Whether for replacing obsolete equipment to ramp up production, expanding your business to an additional location, or both, financing a growth strategy invariably requires an amount of money the average small business owner just doesn't have lying around.

Unless you have a surplus of free capital lying around, you’ll likely want to attract support from an external lender, whether that’s a bank, a personal investor or some other financial player capable of providing that eagerly sought after funding injection. But how to make a strong case investing in your operation will pay off?

Just how much debt can you take on?

The first step should be taking a good hard look at the company’s financial picture and determining how much debt it can reasonably take on now and years from now. According to ATB Financial business strategist Dustin Paisley, no matter how large it grows, a business that’s overleveraged itself will suffer long term from the burdens of paying off the debt.

As an entrepreneur, Paisley co-founded Local Laundry in Calgary. The socially-minded apparel company sells high-quality casual wear items, all designed and made in Canada, through its website LocalLaundry.ca.

Even with financial constraints unique to the clothing industry- high inventory and warehousing costs among others - Local Laundry has grown steadily since it was established in 2015. The company projects to pass two million in total sales by the end of 2020.

Local Laundry opted for a “slow-growth strategy” to keep its debt levels low, says Paisley, eschewing more traditional forms of capital investment, like a sizable bank loan. Profits are instead reinvested back into the company and nearly all of the production and design work is outsourced to manufacturing partners.

“We operate extremely lean and that’s always been the name of the game for us,” says Paisley.

Local Laundry’s growth strategy was inspired from the failures of struggling businesses which all seemed to have one thing in common.

“It was always their cash flow that was the issue, because of financing and being over leveraged, so (Local Laundry) never wanted to go that route,” says Paisley. 

Get real about your business plan

Paisley recalls a recent loan applicant seeking a sizable injection of equity to launch a restaurant. The plan of the first time business owner initially was to spare no expense in constructing the state of the art restaurant space of her dreams.

Startup costs alone were projected to cost well over half a million dollars, and the applicant had only committed to funding around 10 percent of the construction budget from her own money. The business plan presented, however, was suitably impressive, and there was an interest to offer financing, says Paisley.

Still, no bank was going to offer the entire amount sought after by the first time entrepreneur. For one thing, a typical startup’s operating costs at the onset of the business are often higher than expected, requiring extra cash on hand. Even with financing, the would-be-restaurant owner was sure to be hundreds of thousands of dollars short of the projected budget.

Faced with this reality, the applicant revised the numbers, finding she could lower her startup costs significantly without sacrificing too much of the original vision. With the entire financial picture layed out for her, the applicant was able to come up with a workable plan.

“Whatever your plan, let's paint a realistic picture and then figure out where you fall into that,” says Paisley.

“It’s laying the whole picture out to say, here’s the (financial) reality. Here's where your idea, or your funding model, fits within this reality. And if you want to go this route, here's what you need to do. In many cases, this means adding to your team. Whether it's a business partner with cash, an outside investor, or simply capital raised from family and friends, more non-debt based cash is often the best answer.”

Go over your financial books (then go over them again)

Understanding your company’s complete financial picture will allow you to plan contingencies for potential dry patches when the need for financing is greatest. Paisley strongly recommends tracking the business’ cash flow on a regular basis, whether that’s weekly, biweekly or monthly. You should have an idea well before end of year calculations whether you’re making money.

Knowing where the company stands is just good fiscal sense and will strengthen the chances of financing. Just as important, it will greatly diminish the need to resort to riskier financing options such as lenders of last resort whose support will invariably have many more strings attached, such as higher interest payments, than a traditional lender.

If there’s just no better financing alternative than a risky loan, Paisley strongly recommends halting the plan until conditions improve.

“If you're not getting support from investors, or from anything or anyone you know, the project itself may come into question,” he says.

Assess your financial options

Walk down any street in the country and if you see a pizza shop or some such small retail operation, chances are it was established with government assistance.

The Canada Small Business Financing Program guarantees loans of up to $350,000 for anyone who is eligible and looking to purchase leaseholds and equipment for their business. The program is backed by Industry Canada and administered through financial institutions similar to that of a regular bank loan.

“One advantage for borrowers is not having to provide as much of a personal guarantee to qualify. Traditionally, to qualify for a loan to open a business, you’re going to have to provide a 100 percent personal guarantee,” says Paisley. “With the government loan, this personal guarantee can be reduced to 25 per cent depending on the risk.”

Another benefit to the federal small business loan program is the lending institution is able to increase accessible funds to a maximum threshold of $350,000 because of the government's support.

Such programs are perfect to finance leaseholds or equipment and materials, purchases other lenders are unlikely to support, says Paisley.

“It’s not often you’re going to get secured funding,” says Paisley. ”If you buy a $250,000 machine for your business, under the small business loan program, in some cases you can get the entire amount for that piece of equipment.”

While there’s plenty of government support out there for technology and innovation, some ideas won’t attract much institutional interest.

In those cases, like funding the development of a mobile video game for example, popular crowdfunding options like Kickstarter or Indiegogo make more sense. What’s more, if such a project proves a success, it could create credibility in the eyes of a lender to perhaps support another financing plan down the road.

“That obviously shows there’s some validation there,” says Paisley. “The biggest risk for any brand new business is there’s not going to be any customers. But if you know there’s cash up front (from crowdfunding) to help finance the orders, that’s really key.”

Feel free to reach out to one of our entrepreneur strategists to explore where you are with your business, where you want to be, and how to get there!