Small Business Loans for Expansion
Small Business Loans for Expansion
When their business has reached the point where it is ready to expand, many small business owners struggle with taking it to the next level. Growing pains can happen when your business is ready to expand but does not yet generate enough revenues to fund the expansion.
Common scenarios could be when a bakery has the opportunity to win a huge contract with a local hotel chain but does not yet own the ovens or have the space to meet the orders. Or, you have finalized a product design and are ready to go into production but used up all your funds on design.
The answer to these growing pains is to take out a business loan for expansion. It is almost impossible for a small business to generate the funds it needs to scale up without taking out some form of credit. If you have reached the point where you need to borrow to grow, Shield Funding can offer you a private business loan to fuel your company’s growth and expansion. The process is fast and easy and can be completed online. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Does it Mean to Expand your Business?
Expanding is a growth strategy for many businesses. While some small business owners may be happy with their current revenues, other seek to grow and make more money. But, confined by their current resources, this could be hard.
Business expansion can take place through literally expanding a space, such as taking over a neighboring storefront and combining it with your current yarn shop, or opening other locations. It can also be adding more product offerings, and require an investment in more inventory or product development.
One of the key aspects of expansion is that you are seeking to bring in new revenue, and you typically have to spend money to make more money. You have to sign a lease for a new space, order more inventory, or invest in new machinery. This is where debt financing becomes relevant.
Taking on debt for the purposes of expansion is the top reason business owners borrow. Of small business owners who applied for a loan in 2017, 59% of them said they did so to fund an expansion. More than half of the loans that were granted had amounts less than $100,000.
Debt for expansion purposes, when borrowed wisely and with a clear plan in place, ultimately can become one of the best decisions you ever made for your business.
What are the Characteristics of a Business Loan for Expansion?
First and foremost, a business loan meant to cover an expanding business should be sufficient to cover all the business’s funding needs. Therefore, it should be a business loan available in a large enough amount that you will not be seeking out more funding, or engaging in business loan stacking, in a few months.
Secondly, the loan’s repayment period should align with the amount of time you expect to receive a benefit from the loan’s funds. You do not want to be making payments on a loan when the usefulness of its funds has ended.
You might also need renewable funding, or a combination of funding, to expand your business. Renewable funding, which is capital you can draw on over and over again, could cover daily operations while a larger term loan funds the actual expansion.
In short, a business loan for expansion should meet the following criteria;
- Large enough sum of capital to meet all your needs
- Sensible repayment periods
- Renewable funding
These goals can be met with different types of funding options to fund your expansion. Plan on spending some time comparing each of them to your business need to pick the one that is best for you.
Can I Get a Business Loan for Expansion From a Bank?
Banks prefer to lend larger amounts, for longer terms, to highly qualified borrowers. This maximizes their profits and minimizes their risk. But this also means that it can be difficult for small business owners to qualify for bank funding. Typically, you need to meet the following criteria;
- A credit score above 620.
- Been in business for longer than two years.
- Strong monthly and annual cash flows.
- A business plan and a clear purpose for the funds.
These are the minimum qualifications, and not all that you will have to provide to the bank to be approved. The underwriter could require a long list of documents with your loan application, including several years of tax returns and bank statements, a five-year business plan, and financial statements.
Banks and traditional lenders do not move quickly through the underwriting and approval process. If your business expansion plan relies, in part, on a limited time opportunity, they could be the wrong choice for your business.
Types of Business Loans for Expansion
There are many types of business loans which could effectively fund your expansion, but the best loan for your business will depend on your future plans. A long-term loan would be best for expansion planned to take several years, but horrible for a business owner whose project will be done in months.
Short-term funding helps business owners finance a remodel or another project with a fixed end date. The borrower only makes payments throughout the time that the funds are being put to use.
Short term business loans can have periods of six to twenty-four months, ideal for a small scale expansion project. The funds can be used for anything you need to expand, whether it is a remodel or purchasing new equipment. The minimum borrowing amount is $15,000 and the maximum is $1 million.
It is always wise to have a clear plan, and budget, for the capital you borrow so that you know it will be put to good use. Rates range from 9 to 45%, primarily because a lender has a shorter period of time over which to make their profit.
It is easier to qualify for a short-term loan from an alternative lender. Banks do not always offer short-term options because they do not see the value. Alternative lenders will grant short-term loans if you have been in business for a year and have a credit score above 650. Your minimum monthly revenues must be above $10,000.
Working Capital Business Loans for Expansion
Working capital loans are intended to fund a company’s day-to-day operations. In other words, they provide the capital to keep everything working. You might need a working capital loan during an expansion if, for example, you must close a space to remodel but must still pay employees.
Working capital loans help businesses with seasonal cash flow cycles cover the down months. They can be for a term of one to three years. If you’re planning a larger project, or worry that it could take a while for your new investment to generate revenues, look into a working capital loan.
Banks prefer borrowers with a long business history and previous borrowing experience, but at an alternative lender, you only have to have been in business for two months. Rates will be between 9 to 45%, depending on your credit score and other factors. Your minimum credit score must be 650 and your business’s revenues at or above $10,000 a month.
Business Lines of Credit for Expansion
A small business line of credit can be used to expand your business but is probably not the best option. Lines of credit are similar to credit cards in that they are unsecured funding which you can draw on at any time. They have lower rates than credit cards because the lender does some underwriting, and are renewing.
The fact that a line of credit is renewing could make it a good choice to help fund your expansion, though perhaps in combination with another loan. A renewable form of capital means that once you pay off what you have borrowed, you can borrow from it again. It could help you cover operational costs during expansion while a short-term loan covers expansion-related expenses.
The reason that they are not the best choice for expansion is that lenders rarely give high borrowing limits. The unsecured nature of the loan makes it higher risk, and to minimize their risk lenders will not give you access to as much capital.
Business Loans with an Alternative Lender
If you know the total amount your expansion will cost, but that it will also take several years to complete, consider taking out a business loan for bad credit with an alternative lender. Alternative lenders can approve funding in as little as 24 hours, and you could have the funds in your bank account within a few days, so if your expansion plans hinge on moving quickly they could be an ideal funding source.
It is relatively simple to meet an alternative lender’s minimum lending requirements. They just ask for a credit score above 500 and that your business generates $8,000 of monthly revenues. Funding can be obtained in amounts from between $5,000 to $1 million.
Interest rates for loans at an alternative lender will range from 12% to 45%, with the lower end being highly comparable to banks. Borrowers with higher credit scores could be able to borrow for the same rate as at a bank but without all the hassle.
The easy repayment terms offered by alternative lenders not further hurt your ability to manage cash flow during expansion. Payments on your loan can be made on a monthly, bi-weekly, weekly, or even daily basis. Alternative lenders approve more than 75% of their applications, much higher than bank’s 56% approval rate, so you will have better odds of obtaining capital with them.
Business Loans for Women to Expand
There are business loans and grants which are only available to women-owned businesses. If you qualify for one, it could help you expand.
While the Small Business Administration or SBA does not lend directly to women, it runs Women’s Business Centers where women can find educational resources and network. It can be the perfect place to find people interested in investing in your business or to be put in touch with loans and grants which are gender-based that are offered by local charities and corporations.
The National Women’s Business Council lends money directly to women business owners through alternative lending and grant programs.
Alternative lenders are willing to lend to women who may not have as much time in business and experience as their male counterparts. To help women expand their businesses, they offer business lending for female borrowers with credit scores as low as 500 who have only been operating for two months. Obviously, as the borrower is higher-risk the rates are higher, between 12 to 45%.
Women-owned businesses can also get help through Women’s Economic Ventures. They grant start-up and expansion loans for amounts up to $50,000. The approval process can take up to four weeks, so plan accordingly.
Merchant Cash Advances
A merchant cash advance or MCA might better meet daily cash flow needs while expanding. It is a lump sum advanced against future sales. Since it is repaid out of those sales, this will not be a good option if you plan on shutting down for a period of time while expanding.
MCA’s are granted on the basis of credit card sales, so you will have to provide the underwriter with credit card or bank statements. The amount they lend will be based on your average cash inflow.
The MCA is repaid by a percentage that the lender deducts every time you swipe a credit card. The lender’s percentage includes their principal and interest. This form of funding works quite well for businesses whose customers pay primarily with credit cards. Interest rates start at 15% and go up to triple digits if the loan is not being repaid quickly enough.
Equipment Financing Loans
Expansion goals can often require new equipment. Let’s say you could meet those new orders, and take on the new customer, with more machinery and equipment. Consider an equipment financing loan.
Any equipment and machinery purchased with an equipment financing loan serves as the loan’s collateral. It will be forfeited if you default. Because of this collateral, equipment financing lenders often charge lower interest rates and business owners with lower credit scores are not automatically disqualified.
The loan’s terms commonly align with a depreciation schedule, such as 2-3 years. Many equipment financing lenders give you a 90-day grace period before you have to make your first payment, allowing you to generate revenues from the equipment before paying for it.
But an equipment financing loan will likely only cover one part of your business expansion plan. Where will you put that new oven, or park that forklift? You may need to remodel, expand, or reconfigure your space. Taking on more business also often leads to hiring more employees. If you seek out an equipment financing loan for your planned expansion, it is almost a guarantee that you will also need another form of funding.
How to Find the Best Business Loan for Expansion
It can be hard to evaluate all your options, or sometimes the obvious choice just jumps out at you. The best business loan to help your business expand will support and not harm your goals. Repayment terms and options should be flexible and align with your cash flow, and the interest rate you pay should make sense with its return.
When determining if a business loan is the right one for you, most financial advisors tell you to calculate the return on capital. This is the amount of revenues that you expect the capital to generate for you. If this percentage is less than what you will pay to borrow the funds than the loan does not make sense.
Calculate return on capital by dividing your projected net operating profit by the amount of capital used to generate that profit.
For example, if you expect that borrowing $10,000 to buy a new oven will generate $30,000 in net sales, your return on capital would be 300%. Much higher than what you would pay to borrow. But if a $10,000 loan would only generate $5,000 in net sales, for a return on capital of 50%, and your loan’s interest rate was 45%, you might want to find another lender.
In addition to the loan’s interest rate, other important items include fees. Common loan fees include origination fees, underwriting fees, and appraisal fees if an asset is involved. These are all factored into the APR or annual percentage rate.
This blended interest rate presents a more accurate cost of capital. Even if two lenders initially offer the same rate, the fees at one lender could compute to a much higher APR.
Also, take into account your lender’s reputation. A business which has been operating for ten years, such as Shield Funding, knows how to responsibly lend and serve their customer’s needs.
The Final Word on Business Loans for Expansion
The best business loan to help your business expand will be the right amount of money, the right term, and offer the speed of funding you need. A good lender will sit down with you or walk through your needs over the phone to help you identify the best product for your business. You want a business partner who wants to see you succeed.
If it’s time for your business to grow, call Shield Funding today to find out more.