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Expansions take numerous forms, from building out new locations to marketing to new customers or even launching a new product. In any case, these expansions require a significant amount of capital that a small business owner may not have on hand. Expansion loans allow business owners to take advantage of increasing demand or market opportunities before they have the working capital to do an expansion on their own.
Business expansion loans take many forms and each has its pros and cons. Keep reading to learn how financing an expansion can increase your market share and the flexible business expansion loan you’ll need to make it happen.
There are several ways to finance an expansion and the type that’s right for your business depends on how you intend to spend the money. These are some of the most common uses for a business expansion loan.
Do you have a line of customers out the door? Are there potential customers across town or in another city that you could be serving? Your business might need a second (or third) location! Purchasing real estate is one of the most common reasons for small business owners to take out a business expansion loan.
Your business may have started with just you and a few trusted employees, but as your customer base grows so must the team. Hiring more employees allows you to serve more customers more quickly.
If you don’t have the capital necessary to hire more employees, but you’re certain that you could bring in more revenue with a larger team, a business expansion loan can help you make payroll while the customer base grows.
Outdated, inefficient, or simply insufficient equipment creates serious bottlenecks for your business’s productivity. You can use expansion financing to purchase new vehicles, computers, or industry-specific machinery that will boost your profits and grow the business.
Financing an expansion isn’t always as simple as walking into a bank and requesting a loan. Small business owners have plenty of options with varying interest rates, repayment periods, and approval times. We’ll cover some of the most popular financing options to see which is right for your business.
This is the first stop for most small business owners in need of financing; traditional bank loans feel familiar and usually have fairly low interest rates of around 7 to 10%. However, those low rates are only available to businesses with rock-solid financials i.e. they have been in business a few years, are bringing in strong revenue, and are saddled with minimal debt.
Traditional banks are always going to be risk-averse, which is why they also don’t have the best terms, with shorter repayment periods and small loan amounts –– most often between $25,000 and $500,000. They also take longer to approve a loan, with a couple of weeks being standard.
SBA loans are one of the most attractive options for business expansion as they’re guaranteed by the federal government through the Small Business Administration (SBA). This allows lenders to provide them at much lower interest rates, starting at 6.5%. Loans can be anywhere between $5,000 to $25,000,000 with repayment terms between 5 and 25 years.
The downside is that SBA expansion loans have significantly longer approval times, typically three weeks or more. The long wait time is due to both the SBA and lender needing to approve your paperwork.
Need to close on a property right now to build your business’s second location and can’t wait around for weeks to get approval from a bank or the SBA? A commercial bridge loan will get you the money needed, between $25,0000 and $500,000 to make an offer on that property in as little as a few days.
Interest rates for these loans are high, usually around 10% as they’re intended as a stop-gap solution. Repayment terms are between 12 to 36 months, after which you’ll want to secure lower interest rate financing.
Depending on the type of equipment, and how easy it would be for the lender to sell it in the event of a default, interest rates vary between 10% and 30%. Repayment terms are structured around the expected lifetime of the equipment; if you’re purchasing assets that’ll be obsolete in a few years, the loan needs to be paid off sooner. These loans have some of the fastest approval times, usually just a few days, since for considerably less money than some of the other options.
Regardless of the type of business expansion loan you apply for, you need to come prepared. Lenders risk a significant amount of money when they invest in your business’s expansion and they want to be sure that the expansion is successful.
These are a few of the most important things to prepare for when applying for any business expansion loan.
To get funding, you’ll need to show how an infusion of cash will make your business more profitable, and thus how you’ll have the means to pay back the loan. A well-thought-out business plan will explain how you intend to use the lender’s money while past income and cash flow statements can demonstrate the business’s potential.
If you’re using the loan to purchase real estate or durable equipment, those can serve as your collateral. If you’re seeking financing to hire new employees or for working capital then you’ll need to use other assets, like your business’s current property, to secure the loan.
Lenders need to know that you have a stake in the expansion’s success, which usually means putting down some of your own money. Most lenders require somewhere around 20% of the capital for an expansion to be provided by the borrower.
Too many business owners wait to do an expansion, hoping they’ll accumulate enough savings to self-fund it. However, market conditions change and opportunities will pass you by. The best time to expand is when the demand is present, not when you have the money to take advantage of it. AVANA Capital offers a variety of financial products to empower you as a business owner and facilitate your company’s growth.
With over 150 combined years of experience, our team of experts will work with you to get you the capital you need for expansion. Contact AVANA Capital to learn how we can help with your business expansion and get you funding today!