Your Guide to Small Business Growth: Strategies, Financing Options, When to Expand

Last Updated November 29, 2024

Small business growth is an important consideration for any business owner—especially since it can look very different for each company.

For some, expanding a business simply entails increasing their customer base and potentially hiring a few additional employees to manage the extra workload. For others, the growth plan involves expanding to new cities or states.

Regardless of your specific plans, understanding common small business growth strategies as well as the challenges of small business growth is crucial to ensuring you can scale effectively. Premature or ineffective growth can all too easily lead to business failure.

By understanding what to consider when expanding a business and developing a suitable small business growth plan, you can navigate this crucial period effectively.

Small Business Growth Statistics

Small businesses make up 99.9% of all businesses in the U.S. Revenue can vary significantly based on factors like the industry a small business operates in, whether it has any employees, and so on. For example, the average revenue for a small nonemployer in real estate is $102,040, compared to just $15,110 for educational services.

Overall, small business leaders are optimistic about their chances for growth, with a September 2024 survey by the U.S. Department of the Treasury finding that over 70% of leaders expect revenue growth in the next year. The report further notes that small businesses have created 71% of job growth during the recovery from the COVID-19 pandemic. As a result, over 45% of businesses plan to increase their investment in their business.

However, turning that into lasting expansion can be a challenge. Research from MITSloan Management Review reveals that overall, only 16% of companies successfully scale. Similarly, McKinsey claims that only 22% of the businesses launched in the past 10 years successfully scaled.

So, while expansion is attractive, it is clear that understanding how to expand a business is crucial.

Why Would a Business Want to Expand?

Why do small businesses want to expand in the first place? There are several advantages of expanding a business, if it is done properly. First and foremost, expansion can help a business increase its sales and revenue, allowing for continued financial growth. This usually occurs as expansion helps bring in new customers or generate additional sales from existing customers.

Businesses may also wish to expand as part of a desire to diversify and spread their risk. Diversifying by offering new products or services or entering a new market can help reduce the overall risk profile of the business. It can also make the business less vulnerable to its competitors.

In addition to accessing new customers in new markets, businesses may also wish to expand as part of an effort to hire talent from the areas where they are expanding. In some cases, geographic expansion can provide access to more cost-effective materials, labor, and other resources.

When done right, expansion protects a business from declining or stagnating.

When Is the Right Time to Grow Your Business?

Timing is key. One of the most important elements of small business expansion strategies is understanding the right time to grow your business. Attempting to scale too soon can be financially devastating for a business, straining its resources in a way that cuts away at its budget and frustrates customers.

Because of this, small business owners should be mindful of several factors when expanding a business. For example, consistent sales and revenue growth over time are usually good indicators that the time is right to grow your business. But don’t just rely on a single short-term increase that may not last—look for long-term trends. In addition, small businesses should be in a financially stable position to support growth plans. You should also consider the state of your industry or market as a whole.

You may also determine the time is right if you are seeing more customer demand than you can handle. Whether it’s a desire for new products and services or simply an increase in service requests, you may need to grow before your current team becomes overwhelmed.

If these elements are in place, then you can begin looking at other aspects of your business and ensuring that everything is in order to begin expansion.

Common Barriers to Growth for Small Businesses

Managing growth in small business isn’t without its challenges. The following are some of the most common obstacles that can limit your growth potential.

Cash Flow

Cash flow management is undoubtedly one of the biggest barriers to small business growth. Expanding a business costs money—and quite often, small business owners don’t realize just how much money will be necessary to scale. This could result in overextending the business’s finances to acquire new equipment and supplies, make new hires, and so on.

Even with the help of small business loans for expansion, business owners must carefully evaluate how growth will affect their finances. If expansion leads to a consistently negative cash flow, it could put you out of business.

Inefficient Processes

Many small businesses have internal processes that work well with just a few employees but can become inefficient as they begin to scale. This could involve anything from how you respond to customer inquiries to payroll processing. As you expect to increase both your customer base and number of employees, internal processes that haven’t been sufficiently streamlined could become a major barrier.

Lack of Skills

In a similar vein to having inadequate processes, small business owners may find that their current team lacks the necessary skills to implement their expansion strategy. This is why expansion often requires hiring new employees. For the business owner, outsourcing tasks outside of their area of expertise becomes crucial for managing their growing responsibilities in other areas.

Finding the right talent to make up for your existing skills gap while staying cash flow positive can become quite difficult, particularly in a competitive hiring market.

Lack of Focus

Small businesses often risk losing a focus on what made them initially successful as they try to expand. Trying to add new products and strategies can be a smart growth strategy, but if you stray too far from your area of expertise, you might struggle to deliver the level of quality your customers have come to expect.

Small Business Growth Strategies and Tips

To successfully grow your small business, you must begin with a small business growth plan. The following elements should play a key role as you develop a plan that is specific to your business and its goals.

Project Future Financials

Before you begin expansion efforts, you must first determine if you are financially ready to expand. Conducting a pro forma analysis allows you to project your future expenses and revenue based on your historical data and the hypothetical outcomes of your expansion efforts.

For example, this would include creating a pro forma balance sheet that projects your future assets, liabilities, and equity, as well as a pro forma cash flow statement that projects monthly income and expenses.

Conducting these in-depth analyses will give you a better understanding of whether your business can financially support your growth initiatives. These documents can also help you obtain financing because they offer professional and realistic income and expense projections.

Emphasize Customer Retention

If you wish to grow your business, you need to make sure your current customers get the level of attention they need. Providing exceptional service to your existing customers will help you earn their loyalty, which can pay dividends through word of mouth marketing when you begin expansion efforts.

In addition, coming to better understand your existing customers’ needs can help you gain crucial insights about your target audience. From understanding the media channels they use to the type of messaging and offers that are most appealing to them, learning about your existing customers will enable you to develop a more effective marketing strategy for reaching new customers.

Your existing customers can also give you insights into areas where you can expand. Listen to their requests or complaints—areas where they feel like you could improve or services they wish you offered. Tailoring expansion to better serve the needs of your existing audience can help increase your odds of success.

Consider Automation and Outsourcing

As you scale your operations, investing in automation, business software, or even outsourcing certain tasks can help you work more efficiently. Business software can assist with a wide range of activities, such as tracking inventory, scheduling employees, managing relationships with customers and leads, and more.

Focus your efforts on the activities that are the most challenging or time-consuming for your business right now. By finding an outsourcing partner or software tool that you can delegate these tasks to, you can keep your focus on your core business activities as you expand.

Financing to Fund Small Business Growth

Small business expansion financing is essential if you wish to successfully scale your business. The following are some of the most common financing methods used for funding small business growth.

Traditional Bank Loans

A business loan from a bank is the second-most common source of startup capital aside from personal finances, and it can also work well for funding expansion efforts. As a more established business, banks will be more likely to lend money to you at a competitive interest rate.
Rates vary significantly, and obtaining a loan for small business growth will likely heavily depend on your ability to show a strong current financial picture and a well-thought-out growth plan.

Invoice Factoring

Invoice factoring is not a loan but rather a solution that allows you to sell unpaid invoices to a third-party company for a cash advance. You receive 80-90% of the invoice total in advance, and when the client pays, you receive the remaining balance minus a small fee from the factoring company.

This helps businesses deal with payment delays that could negatively affect their cash flow and helps them access sufficient cash flow to begin expansion activities.

SBA Loans

SBA loans are partially guaranteed by the U.S. Small Business Administration. These loans can be used for expansion efforts and typically have lower down payments and more flexible overhead requirements than traditional loans. Businesses can qualify for loans ranging from $500 to $5.5 million.

To qualify for an SBA loan, a small business must be located in the U.S. as a for-profit business, be creditworthy, and have exhausted other financing options.

Business Lines of Credit

A business line of credit is a more flexible loan option that functions similarly to a business credit card. This can be helpful for long-term expansion efforts, as the business is approved to borrow up to a certain amount as needed. Because the line of credit is renewable, the available credit is “refreshed” when you make repayments. However, interest rates tend to be higher than traditional bank loans.
Line of credit limits are typically smaller than a traditional loan amount but offer greater flexibility to borrow money for expansion on an as-needed basis.

Equipment Financing

If your expansion efforts include the purchase of new equipment, you may be able to finance that purchase. This spreads the total cost of the equipment purchase over several months or years, which can make your cash flow more manageable on a month-to-month basis.

In-Summary: Small Business Growth Strategies

Small business expansion represents both a major opportunity and a significant challenge. While expanding can help you increase your sales and revenue and find new customers, it can also put added financial strain on your business and require that you hire new employees or outsource certain tasks to maintain a high level of quality.

By developing a small business growth plan that accounts for your financial picture and other expansion needs (and using the right funding options), you can grow in a way that makes sense for the specific needs of your business.

Small Business Growth FAQs

How much does it cost to expand a business?

The cost to expand a business depends on your location, the scope of your planned expansion, and the type of business you operate. Small business expansion typically costs tens of thousands or hundreds of thousands of dollars, as it usually includes equipment, real estate and inventory purchases, new employee hires, and additional marketing.

What is a good growth rate for a small business?

Generally speaking, a small business should aim for around 15% annual growth. This allows it to stay ahead of inflation and reinvest in the business without experiencing such a high level of growth that it overwhelms its operations.

Why would a small business not want to expand?

Businesses may choose not to expand because the owner wants to maintain full control of their business, or they fear sacrificing quality by expanding. In many instances, owners put off expansion due to financial constraints, risk aversion, or market saturation. And, of course, it is often a lifestyle choice for small business owners who want to prioritize their work-life balance.

How do you expand a business to another state?

When expanding your business to another state, you’ll need to register your business with the help of a registered agent in that state and get a business license. You’ll also need to acquire any other permits related to your company’s work and ensure compliance with local tax laws. Depending on your method of expansion, you may also need to select a physical location for your business and obtain or expand insurance coverage. Requirements can vary from state to state (and even city to city), so be sure to do your research.

What are the risks of growing a business?

Growing a business can be expensive and put excess strain on a small company’s cash flow. In addition, ineffective processes could damage your ability to deliver quality results to your clients, hurting customer satisfaction. Current employees could become overwhelmed by their growing workload, while new hires might not be the right fit for your company culture. Carefully evaluating these and other risks is crucial for successful expansion.

What are some grants for small business expansion?

Small business expansion grants include the State Trade Expansion Program (STEP), the Small Business Innovation Research (SBIR) grant, the Rural Communities Opportunity Grant, and the U.S. Economic Development Administration (EDA) grant. Other businesses and nonprofits also offer expansion grants for small businesses. Qualification requirements and grant amounts vary.