It’s a cause for celebration when your small business finds success in its chosen market. And while that’s a notable accomplishment, it comes with its own set of challenges. Namely, how will you keep up with the additional demand for your goods and services? It’s important to grow your business to keep up with the increased clientele, but doing so can take more capital than your profits can provide. A loan for business expansion is a better way to afford all the upgrades your business needs.
What can you use a business expansion loan for?
Small business owners have several options for growing their company, so you should consider your business's needs before applying for a loan. Below are a few of the most common reasons that entrepreneurs seek loans for business expansion.
Hiring new employees
One of the most valuable expansions you can make to your company’s operations is hiring new team members. Keeping more hands on deck to work with your customers means your business can serve more people at once.
Small business expansion loans can help you pay your new team member's first salary, but their future paychecks should come from company profits. This way, you’re not constantly taking out debt to afford payroll – that’s just not sustainable. It’s best only to use loans for payroll when you’re sure that hiring new employees will lead to increased revenue.
Tap into a new market
Let’s say your small business provides a product or service that proves to be a hit in its current market. In that case, you might want to branch into new markets through a market development growth strategy. A business expansion loan can help you develop and produce these new products while still maintaining the resources to operate normally. Breaking into a new market can potentially increase your cash flow, though you should only take the risk when profit is highly likely.
Offer new products
With success comes the opportunity to expand your business's product line. While the goods or services you offered before initially attracted customers, continuing to provide the same thing could eventually lead to a drop in sales. Using a loan allows you to fund new products that can keep old customers interested while attracting new ones.
Remodel your storefront (or buy a new one)
When deciding how to expand your business, one option is to increase your physical presence. Adding square footage to your old storefront can provide added space for new customers to move around. Internal renovations can also invite them to stay and try your products. It also benefits your employees, who will have an easier time maneuvering around the store and providing customer service. Remodels can be expensive and time-consuming, so small business expansion loans can come in handy here.
If you want to purchase an entirely new storefront or other location, loans for business expansion can help too. Certain small business loans with high loan amounts, low interest rates, and long repayment terms are reserved for commercial real estate purchases. These loans can make it much easier to afford a new storefront and slowly repay your big purchase in small monthly installments.
Purchase new equipment
Another common way to improve your internal operations is to repair, replace, or upgrade old equipment. After all, most technology breaks down over time or becomes obsolete as new models emerge. While older equipment may still work, your business often isn’t working at peak productivity or efficiency without an upgrade. Using an expansion loan to purchase top-of-the-line equipment can make your team’s job easier and help them better serve customers.
Different types of loans for business expansion
Financial institutions and online lenders offer several expansion loan options. The exact terms of your loan agreement often vary depending on the lender and the type of loan. Each loan type has unique advantages and disadvantages, so you should figure out which expansion loan will benefit your business the most before applying. On that front, you can learn about some common expansion loans below.
1. Bank term loan
Traditional bank term loans are some of the most desired loans among small business owners due to their flexible terms and large loan amounts. They’re also relatively straightforward in how they work. After qualifying for the loan, the lender provides money that the borrower must pay back over time, in monthly installments, with interest. You’ll typically have to meet strict criteria to be eligible for a bank loan, but you can use them for nearly every business-related expense.
Here are a few additional facts about bank term loans:
- Maximum loan amount: $30,000 to $500,000
- Repayment term: 2, 3, or 5 years
- Speed: 1 to 2 weeks
2. SBA loan
Small Business Administration (SBA) loans are perhaps the most sought-after loan for business expansion. Rather than directly giving you money, the SBA financially backs loans that approved financial institutions provide. Doing so allows lenders to qualify more loan applicants thanks to the reduced economic risk.
Some additional facts about SBA loans include:
- Maximum loan amount: $5,000 to $5 million
- Repayment term: 5 to 25 years
- Speed: Around a month, though faster with certain types of SBA loans
3. Equipment financing
As the name suggests, equipment financing is meant solely to help businesses purchase new equipment. Like most loans, you’ll get a set amount of cash that you must pay off over time. The main difference between equipment financing and traditional loans is that, with equipment financing, whatever you purchase is preemptively used as collateral.
As such, the lender can seize your equipment to recoup their losses if you fail to repay the loan. Additionally, your loan amount will often be smaller than with standard lending options because you usually borrow the exact amount needed for the equipment. Below are a few additional facts about equipment financing.
- Maximum loan amount: Up to 100% of equipment value
- Repayment term: Approximately the equipment’s lifetime
- Speed: In some cases, funding is available within 2 days.
4. Business line of credit
Business lines of credit work similarly to typical credit cards. The financial institution you apply to sets a maximum amount of money you can withdraw. You’ll only pay fees on the amount you use. However, these fees can be quite high. That said, with careful use, a credit line can help you buy everything necessary to expand your business.
Below are a few additional facts about business lines of credit:
- Maximum loan amount: $10,000 to over $1 million
- Repayment term: 6 months to 10 years
- Speed: Sometimes, you can get funds in just one day.
5. Short-term loan
Short-term loans are often riskier than more traditional lending options, but they can still be a valuable resource for growing your business. After qualifying for a short-term loan, you’ll receive a certain amount of capital to help pay for certain expenses. But, unlike with traditional loans, you may need to repay daily or weekly, and your shorter repayment term will mean more expensive payment installments.
Additionally, while the amount you receive from short-term loans is usually low, the interest rates are often higher. In fact, most traditional financial institutions don’t offer short-term loans – alternative online lenders more commonly carry them.
Below are a few additional facts concerning short-term loans:
- Maximum loan amount: $25,000 to $250,000
- Repayment Term: 3 to 36 months
- Processing speed: Some short-term loans become available in just one day.
6. Merchant cash advance
Merchant cash advances are a type of lump-sum small business loan that doesn’t require active repayment. Instead, the lender takes a portion of your store's daily credit and debit card sales to recoup your debt. As a result, it’s mostly an option for retail stores.
Below are a few additional facts about merchant cash advances:
- Maximum loan amount: $2,500 to $250,000
- Repayment term: Your loan provider will withhold a small portion of your daily credit or debit card transactions until you’ve fully repaid your loan.
- Speed: Merchant cash advances often become available in 1 week.
7. Invoice financing
Invoice financing refers to a lender giving you cash equivalent to roughly 80% of your accounts receivable. Once you collect on all your invoices, you’ll pay the lender that 80% plus an additional fee. This loan option can solve any cash flow issues that arise due to unpaid invoices. However, if you can’t collect your invoices since your clients just aren’t paying, your effective interest rate can quickly balloon.
Below, you’ll find additional information about invoice financing.
- Maximum loan amount: Roughly 80% of the total invoice amount
- Repayment term: When your customer pays the invoice, you repay the loan, and you also pay a fee.
- Speed: Some invoice financing companies can advance you in just a day.
How to pick the right loan
There are many loans available to you, and not all of them will completely match the needs of your business. Here’s how to figure out which one is right for you.
Decide how much funding you need for growth
Figure out how much your growth initiatives will cost before you apply for a loan. New equipment, new employees, and new locations all cost different amounts that some loans may or may not reach. Knowing how much your expansion will cost can help you decide on a loan option.
Know what you qualify for
Each loan type has specific prerequisites that you and your business must meet before qualifying. The loan application process can be lengthy, so you don’t want to lose time pursuing something you weren’t eligible for in the first place.
Look at your credit score
Your credit rating is one of the major factors determining whether you’ll qualify for a loan. You can qualify for higher-value funding options such as bank term loans and SBA if you have good credit. With a lower rating, you might be limited to invoice financing and business lines of credit.
Look at your revenue
Revenue is another factor lenders look at to determine your eligibility for a loan. That’s because financial institutions want to avoid risk when lending money to a borrower. To do so, they’ll check your business's revenue to make sure that you can pay the debt within the repayment period. If not, you likely won’t be approved. The exact profits you need for approval can vary depending on the type of loan you apply for, so check each loan’s minimum revenue beforehand.
Consider your timeline
Before applying for a loan, try and calculate how your repayment schedule will affect your short-term and long-term goals. Expansion can help improve your revenue stream, but you’ll also have several new expenses to pay each month. The costs of new equipment, new employees, extra retail spaces, and loan payments can easily surpass your potential profits if you don’t plan carefully.
Find a loan for business expansion with SmartBiz®
Business expansion loans are great, but you also need to be careful with them. Loan products that ultimately don’t meet your financial needs can easily do more harm than good. But that doesn’t mean you should drag your feet on purchasing improvements. If you understand what your company needs to succeed and you’re ready to capitalize on your success, apply for a business expansion loan through SmartBiz. See if you pre-qualify* for SBA loans, bank term loans, and custom options.
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.