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Updated: December 18th, 2023
Growing your business successfully begins with a plan. And of the main ways to grow is to identify what’s working well for your business, then build on that.
Oftentimes, taking your business to the next level requires capital to help spur growth. This is where a business expansion loan comes in. If you’re a business looking to expand, here’s everything you should know about financing.
Expanding can mean different things for different types of businesses. At its core, expanding means finding ways to generate new revenue streams for your company.
Ideally, expansion is a planned effort. You have clear growth goals for your business and a defined strategy for pursuing them. For some businesses, however, expanding may be an unexpected but welcome scenario.
For example, demand for your products and services increases so rapidly that you need to increase inventory to keep up. Or perhaps you have lines out the door and need to consider opening a second location to service the growing customer base. Whether the expansion is unexpected or predicted, a business expansion loan can help you grow at a sustainable pace and invest in the parts that matter most for your success.
When it comes down to the nuts and bolts of growth, there are several paths you can take to expand operations. Your definition of business expansion might include any of the following scenarios and a loan to expand business could help meet your needs.
If your team started small with just one or two employees, using a small business expansion loan to hire some additional help could be an essential step for growth. The more people you have pitching in, the better it will be when it comes to executing the different action steps in your growth plan. Plus, the right hire should save you energy and time, freeing you up to focus on the big-picture strategy for expansion.
An expansion loan can help cover the cost of finding, onboarding, training, and paying new employees.
If you run a brick-and-mortar operation, opening a new location is a way to increase your physical footprint. But there are costs that go along with a business looking to expand like that. You might be purchasing a commercial property or buying land to develop. Or you may be leasing an existing structure but need to outfit it for your business.
A third option is overhauling your current location so you can accommodate more customers or operate more efficiently as you grow. That might mean tearing down walls, changing up the layout or buying new equipment. These are all things a business expansion loan can help finance.
Buying a business that’s been around for a while has some advantages. You might be able to avoid some of the initial startup costs that go along with launching something completely new. And when you buy an existing business, you also often inherit an established customer base.
However, there can be a laundry list of costs to factor in beyond just the seller’s asking price. For instance, you could pay several thousand dollars just to get a professional evaluation of the business’s financial health. Plus, you’ll want to have some cash on hand to account for unforeseen obstacles and potential profit loss during the transition. Using a loan to expand your business that covers these and the other expenses of buying a second businesses allows you to preserve your cash flow for your existing business.
If your business is looking to expand, opening up new product lines or adding to your range of services can help attract new customers or increase what your current customers spend with your business. On the product side, you may be spending money on research and development in the initial stages. And once your concept is nailed down, the next stage is manufacturing which comes with its own costs.
While you might be able to skip those steps when adding a service, you could run into other expenses related to distribution, sales and marketing. For example, you may need to do some focus group testing or spend money on online advertising to get the word out about your new services. A business expansion loan makes tackling those tasks or managing the costs of product development easier.
Moving into a new market can help you connect with a broader customer base for your products and/or services. Depending on the kind of business you have, that might mean entering a new geographic market with a physical presence or boosting your visibility online with an e-commerce store.
Either way, a business expansion loan can help with the costs. You could use a loan to pay for marketing and advertising, getting your e-commerce site up and running, or paying for shipping costs if you’re mailing products to customers beyond your local area.
Equipment may be an essential part of your business’s day to day operations. You might rely on appliances and kitchen equipment to keep your restaurant running smoothly or need heavy machinery to get the job done in your construction business. Equipment needs can also cover things like office equipment and furniture, computer hardware and software, fleet vehicles and manufacturing equipment.
Purchasing new equipment or upgrading what you already own can easily eat into your cash flow. An expansion loan gives you the flexibility of being able to pay for large-scale investments, like equipment, over time.
Struggling to keep up with customer demand is arguably a good problem to have. However, rapid growth—especially for new businesses—often leads to problems with inventory management. Not having enough cash on hand to scale up your inventory means that your business could be losing out on precious sales.
Whether you get a contract with a major online retailer or sales are booming and your inventory is simply flying off the shelves, a loan to expand your business could be a solution.
The common thread with business expansion is making sure you get the timing right. You don’t want to be unprepared for rapid growth and find yourself in a position where you can’t meet customer demand or lack the staff to maintain the highest standards of customer service. That said, if you overshoot in your planning, you can find yourself in a tough situation where you’ve invested too much into expansion without the demand.
If you’re wondering whether expansion – and consequently an expansion loan – is right for your business, it helps to ask the right questions. Here are a few guidelines to keep in mind.
You might have a big vision when looking to expand your business but vision can only take you so far. Your goal needs to be realistic and something that’s achievable, based on where your business is now and the amount of time and money you have to invest. You need to have a clear idea of how you plan to put the funds to use, and how that will impact your bottom line. Giving your growth goals a second look can tell you if the time is right for a business expansion loan.
Small business expansion loans are a form of debt financing, which means you’re not giving up any equity in your company. That’s a plus, but on the flipside, you need to know that your business can handle repayment now and in the future. Here’s where estimating your return on investment (ROI) becomes important. Getting a loan to expand your business makes the most sense when it generates enough revenue to justify the cost of the loan itself.
Growing your business isn’t something you can do on a whim; there needs to be a demand. For example, have your sales been increasing steadily over the last year? Are you seeing a regular influx of new customers? Do those patterns seem like something you can maintain over the long-term? If you answered ‘yes’ to all three that could bode well for your growth prospects and your decision to apply for a business expansion loan.
There’s more than one way to use a loan to expand your business. And one form of financing might be a better fit than another to meet your specific growth goals. That’s why it’s important to research all the options available to small businesses before you take on any new debt.
Business term loans offer borrowers a lump sum of money that’s repaid over a set time frame. Depending on the lender, you could receive a term loan ranging from $25,000 to $1 million for a period of one to 10 years.
Term loans are usually best suited for established businesses with at least two years of operating history, and a specific purchase in mind. Good credit and a minimum annual revenue of $100,000 or more is also typically a requirement.
Term loans offer flexibility when it comes to how you can use them for growth. Some of the ways a term loan could be used to expand a business include opening a new location, buying inventory, developing new products or hiring new staff.
SBA loans are long term, low-cost, government-backed loans ranging $5,000 and $5 million. The Small Business Administration offers a variety of different loan programs, all with different requirements and criteria to qualify. With the exception of microloans, which max out at $50,000, most SBA loan programs are designed for established businesses.
SBA loans offer some of the lowest interest rates around, and with certain loan programs, repayment terms can extend up to 25 years. However, credit requirements are a bit more stringent compared to term loans. And the entire process typically takes between 60 to 90 days, which isn’t a viable option if you need a loan to expand your business fast.
Equipment loans are designed specifically for purchasing equipment. These loans can offer up to 100 percent financing, although some lenders may require a down payment of 10 to 20 percent. Another plus is that the equipment you’re buying serves as collateral for the expansion loan in most cases, so you don’t have to put any of your assets on the line.
In terms of where to find equipment financing, you can find these loans at traditional banks. A number of online lenders also offer equipment-specific loans for small business expansion.
A short-term loan is a term loan that’s repaid over a period of months, versus years. Short-term loans tend to be easier to qualify for, but the amount is often less than a medium or long term loan, and the rates are often higher.
Because short-term loans are repaid relatively quickly, they could be good for smaller expansion projects that don’t require as much capital.
A business line of credit might be your preferred option for expansion financing if you’re looking for a capital source you can draw against over time. You only pay interest on the amount of your credit line you’re using, unlike an expansion loan, which requires you to pay interest on the full amount you borrow.
You have some flexibility with a line of credit, since you can use it as needed. That could make it a good option if you’re pursuing multiple expansion strategies at different points in time.
Invoice factoring (as well as invoice financing) allows you to borrow against the value of your outstanding invoices. Rather than paying an annual percentage rate, this small business expansion loan option means you pay a factor fee (which ranges from 0.5% to 5% per month of the invoice amount advanced or total invoice amount). The invoice factoring lender provides you with an advance (an upfront payment of 80 to 85 percent of the invoice) holds back a percentage of your receivables in reserve. Once the loan is repaid, the remaining amount (minus any applicable fees) is returned to you.
Invoice factoring is quick and convenient for a business that’s looking to expand rapidly, but it can be one of the more expensive ways to borrow for expansion. However, for business owners with poor business and/or personal credit scores, invoice factoring may be one of the most accessible financing options as credit is rarely a factor in the approval process.
A merchant cash advance is another type of short-term financing. Instead of borrowing against your invoices, however, you’re taking an advance against your business’s future credit card receipts.
There’s no APR; you pay a factor rate for this type of financing, which can range anywhere from 1.1 to 1.5. That rate is multiplied by the amount you’re borrowing to determine how much you’ll repay altogether.
You don’t need perfect credit or a lengthy business history to qualify for a merchant cash advance. But the factor rate can easily be equivalent to an effective APR in the double- or even triple-digit range, so it’s important to weigh the costs.
There’s some groundwork you’ll want to do before applying for a business expansion loan. The more prepared you are, the greater your odds of being approved.
First, get your paperwork together. That includes an updated business plan, along with key financial statements for your business, such as a balance sheet, income statement and a recent cash flow statement. Your lender will likely want to review these to make sure your business is financially sound.
Next, check your credit. There are 5 Cs of credit to keep in mind considering any business loan:
Some small business expansion loans may require collateral so it’s important to know that upfront. If you don’t have business or personal assets to secure a particular loan, you may have to look into a different financing option.
The amount of capital you’ve personally invested in the business tells lenders how serious you are about growth. Lenders may view your request for a loan to expand your business more favorably when you’ve got some “skin in the game”.
Capacity just means your ability to repay the loan. This is where your cash flow, debts and cash reserves come under scrutiny. Conditions are any factors or situations that could impact your ability to repay what you borrowed such as industry-specific risks or competition. Lenders want to know you’ve thought about these future roadblocks and have a plan to address them if they arise.
As far as character goes, lenders want to know that they’re dealing with a borrower who’s credible and trustworthy. Having a good track record of repaying debts or even positive customer reviews can cast your business in a positive light.
Finally, think about which kind of financing you’re most likely to qualify for and which kind of expansion loan is best for your growth plans. This will save you time because you can focus on applying for the specific loans that are suited to your needs and financial profile.
If you’re in the market for a business expansion loan, there are some great reasons to make Funding Circle your lender of choice. Applying for a term loan with Funding Circle isn’t complicated; the application process is quick and easy and you can complete it online in just 10 minutes. There’s minimal paperwork required and you can get a decision in as little as 24 hours after document submission.
Once you’re approved for an expansion loan, you get the benefit of an uncomplicated monthly payment, with an option to repay your loan early without a penalty. Predicable payments mean a more predictable cash flow so you can focus on the most important task at hand: growing your business. If you’re ready to expand, spend a quick 60 seconds checking your eligibility for a Funding Circle term business loan now.
Why should I borrow from Funding Circle as opposed to a bank or other lender?
While the underwriting process at traditional banks can be clunky and opaque, Funding Circle delivers a best-in-class experience to our business customers. You’ll work with a dedicated loan specialist who will guide you through the entire application process and remain focused on meeting your unique financing needs. And we will never leave you waiting — you’ll have a decision from us in as little as 24 hours after document submission. We also deliver competitive rates, with no prepayment penalty or any other hidden fees.
How long does it take to apply for financing through Funding Circle?
Funding Circle’s application process is quick, easy, and transparent. You can apply for an expansion loan and get a decision in as little as 24 hours after document submission.
What are you rates?
Do you offer business expansion financing for startups?
We like to support all kinds of entrepreneurs, but our focus right now is on helping established small businesses grow and thrive. To qualify for a loan on our marketplace, your company has to have been in business for at least two years.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.