If you’ve started a successful small business, congratulations! Companies like yours are key to the economic growth of the country. Small businesses, defined as those employing fewer than 500 people, contribute more than half the jobs in the U.S.
What if the day comes when you need to expand your business? You may need more employees. You may need additional equipment – everything from more computers to a backhoe. Maybe your product is selling out at your flagship location and you want to open a second location.
These are good problems to have, but expansion does not come cheap. What happens if you don’t have the capital? Well, it might be time for a business expansion loan.
When should you consider a business expansion loan?
A business expansion loan is exactly what it sounds like – a loan to expand an existing business. It is not seed money, a term used for an initial sum that allows a business to get off the ground.
Lenders of business expansion loans require borrowers to have an existing business already in place. They offer loans to help already viable businesses become larger or more productive. Having said that, some lenders — such as OnDeck, Funding Circle, and Kabbage, provide business loans for a wide variety of purposes.
Getting a business expansion loan
Naturally, getting a business loan requires you to submit an application, regardless of the lender you choose. This article provides a step-by-step guide on how to apply for a business loan. In short, lenders will want to see:
- Profit and loss statements
- Tax forms
- Financial records of the business
- Legal documents that reveal the structure of the business (corporation, partnership, etc.)
- A business bank account
- Business credit score
- Business plan
- A statement of loan purpose
Lenders also require personal financial records and credit score.
Credit Scores and Business Loans
A word about credit scores and reports: They are an important part of any loan application. Both business and personal credit scores are an indicator of whether you pay bills on time and manage credit wisely. Lenders want to know whether you have too much debt for the income of the business.
So it’s a good idea to look at your credit score – and to make sure the information in the credit report is correct – before applying for a loan.
You’ll need a business plan
Businesses need a business plan to get loans. Really, all businesses should have one. Most entrepreneurs are eager to launch their businesses, but not particularly excited about doing financial projections.If you haven’t written a business plan before, you need to do one before trying to get a business expansion loan.
A business plan should include the following:
- A Company Description (including type of business, e.g. partnership, corporation, etc.)
- Service(s) or Product(s) Offered
- Background and Personal Financial Statements for Principal Officer(s)
- Company Financial Statement
- Market and Industry Analysis
- Marketing Plan and Sales Strategy
You can see why this is useful to a lender; the business plan will reveal the success of the current plan and why you think expansion is a good idea. If you are selling a chocolate yogurt drink and want to add a second flavor (say, vanilla), the Service or Product Offered section is the place to explain that.
Similarly, the Marketing Plan and Sales Strategy can explain why expansion is a good idea. Is your service successful in one part of the city? Then detail why it would be successful in another area if you add additional locations.
In order to determine how much capital you’ll need to expand, you must forecast the associated costs. For a retail expansion, for example, you’ll need to acquire estimates for: leasing space, building out your location, hiring staff, and procuring additional inventory. Perform a break-even analysis to determine how long you’ll need to support your new venture before it becomes profitable.
The good news is: this isn’t your first time around the block. Since you already have the experience of launching your first location, it will likely be much easier to forecast costs the second time around.
Determine how much you need
For a business expansion loan, you’ll need to determine how much you need from a lender. Use existing business records to forecast how much you will require. Are you opening a new location? Use the numbers from your first location to help forecast the costs.
Then, estimate how much the expansion will bring in. How much revenue can you expect from the new location? How much will the new equipment contribute to the bottom line?
Offering your lender with both your financial need and expected revenue will instill confidence in your expansion plan.
Types of business expansion loans
Business expansion loans are offered with two different types of interest rates.
Fixed means that the interest rate – and payments – will be the same throughout the life of the loan.
Variable means that the interest rate may rise or fall depending on changes in market interest rates. If it rises, your monthly payments go up. If it falls, they go down.
Business loans can be:
A secured loan is backed by collateral, which lenders can sell or reuse if the borrower is unable to pay back the loan. A lender may be willing, for example, to offer a secured loan backed by the equipment the loan is used to purchase.
An unsecured loan is not backed by collateral. It is approved based on creditworthiness and other financial indicators.
Where can you get a business expansion loan?
Banks, credit unions and alternative lenders are all places where you can get a business expansion loan.
In addition, the U.S. Small Business Administration (SBA) also offers loans for small business expansion. Your business must employ 500 people or fewer to be eligible.
The SBA does not make loans directly. Instead it insures business loans to reduce the risk for lenders, which makes it easier for companies to qualify for a loan and get lower rates.
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Lenders with fast approval times
Traditional lenders such as banks and credit unions often take several weeks (or more) to process a business expansion loan.
If you need money more quickly to capitalize on an opportunity, alternative lenders typically have shorter approval times. On the other hand, alternative lenders often have higher interest rates and fees. You can often find better rates if you’re not working under a time constraint.
One popular alternative lender to consider is OnDeck, which will qualify lenders with a minimum personal credit score of 500. They require a business to have been operating for one year and a minimum of $100,000 in annual revenue. Loans range from $5,000 to $50,000; APRs range from 9% to 98%.
Another alternative lender with relatively quick approval times is SmartBiz. It offers SBA loans more quickly than banks or credit unions and APRs range from 7% to 8%. SmartBiz requires a business to have $50,000 in annual revenue and to have been in business for a minimum of two years. Business loans are approved in a range from $30,000 to $350,000. The loan term is 10 years.
Both OnDeck and SmartBiz cater to those with credit scores of 500 to 600, a range where you may have difficulty getting a business expansion loan approved by a conventional lender.
Business expansion loans for veterans
If you’re a U.S. veteran, you may be eligible for Department of Veterans Affairs (VA) loans and other assistance. For instance, the U.S. Department of Veterans Affairs and BusinessUSA offers the Veterans Entrepreneur Portal as a resource for loans and other funding, as well as advice on how to grow your business.
Want more information on how best to get a business expansion loan or another type of loan? Read this article to find the best small business loans for veterans.
The Bottom Line
Finding the right expansion loan for your business is not an easy task. You need to have a clear business plan that details the purpose of the loan and how it will increase your revenue.
Check your credit score and correct any mistakes in your credit report before you start rate shopping for business loans. Get your paperwork in order and create a file with the financial statements and documentation lenders require.
SuperMoney makes it easy to compare the rates and terms of multiple lenders. You can also read the comments of borrowers so you know who you’re doing business with before you sign on the dotted line.