Not all small businesses remain ‘small’ in the strictest sense of the term, and the time comes when any moderately successful business feels the need to expand. However, indiscriminate expansion can often kill a small business as surely as skewered cash flow management or unfair trade practices. Therefore, knowing when and by how much to expand is a crucial factor that a small business owner must keep in mind while planning an expansion. “The trick is to optimize your resources rather than aim for the sky and fall flat on your face,” says financial consultant Arnold Sayers.
Jeremy Coney, who runs a family business of ceramics, says the first step in expanding a small business is to determine whether it will increase production and if so, if you have the demand to justify the increased production. “Too often, one comes without the other, so that production is increased without either the infrastructure to keep it going, or the means to distribute effectively.” As example, he cites his own decision to take on more staff to spread his marketing network. “It was only when I was assured that I could support an increase in production that I decided to increase the demand,” he says. For Jeremy, yet another motivation to expand was lack of storage space. “I found that I needed to keep more inventory because price fluctuations meant that I could not always have the option of immediate procurement of raw material or finished goods. So I had to invest in a warehouse facility,” he explains.
For Tara Adamson of Manchester, New Hampshire, international orders for her customized footwear led her to consider localized points of sale, a move that nearly broke her business. “I went ahead with fixing franchises in Europe and getting them to form a network without adequately analyzing the demand, and then found I just didn’t have the returns to show for it,” she says. “I had also invested a fair bit in automating parts of the business, and incorrectly calculated the maintenance costs,” she says.
Tara also made the mistake of hiring extra personnel to operate the automated machinery instead of training some of her existing staff. “For a business that does not depend on mass production, an influx of extra manpower can be dangerous,” she says. “And I realized that I needed to maximize my use of the Internet to reach international clients rather than incur extra expenditure by trying to set up physical points of sale.”
Yet another problem in expanding a small business is the question of funding. Typically, most small business owners will seek a business loan to expand operations, but the danger here is that if the expansion doesn’t go according to plan, the business can very easily end up in the red. “Not only are you faced with the prospect of trying to revive a dying business, but you have also acquired a history of bad credit, which makes future funding difficult to obtain, or at least difficult to obtain on your terms,” says Arnold.
One reliable source of funds is the SBA, or Small Business Administration, a branch of the US Federal Government that helps small business ventures and provides a variety of loan programs on easy payback terms. The SBA also offers many types of grants that are meant to indirectly benefit small business owners, by way of aiding those organizations that provide technical or financial assistance to small businesses. So monetary grants from the SBA usually go to state and local governments, and non-profit organizations that act as lending institutions.
So when expanding a small business, the owner can turn to these institutions for financial aid. He will need a concrete expansion plan and meet certain basic criteria to avail the loan. The SBA also has special programs in place for women and ethnic minority groups that are designed to encourage independent ventures and expansion of existing businesses.
Tara, who resuscitated her business with the aid of an SBA grant courtesy a non-profit lender, says the grant was the only option she had because she was too unstable to gain approval for a bank loan and too jittery to approach non-conventional lenders because she feared having to make huge down payments and astronomical interest rates. “With SBA, though I couldn’t borrow the amount that I wanted, I was at least secure about repayment terms and knew I had no chance of defaulting,” she says.