Deciding to grow your business brings new challenges – where to get the money needed for expansion? Successfully developing operations, it's likely that the company will already have a substantial financial reserve, part of which can be used for investments, but for businesses that have only recently entered the market, the only option remains to look for other financial sources. Indeed, even if there is an opportunity to invest in business expansion oneself, it is not always the most cost-effective option. The head of the business loans department at the crowdfunding platform 'FinoMark' advises on how companies should decide – to invest or borrow.

First, properly prepare for expansion

Before committing to business expansion, whether planning to invest company funds or borrow, it is first necessary to ensure the company’s stability – to accumulate an untouched reserve of funds in case the business encounters an unexpected critical situation. "During my years of work, I have seen many cases where a company was very profitable, but a changed political situation in Europe or just one or several suppliers not settling their accounts forced companies to close. Some of them, if they had had reserve funds, would likely have overcome the difficulties and got back on their feet quickly," comments Emilija Poškonienė, a representative of 'FinoMark'.

According to her, to invest in business expansion, it is optimal to follow the 50/50 rule, i.e., invest half the funds from one’s own and the other half from borrowed money. In this way, the company will not use up all its accumulated reserve, and the loan will not be as large as borrowing the entire necessary amount, so the payments will also be more manageable each month.

Or is it still worth taking a business loan more?

Although it is usually recommended to split funding sources into two similar parts, it is worth delving deeper into your business model and situation. There are many cases where borrowing money from crowdfunding platforms can ultimately pay off better and faster for a company than investing its own funds.

"Many companies apply quite long payment deferral terms for their clients. In such cases, a company may face a significant lag before receiving payments. If a company encounters such situations, it might be more beneficial to consider borrowing rather than allocating company funds for expansion. Taking a business loan and directing it towards growing operations, it is likely that the company will receive more orders and make a higher profit than waiting months for payments that hinder business growth," says E. Poškonienė.

Borrowing funds makes it easier to expand the customer base, which can seem tempting. However, before rushing to borrow, it is also necessary to assess whether the company will face difficulties in repaying the loan. If the business is still very new, does not have a base of customers, or at least contracts with prospective customers, it is better not to risk thinking that borrowing will kickstart the business, start generating profit, and easily repay the loan. For newcomers still weakly established in the market, it is recommended to invest their own funds into business growth. Thinking about a loan can be considered when the company has gathered at least a small but regular customer base.

Thorough homework – a must

Deciding to take a business loan, it is necessary to ensure that the company will be capable of repaying it. One way to calculate this is to determine what size payment the company is capable of making each month, considering the amount needed. This will make it easier to set a loan term that does not create difficulties. The 'FinoMark' representative also advises calculating how much the company plans to receive in assured orders per month, how long it plans to sell goods or services, and what markup it intends to apply. A clear assessment of the situation will allow a better understanding of whether the loan will help the company implement its planned expansion or hinder it with large monthly payments.

The significance of such homework is also emphasized by Arvydas Juozeliūnas, director of the clothing, footwear, and accessories store network 'F8', who recently used a business loan for working capital to open another store in Kaunas.

"Checking whether you can repay the loan requires quite a bit of work: clarify your business model, answer clearly to questions about what services/products the business sells? Who are the typical customers? How many customers does the business have? If the company trades, from how many suppliers does it buy production? Is the activity sustainable? Will it be a big shock if we lose a few clients or suppliers? Preparation is extensive, but the most important thing is to believe in what you do and act decisively. For us, the professionalism of the lending platform was also important – whether decisions are made quickly and the loan is granted, whether the information is clearly presented. At first glance, the financing process may cause fears due to unclear processes and documentation. So, choosing a quality service financial institution is also very important," shares the representative of the 'F8' brand.

Having now achieved the set goal of opening a store, the interviewee says he continues to look towards greater expansion. Wisely distributed funds helped A. Juozeliūnas more easily reach the planned goal; the store network's expansion used part of its own funds, part borrowed on a crowdfunding platform.

"I would recommend taking out a loan when the brand is growing rapidly, and the set goals require more investment. Opening a store in one of the largest shopping centers in Lithuania, we reasonably expected an increase in customer base, sales, and recognition. However, if the company is not yet established, plans slower growth, I would plan expansion from the company's own funds," shares his experience the interviewee.