Scaling up – getting the right funding for your expansion project
If launching a new business is a daunting concept, scaling up for the next stage of expansion can be even more so. Food-to-go businesses, perhaps more than any other sector, need to evolve to survive, and expansion is often the logical answer. Understanding the choices available is essential to this process, writes Victoria Symons, a partner at law firm Cripps.
The list of initial decisions is long: How should we grow? When is the right time? What do we want to achieve? Are we looking at increasing recipes, volumes or premises? Whatever the answers, expansion comes at a cost.
Some fortunate readers will have built up a ‘war chest’, but just because you can afford it doesn’t mean it’s the right choice. Removing a cash comfort blanket can leave you exposed in a falling market and using the funds in other ways (eg buying premises or paying debts) may be better in the long run.
For many, institutional lending is the first port of call. Banks are lending, and many are going to great lengths to push this message to the market, but on the whole their criteria are conservative and inflexible. If you don’t have an established trading record or the funding proposition includes construction costs (for instance to expand your kitchen), you may struggle.
Alternative lenders offer greater flexibility, but this comes at a cost: amounts available may be lower and the fees can be eye-watering.
One thing both types of debt provider have in common is their approach to security: they will expect protections, including charges over the business assets, land and guarantees. It is important you read and understand these to make sure your expanded catering business can cope with the restrictions imposed.
Debt finance is not the only option. There is a vast array of high net worth investors – individuals and organisations – offering equity finance (cash in return for shares). Equity investors can offer a number of advantages to catering businesses: giving guidance and support based on their own experience, as well as access to previously unexplored markets, alongside the required cash injection. The key is to find someone whose interests align with yours in terms of vision, appetite for risk and period of investment.
Equity investors rarely expect security for their investment in the way debt providers do, instead they want rights and protections attached to their shares, particularly in decision-making and dividend entitlements. These investors will usually expect to sit on the board, to receive regular updates on business plans and to have a range of veto rights over key decisions, so consider if this is a request you are willing, and able, to meet.
Whatever your approach to expanding your catering business, do your homework. Understand what is being asked for in return for the cash, and how this will impact on your plans. Draw up a realistic business plan and take the time to find investors and a professional team that share your vision and will help your business be the very best it can be.
This article first appeared in Out of Home.