John Cradden looks at the risks and rewards of various growth strategies for small businesses.
It’s a rare business that grows or expands without much in the way of a strategy or plan. Sooner or later, you’ll reach a point where you’ll be expected to outline – even if it’s just for yourself – some kind of structure or guidance to your firm’s growth.
This plan could just settle around slow, bootstrapped, organic growth funded by reinvested profits and perhaps some modest business loans. Or, it could focus on rapid, inorganic growth made possible by an opportunity that comes your way, a merger or acquisition, or raising external investment or funding to support an new product launch, move into a new market or to create an export strategy. Most owners will probably combine elements of both.
“New products or services may enable you to achieve higher margins compared to existing products”
Here we take a look at the risks and rewards of some of the more common elements of growth strategies, along with some examples of Irish SMEs that have used these strategies to great success.
Bootstrapping
Bootstrapping is a growth strategy centred around organic growth using re-invested profits or else debt. It’s not for everyone, but a strong advocate of this approach is Mark Coan of MoneySherpa, an online mortgage broker. According to Coan, among the advantages of bootstrapping is that you retain absolute control and ownership of your business, and allows you to focus on building the business rather than expending huge efforts just to fundraise. He adds that for many digital businesses in particular, technology has removed the need for large upfront investment, while automation and remote working has enabled many to attract talent that they wouldn’t otherwise get.
Crowdfunding
Online peer-to-peer (P2P) lending platforms, also known as crowdfunding, use the power of the crowd to connect small businesses in need of funding and potential lenders (both private and institutional investors) looking for profits. The platforms themselves do not invest their own funds and don’t provide protection for lenders; they act as intermediaries and provide additional services like risk assessment, payment transfers and portfolio management in exchange for a fee.
One of the potential downsides of using P2P loans is that they are not covered by the Deposit Guarantee Scheme, which means there is no immediate recourse or protection for any monies deposited with a peer-to-peer outfit.
Foxes Bow, a fast-growing Irish whiskey brand with ambitions to break the US market, has tapped crowdfunding not once but twice in the space of a year. By offering would-be investors the opportunity to get involved for as little as €10. After raising €514,000 in an oversubscribed crowdfunding campaign on Crowdcube during 2022, the emerging brand launched a second fundraising campaign on the UK platform in 2023 to raise at least €375,000 to power its US expansion.
Borrowing
Besides crowdfunding, you could also look at microfinance loans. Small firms with fewer than 10 employees and an annual turnover of up to €2m can apply for unsecured business loans of between €2,000 and €50,000, for a range of purposes from the Government’s Microfinance Ireland loan fund, via either your Local Enterprise Office or else directly from Microfinance Ireland.
There are also a number of non-bank lenders like who lend to SMEs and businesses but with a focus specific products like asset, invoice or trade finance.
Some of this lending is supported by the Strategic Banking Corporation of Ireland, a State agency that aims to provide flexible and easier to access SME funding here through low-cost finance and risk-sharing schemes, and to support competition in the SME lending market.
To borrow from a bank is a form of debt finance. The golden rule is to match the type of finance (short term-or long-term) to the intended business need.
Short term finance: Includes overdrafts, invoice discounting and business credit cards.
Long-term finance: Includes asset finance, term loans and finance under the Credit Guarantee Scheme if your business has been impacted by the Covid-19 pandemic.
It is very important from day one to separate your personal finances from your business finances. Many business owners fail to make this distinction, but it is worth getting this right from the start. Open a business bank account when you’re ready to start accepting or spending money as your business. Not only does this help you to stay legally compliant and protected, it also benefits customers and future employees in the long run.
Bank of Ireland has created a Business Startup Package that includes a business current account. To learn more click here
Mergers and acquisitions
The primary goal of a merger or acquisition is to grow your company faster than you would achieve on your own, such as by exploiting the cost synergies, economies of scale, market access or the bargaining power with suppliers that comes with being a bigger entity.
Of course, as growth strategies go it’s among the most risky. While it can potentially transform your business, it could also transform it in the wrong way or end up not seeing any of the synergies you hoped it would generate. Also, if your SME is on the larger side (i.e. turnover of over €10 million), it may need to be examined by the Competition and Consumer Protection Commission to see if a merger or acquisition deal could potentially lessen competition in the market and reduce choice for consumers.
That said, enthusiasm for M&A is healthy, according to AON’s latest report, with 1 in 3 companies – around two-thirds of them SMEs – said they were “actively considering or may consider engaging” in a merger or acquisition over the next year.
Diversification
Diversification may be perceived – especially since Covid – as a way for a business to survive in tougher times as opposed to something that you can use to underpin an honest growth strategy, but the fact remains is that it’s a pathway to new products, services, markets and revenue streams.
New products or services may enable you to achieve higher margins compared to existing products, or help you lower production costs by economies of scope – whereby the production of one good reduces the costs of producing a similar product. It’s also a good way to even out the peaks and troughs of seasonal businesses.
Naturally, diversification may not make sense depending on the nature of your company, and it may also be a bigger ask for a small business than a large corporate in terms of demands on finite resources, the risk of other parts of the business being ignored or neglected, and a lack of expertise.
Diversification definitely works as a growth strategy for farms or other businesses that are strongly rooted in their locations. St Tola goats cheese makers in Co Clare is a long-established business that started in a neighbouring farm, while nearby Moher Cottage is a coffee and gift shop that emerged from the re-purposing of a cluster of stone farm buildings that straddled the road leading to the Cliffs of Moher. Highbank Farm in Kilkenny makes a virtue of its organic farming of apples that it transforms into an impressive variety of award-winning artisanal ciders, juices, syrups, vinegars, brandies, gins and spirits.
Raising investment
Looking for external investment is hardly a growth strategy in itself, but it will push you to devising a solid plan for your anticipated expansion so that you can attract interest from would-be backers – particularly if its venture capital or angel investors you’re aiming for. Ambitions and belief in your growth potential must be high (i.e. those looking for much less than €500,000 need not apply to venture capitalists, while angel investors might inject up between €50,000 and €250,000), and they will expect your product or service to solve or address a clearly identified problem.
Venture capitalists invested nearly €260m in Irish SMEs in the first quarter of 2024 in seed and early stage funding. Although this represented a drop of 50% compared to the same quarter in 2023, seed funding is still showing resilience, particularly compared to three or four years ago.
What venture capitalists will seek in return for their capital investment (along with possibly expertise, support and access to their contacts) will of course vary, but be prepared to cede some control over your company to align more with their priorities.
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Bank of Ireland is welcoming new customers every day – funding investments, working capital and expansions across multiple sectors. To learn more, click here
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