If you feel like your company’s growth has stagnated, it may be time to look at inorganic growth strategies. Inorganic growth involves expanding through mergers and acquisitions rather than increasing your company’s current activities. It’s generally considered faster than organic growth but requires a larger upfront investment and comes with some risk.
Read on for a closer look at inorganic growth, including its pros and cons, how it compares to organic growth, along with strategies for achieving (and funding) inorganic growth.
What Is Inorganic Growth?
Inorganic growth is growth that is created using resources outside of the company. It typically involves mergers and acquisitions, joint ventures, or adding locations. This is in contrast to organic growth, which occurs through harnessing a company’s existing resources.
While organic growth tends to be slow and gradual, inorganic growth enables a company to expand rapidly by entering a new market that may be related to or different to its original business line. Inorganic growth typically involves a more dramatic shift in how a business operates and requires a larger upfront investment than organic growth. Owners will often use small business loans to fund inorganic growth.
5 Inorganic Growth Strategies
There are several inorganic growth business strategies to consider, depending on how your business is set up and how willing you are to give up your company’s independence.
1. Acquisition
Purchasing an already-established business is one way to instantly increase your business’s revenues and profits. An acquisition allows you to take over a proven business model with customers and systems already in place rather than having to build it from scratch.
2. Merger
In a merger, two firms agree to become partners in a larger business. To achieve inorganic growth through a merger, you might join forces with a competitor. This takes your competition out of the marketplace and allows you to absorb its market share. It also gives you access to its technology, products, and workforce.
3. New Location
Opening a new location for your existing business leverages the hard work you’ve already put into your brand. You won’t have to develop new management or marketing strategies, other than extending what you’re already doing at your original location. If you sell products, you may be able to negotiate a lower per-unit cost if you need to increase the size of your orders from suppliers to outfit a new location.
4. Strategic Alliance
When two brands see benefits in working together but don’t want to give up their individual independence by merging, you have a strategic alliance. Perhaps Company A has the audience that the other wants to reach, while Company B has technology that Company A can leverage.
5. Joint Venture
Similar to a strategic alliance, a joint venture involves two or more companies coming together to take on a particular business activity for a limited period of time. A joint venture creates a new business entity that is separate from the participating businesses. This allows the participating businesses to grow while maintaining their independence and individual brands.
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Pros and Cons of Inorganic Growth
To help you decide if an inorganic growth strategy is the right fit for you, here’s a look at some of the benefits and drawbacks of inorganic growth.
| Pros | Cons |
|---|---|
| Enables faster growth than you can achieve through organic growth | High upfront costs |
| Allows you to take over a proven business model rather than start from scratch | Merging workforces can lead to redundancies, as well as friction |
| Increasing your business size can make it easier to access additional capital for further growth | Investing in another business or location can be risky |
Pros
Unlike organic growth, which can take time, inorganic growth results in rapid expansion, since the company you are acquiring or partnering with already has established systems, customers, and revenues.
Growing through mergers and acquisitions also gives your business access to valuable resources and assets, such as technology, intellectual property, equipment, and staff. In addition, it can expand your market share and reduce competition. Becoming a larger company can also make it easier to access capital through business loans when you need it.
Cons
Inorganic growth generally requires a large upfront investment, which may involve taking on debt. If your company is currently small, getting the financing you need might require collateral, which can put personal or business assets at risk.
Acquiring a new business or adding a new location can also result in management challenges. In the case of a merger or acquisition, you may end up with multiple people in the same roles and need to consolidate. Merging with another company can also lead to friction.
While inorganic growth can result in rapid growth, success is not guaranteed. Investing in another business or location can be risky.
Inorganic Growth vs Organic Growth
Both inorganic and organic growth serve the same purpose — taking your business to the next level. But each takes a very different path to get there.
| Inorganic Growth | Organic Growth |
|---|---|
| Seeks external sources for growth | Leverages internal sources for growth |
| Requires large up front investment | Investment is gradual |
| Growth is fast | Growth takes time |
Inorganic growth involves using resources outside of the company, such as engaging in mergers and acquisitions. Organic growth, on the other hand, uses inside opportunities — such as cost-cutting measures, internal research and development, and operational improvements — to spur growth.
Another key difference: Inorganic growth typically requires a large initial investment, whereas organic growth generally involves gradually investing in marketing, human resources, and operations over time. As a result, inorganic growth usually requires taking out a business loan, whereas organic growth may or may not require financing.
Inorganic vs. organic growth also comes down to speed. Inorganic growth generally leads to a much faster increase in revenues and profits than organic growth.
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Funding Inorganic Growth
Here’s a look at some ways your business may be able come up with capital it needs to fund inorganic growth.
Business Loans
There are many different types of small business loans, including business acquisition loans. If you have good credit, you may qualify for a bank loan with low interest rates and favorable terms. If your business is new or you have fair credit, you may be able to get financing for inorganic growth through an online lender. These alternative lenders often have more flexible qualification criteria than banks, and also provide faster funding. However, loan amounts may be smaller and interest rates can be higher.
Equity Fundraising
Another option for funding inorganic growth is to bring on private equity investors. These individuals (or firms) can provide capital for you to acquire, merge with, or partner with another business, in exchange for equity in the company. Keep in mind, though, that investors may want a say in strategic decisions.
Invoice Financing
If you are looking for a smaller amount of financing to help fund a joint venture or strategic alliance, you might consider invoice financing. This allows you to leverage the value of unpaid invoices to get access to cash quickly. With invoice financing, lenders advance a percentage of your unpaid invoice amount (often as much as 90%). When your customer pays the invoice, you repay the lender the advance amount, plus fees.
Because invoice financing is backed by your invoices, it can be easier to qualify for compared to other types of business loans. However, invoice finance tends to cost more than other types of financing.
The Takeaway
Inorganic growth involves buying or joining forces with other businesses or opening new locations. It contrasts with organic growth, which is growth from within the company. Both inorganic and organic growth may involve outside financing. However, inorganic growth generally requires significantly more capital than organic growth.
If you’re looking for a loan to fund either type of growth strategy, a business loan could help.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
What is the difference between organic growth and inorganic growth?
Organic growth happens over time and involves using internal resources to increase revenues and customers. Inorganic growth, on the other hand, happens quickly and typically involves acquiring, merging with, or partnering with another company.
What is a benefit of inorganic growth?
Inorganic growth enables your business to expand rapidly, since the company you acquire or partner with typically already has established systems, customers, and revenues.
What are the methods of inorganic growth?
Inorganic growth strategies include: acquisitions, mergers, opening a new location, joint ventures, and strategic alliances.
Photo credit: iStock/filadendron
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