When you reach a point in which you want to invest in your business but only have the cash flow to keep your current operation going, you need help. This is where business expansion loans come in. Whether you need to hire new employees, purchase inventory in bulk or open a new location, this type of loan can give you the funding you need.
However, you need to strategize wisely so that your expansion will be successful and you will be able to afford the loan payments. It’s always important to consider that you may be in a worse position after getting a business loan, for example, if you can’t make the payments or if the cost outweighs the potential profits.
To increase the odds of getting a business loan that helps you expand successfully and enables a seamless repayment, it’s important to pick the right lender.
How to pick the right lender
The interest rate you are given on a business loan is the most important factor in the overall cost of your loan. It determines whether the loan is affordable and profitable for your business.
For example, say a lender is willing to give you $20,000 over a five-year term with a 20% annual percentage rate (APR). You would end up with a payment of $530 per month and would pay a total of $31,792 by the end of the loan. On the other hand, if you got an 8% interest rate, you’d pay $405 per month and a total of $24,300. That’s a difference of $7,492 overall and $125 per month to borrow the same amount of money. So it’s important to shop around to find the lowest interest rate you can get. The rate you receive will depend on your creditworthiness as determined by the lender.
Origination fees are the other cost to consider. Most lenders charge this fee in an amount ranging from 1% to 7% of your loan. In some cases, the fee is set and in others, the lender determines the fee based on your creditworthiness. If you get a $20,000 loan with a 5% origination fee, you are looking at an additional $1,000 to add to the cost of your loan. To minimize your total loan cost, you’ll want to look for lenders with origination fees that are low or nonexistent.
Loan repayment period
Another important factor is the loan repayment period. Using the previous example, say you got $20,000 for a term of 10 years at a 20% interest rate. You would end up with a monthly payment of $387 and the total loan would cost $46,381. That means, compared to a five-year term, you’re paying almost $15,000 more for the loan but are saving $144 on your monthly payment.
While the total cost is much more, this may be better for a company that is investing in an expansion that will take some time to see returns. If the returns will come later and this is the best interest rate your business can qualify for, it may be worth it. In any case, it’s important to look for a lender with the repayment period terms that fit your needs.
Business lenders vary widely in the loan amounts they fund, so you’ll want to check on the limits before applying. Some start at $5,000 while others at $30,000. Furthermore, some max out at $350,000 while others go up to $5 million. Find the lender that suits your loan amount needs.
Of course, you also have to find the lender who will lend to you. Qualifications vary by lender but include some or all of the following:
- Personal credit
- Business credit
- Annual income
- Income over the last three months
- Years in business
If you have great personal and business credit, three years in business and $500,000 in annual income, you probably have a wide range of options. However, if your business credit isn’t yet established, your personal credit is poor, you only have one year in business and have earned $75,000 in annual income, your pickings are slimmer. The good news is there is a wide range of online lenders that cater to business owners in various situations.
If your credit score is poor
OnDeck is an online lender backed by Google Ventures that has delivered more than $1.7 billion in loans. Interest rates vary from about 6% to 98% and there is a set origination fee of 2.5%. Loan amounts range from $5,000 to $500,000 and lines of credit are available up to $100,000. Repayment terms are offered from three to 36 months and the minimum qualifications to get approved include one year in business, a 500 personal credit score and at least $100,000 in annual revenue.
Kabbage is also an online lender and has delivered more than $1 billion in small-business loans since 2008. It offers lines of credit which range from $5,000 to $100,000. Instead of interest rates, it charges monthly fees, which are the equivalent of interest rates ranging from 32% to 108%. It has no origination fee. The minimum qualification requirements are that applicants have at least one year in business and a minimum of $50,000 in annual income or $4,200 per month over the last three months. It asks applicants to grant Kabbage access to their business checking account or other payment platform account so real financial data can be considered in addition to personal credit.
If your credit score is average
Funding Circle is a loan marketplace that has processed $700 million in loans since 2010. The company connects accredited institutions and investors with small businesses to fund loans. Interest rates range from 5.49% to 36% APR and loan amounts range from $25,000 to $500,000. An origination fee also is charged, ranging from .99% to 6.99%. Loan repayment terms are available from two to five years. The minimum qualification stated is that applicants have two years in business. It takes into consideration cash flow, credit score, outstanding business loans and online customer reviews.
Bitbond is a marketplace lending platform that connects investors with small businesses. All loans are conducted via the bitcoin blockchain. Interest rates on loans range from 7.7% to 25% and origination fees range from 1% to 3%. Loan amounts are available up to $10,000. To gain access to the site, you need to be approved. BitBond takes into consideration your credit score, employment type, PayPal account, eBay feedback score, country of residence and payment history of Bitcoin loans (when applicable).
SmartBiz is an online marketplace lender that connects business owners with preferred SBA lending banks. It offers loan amounts from $30,000 to $5 million with repayment terms ranging from 10 to 25 years. Interest rates range from 5.5% to 7.75% and include all fees. The minimum requirements to get approved include two years in business, a personal credit score of 600 or higher, no tax liens, no bankruptcies or foreclosures over the last three years, no past due government-related loans and no recent settlements or charge-offs. Further restrictions apply for commercial real estate loans from $350,000 to $5 million.
If your credit is good
LendingClub is a loan marketplace that is the largest in the world. It has processed $9.26 billion in loans. It offers loans ranging from $5,000 to $300,000 with repayment terms from one to five years. Interests rates range from 5.9% to 25.9% with origination fees ranging from .99% to 5.99%. Minimum requirements include two years in business, $75,000 in annual sales, 20% ownership of the company and a 660 credit score.
Find the right business expansion loan for your business
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.