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If your business has been operating profitably with steady performance for some time, like most SME owners you might be looking at expansion.
Expanding your business and scaling it for further growth is the dream of most entrepreneurs but it can also be a very stressful process.
Proper planning, forecasting and great execution is critical.
Planning your expansion and growth means carrying out onerous amount of due diligence. This may include other areas of research that may include studying market trends, competitor research and gauging total market demand.
Is the timing right?
Timing is critical when ramping up growth. There are countless failed ventures with innovative ideas that were adopted by the mainstream market only in later years. These startups failed because their ideas and product were too far ahead of their time when launched.
You do not want to be too far behind your competitors as well to lose the first mover advantage.
Do you have enough data to show that your expansion plans are validated or are you basing your reason on your gut feeling that a wider audience will pick an interest in what you’re offering?
Apart from quantitative questions that hard data and analytics can help with, there is also the qualitative aspect.
Which is, is this really want you envision for your business? If you are very comfortable with your current business model and the risk versus return equation, perhaps the time may not be right for an expansion.
There are numerous entrepreneurs whom took on excessive risk by taking out business loans to finance their expansion plans. If these plans eventually do not materialize positively, personal bankruptcy is definitely a very real possibility.
If you move too fast, you may not be able to cope with the way your company is changing. Rapid growth within a short period of time will usually change a company’s existing culture, process and models to some extent.
Will there be demand?
Have you identified where your growth market will be? Who will you be selling to and what is your ideal buyer persona? What is the total addressable market size?
You should have a clear idea of who your target market is.
It is always easier to sell a product or service with an existing market then to create a market for a new product or service.
Some deep assessment is required of the present state of your business. Have you adequately addressed the needs of your current customers? Do you already practice customer segmentation to improve your margins?
Are there any other ways you can market and cross sell other complementary products or services to existing customers? What is your wallet share of your existing customers compared to competitors?
Also consider the general macro-economic environment. Is the country you are operating in currently in expansionary phase or recessionary cycle?
Are consumers in your target market spending more with rising discretionary income or are they tightening their belts in view of poor hiring sentiments?
Building a team
No matter how visionary you are as an entrepreneur, without a strong and able team executing your plans there’s no way your expansion plans will work out.
When you take that bold step to scale up, you want only the most dedicated and trusted people on ground. You need to hire for the right fit with your organization’s culture and direction. Attracting talent and retaining them will be an important skillset.
You definitely need more hands on deck to cope with the expected increase in workload and volume. Pace your talent acquisition and make sure you have a system in place (SOPs) to make sure new hires can onboard and get up to speed fast.
And remember those who have been part of your business from the beginning. If your existing team seem like they can take on more responsibility and are committed enough, by all means allocate more duties to them.
The moment you go big, you are going to have to deal with less of the pixels and more on the big picture. Utilize the capable hands at your disposal to run the gears while you dedicate time on strategy and planning.
If need be, outsource and delegate non-essential processes such as bookkeeping to external vendors to keep your team lean.
Fail to plan, plan to fail
The moment you scale up, things are going to get much more complicated in your business.
Instead of managing by your gut feel and industry experience, you need to implement systems and processes in your business.
Before scaling up, carry out an assessment on your current processes. Are you able to identify certain repeatable processes that can be automated via technology?
Are there any hidden business costs that you can further eliminate by implementing more efficient internal processes?
Are your existing staff trained in other areas aside from their main role? Will there be someone else who can step up as replacement in the event if any one personnel is not around to discharge their key role?
Without proper implementation of systems and processes, you will be burnt out quickly when you scale. There will be many contingency situations where you are required to put out fires and keep the plates spinning.
Ensuring the right vendor support
Ultimately, when you scale up your business, you are going to be needing more of everything.
Therefore, ascertain if your vendors can meet up with your increased demand.
If you foresee there might be cash flow gaps with an increase in purchases volume, you can also utilize banking facilities such as trade financing as an instrument to finance your supply chain.
It is important that you are able to cater to the needs of your clients as your target to reach a wider audience and expand your reach.
Discuss with your vendors on production forecasts and ascertain their production capacity to ensure no major disruptions to your supply chain.
Your business's current financial health is the number one factor you need to consider when thinking of expansion. Regardless if you’re targeting organic growth or through acquisitions, you’ll definitely need cash.
Ensure that you have got enough cash flow to sustain your expansion plans. Be conservative when doing up your cash flow forecasts and always provision for the worst case scenario.
You will need a reasonable amount of funding to propel your growth. If your initial business entity is an unlimited liability entity, you might need to seek a sole proprietorship business loan.
If these funds are not readily available, there are always alternative sources of funding that you can pursue. Applying for a SME loan in Singapore is the most common way. Other funding sources in the form of an investor or a venture capitalist can be explored as well if you don’t mind parting with equity.
There are also other government grants and government assisted financing schemes such as the Temporary Bridging Loan Programme and the SME Working Capital Loan that you can tap into to aid your plans.
Situations where you need to apply for a SME loan
If your expansion plans falls into place and you start experiencing an exponential growth, this is also a good time to apply for SME financing.
You’ll need more working capital to finance your rapid expansion including buying more inventory, purchasing equipment, conducting mass hiring and moving to a bigger location.
Anticipate cash flow for your expansion needs well in advance so you can plan ahead on your financing.
Cost of essential supplies increasing rapidly
At times, the cost of essential supplies or raw material for your business might increase higher than usual.
Due to external economic, freak weather events or political factors which are not within your control, costs may escalate on some supplies.
For example, sea shipping logistics costs increased sharply during Covid-19. This might impact importers.
Soft commodity prices like sugar and rice are also affected by exporting country’s weather condition. An increase in food commodity prices will hit F&B industries.
When you are anticipating a spike in raw material costs, take pre-emptive steps to react.
Without holding power, if you pass on the cost increase to your customers, your revenue and market share might take a beating.
Before you devise a new strategy to meet this challenge, (either by diversifying supplier source and pivoting to other related business), you should start sourcing financing to buy yourself some time before planning your next move.
Pivot in business direction
You might identify certain risks or spot opportunities to pivot your business in a new direction.
All businesses undergo changes and pivot in direction over the long term as nothing stays static.
If you’re planning for a major change such as:
- Introducing new product line or service with considerable lead time
- Initiating a franchise model for your business
- Preparing for a potential merger and acquisition
- Downsizing or expanding physical locations of stores
- Climbing up the value chain i.e. switch from distributor to be manufacturer
You might want to factor in your financing plans in your change strategy as well so you are well prepared and capitalized.
If you’re in a seasonal business such as retailing of winter wear or selling Chinese New Year food stuff, you should plan financing appropriately.
Try to apply for revolving credit facilities such as bank overdraft during peak periods to help cope with the corresponding increase in purchases and business expenses.
Apply for term loan during the tail end of your business’s peak to ease out cash flow during the subsequent lull periods.
Cyclical downturn and economy slowdown
As a small business owner, you would most likely be able to sense an impending downturn or slowdown in your industry or the general economy before the media starts reporting about it.
If you anticipate an economic recession brewing, do apply for a business loan for working capital cushion before it’s too late.
In a recession, most banks will cut lending to SMEs or even stop lending to the entire small business sector. Credit will be very hard to come by with the banks’ credit tightening.
SME lending is generally deemed as a high risk segment for most banks and lending to small businesses usually slows in a recession.
Once you anticipate a recession or slowdown, do prepare to apply for a business loan in advance.
Why not to say to your bankers
Regardless of which of the scenarios shared above you're applying financing for, here are some common statements you should never say to your banker if you don’t want to jeopardize your chances of approval.
No specific plans for funding usage
You might not have a concrete plan on how the funding will be used and are applying for “standby funding”.
Banks will need to ascertain at a bare minimum what is your intended usage of funds and for what purpose.
Before submitting your application, do come up with some specific use of funds for your business so you can provide an answer when the banker asks.
Objecting to bank’s concerns on deficiencies
Bank's credit approvers will typically raise concerns and queries on an applicant company's financials, cash flow or business model when assessing an application. That is their job.
However, most SME owners remain perturbed and offended by this line of questioning.
"If I can meet your criteria and am financially sound, why would I still need to apply for a loan?"
This is the most common comment we hear from SME owners whom might not be able to qualify for a loan.
Many SME owners will always think that if they can meet all the bank’s onerous credit criteria, there’s no need for a loan in the first place.
Unfortunately, banks are listed entities answerable to public shareholders as well as government regulators. It is to be expected that banks will have a robust credit assessment process in place to minimize non-performing loan risks.
No specific funding amount requested
It’s easier for the bankers to work on your SME loan application if you can articulate clearly what is the exact amount of financing you need.
If possible, produce documents such as purchase order from your customer or quotation for an equipment you’re looking to buy.
These supporting documents can help to justify the amount of loan you require.
If you are not sure of the specifics on what should be disclosed and what not to say to the banker, you might like to consider engaging an SME financing specialist to assist you with the application process.