develop new services and products that will support future growth through predictable increases to monthly cash flow. Another company might diversify their client base geographically to ease the future impact of regional economic downturns.


Financing Your Business Growth

Most businesses rely on some type of cash infusion to fund a growth initiative. Sometimes business growth can be funded using retained earnings in the business, but more often, owners need to turn to an outside financing source for additional working capital — typically a business bank.
However, business loans are not a one-size-fits-all product. You need the right type of loan for your particular growth plans.
For example, most growth initiatives are long-term endeavors so the business funding should come from long-term financing. This means you don’t want to finance equipment and real estate purchases with a line of credit.
A term loan, equipment loan or lease is a better option for financing these kinds of assets, leaving your revolving credit open to fund true working capital needs.
Part of planning for growth is figuring out at what point the business will be stabilized financially and then projecting future cash flow based on this.
If a company is growing rapidly, stabilization might not occur for two to three years or even longer. There will be cash flow challenges during this time, which can lead to severe undercapitalization if not planned for in advance.
Term loans, construction loans, commercial mortgages and Small Business Administration (SBA) loans are a few of the other options that can be used to help fund business growth.
Equity, meanwhile, is the sale of business ownership interests to outside investors in return for cash to fund growth. Private equity firms, venture capitalists and angel investors are the most common sources of equity financing.
Which type of growth financing is best for your business? Each has advantages and disadvantages. The choice is made by deciding which one is best for an individual company’s growth targets.


Experienced Advisors Are Key

The key to successful small business growth is for owners to surround themselves with advisors who are experienced in helping firms in their field grow. This includes the company’s financial team, your CPA, attorney and business banker.
Part of planning for business growth is identifying whether you have the right financial team in place. Your CFO may know how to manage a $3 million company, but not a $36 million one.
The same with your attorney or CPA. You may need to bring in outside consultants with more specialized knowledge or practical experience than the consultants who helped your company in its early days.
Contact a Cadence Bank specialized business banker today for help navigating the challenges of business growth.

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