If you’re a small business owner looking to take your business to the next level, you may not have the capital you need to expand. A small business expansion loan can provide you with the cash you need to open up a new location, hire staff or upgrade your equipment. But where do you start and how do you know if taking out a business expansion loan is a good idea? Here’s a quick guide to help you take the next step.
What Is a Small Business Expansion Loan?
A small business expansion loan is designed specifically for established businesses. The capital from an expansion loan can make it possible for you to scale your business or keep pace with growth.
If you applied for a business loan when you first started your business, you might be hesitant to go through the process again. Getting a startup business loan can require a down payment of 20 to 30 percent, and lenders typically do a significant amount of vetting of your business plan. But if your business now has a track record of success, the process could be much easier.
“The requirements are not as difficult as it would be for a startup business loan,” says John Fleming, Delaware district director for the U.S. Small Business Administration. “A lot of times you can get an expansion loan without coming up with any cash injection.”
Before you start the process of finding a lender, however, it’s essential that you have a plan for the cash and make sure borrowing is a good idea.
[Read: The Best Small Business Loans of 2018.]
What to Use the Money for
There are plenty of ways you can use the funds from a small business expansion loan, so it’s important to focus on what your business needs to grow. Here are just a few ways you might want to use your loan money:
Expand your team. Whether you’re running the business solo or you have a small team, you might feel like you’re stretching yourself too thin. Growing the team can not only help you keep up with demand, but it can also help you offload more menial tasks to new employees and give you and other decision-makers more time to focus on the big picture.
Open or expand a location. It’s common for a new business to outgrow its first physical location. Maybe it’s starting to feel like standing room only at the office, or customer demand is so high that the line is typically out the door. A small business expansion loan can help you afford to expand your current facilities or open a new location, potentially relieving some stress and opening up new opportunities to expand in other ways.
Finance new equipment. Sometimes, your team is big enough, and your location size is sufficient, but your equipment needs an upgrade. For example, a restaurant could meet customer demands better with a new oven, or a manufacturing business could increase production with higher-capacity machinery.
Launch a new product. If you started your business with just one or two products and found a good market for them, your business might benefit from adding a new one to the line. Expanding a product line can be expensive, though. You’ll need to invest in research and development, pay for material and manufacturing costs, and so on. A business expansion loan can help you afford those costs without draining your retained earnings.
Expand to a new market. Say you’ve found success with your current product or service, but the current market you’re in is saturated or you see a new market with less competition. An expansion loan can help you cover the costs associated with that jump to a new market.
How to Make Sure a Business Expansion Loan is a Good Decision
Understand your motivation. Just because you can borrow money for your business doesn’t mean you should.
“You need to recognize why you’re expanding,” says Fleming. “Are you expanding just for the sake of expansion? Some people do that, where they run before they walk.”
[Read: The Best Bad Credit Loans for Small Businesses of 2018.]
It’s important to be honest with yourself about why you want to grow your business. If you don’t feel like you have a handle on things as they stand, expanding could cause you to lose control entirely.
Do the math. While a business expansion loan may be easier to get than a startup loan, you’ll still need to provide lenders with a good reason to give you the money. This means that your expansion idea needs to be profitable. If you’re looking to expand to a new location, for instance, start looking at potential options. Price it out, and consider all of the costs involved. Do the process for a few different locations in case your top option falls through. Then run the numbers for how much a new location would boost your bottom line to make sure the return on investment is worth it.
Make sure you can manage the growth. Even if your expansion idea is profitable, be clear about how you’re going to manage your new product line, location or team. If you’re the only business owner, you may need to bring in a partner or hire someone with management skills to avoid putting the full burden on yourself.
What You’ll Need to Apply
Once you’ve done your due diligence, the next step is to get your plans and documents together to apply for a small business expansion loan.
Here’s a quick summary of what you should have ready to go before you apply:
Tax returns: You’ll typically need to submit your personal and business tax returns for the past three years. These provide the lender with an idea of whether your company has a good track record of profitability.
Financial statements: This may include your balance sheet, income statement and cash flow statement. It shows lenders the state of your business. “Lenders are going to want to make sure [you have] sufficient cash flow to cover any new debt payments,” says Patrick O’Keefe, CEO of Grow Michigan, a fund established by a group of banks to help Michigan-based small businesses.
Business plan: Share some details about your business, how you plan to use the funds and how you’ll make it profitable.
Collateral: Even with an established business, lenders may require collateral to protect themselves against default. Consider which tangible business assets you could use to secure the loan.
Business credit report: If you’ve established a good credit history for your business, it can improve your chances of getting approved. If your business credit is poor, though, or you haven’t established a credit history, you may have a hard time securing a loan.
Legal documents: Lenders may require various legal documents for your business, such as your business license, articles of incorporation, third-party contracts, franchise agreements and commercial leases.
Where to Go for a Small Business Expansion Loan
There’s no shortage of small business lenders, so it’s important to know what your options are and the benefits and drawbacks of each.
SBA loans: The Small Business Administration insures business loans through its 7(a) and 504 loan programs. SBA loans provide reasonable interest rates and long repayment terms, making it easier to find a loan that fits your budget. But the approval process can take 60 to 90 days, and the requirements can be strict. You may also need to put up collateral.
Commercial banks: Many traditional banks have a commercial lending arm that provides loans and other services to business owners. And if you’ve been in business for a while, chances are that you’ve already established a relationship with a bank.
“If you’re happy with your current bank,” says Fleming, “we typically recommend going with them.”
Commercial banks usually offer competitive interest rates and various other business services. But you’ll usually need a strong personal or business credit history to get approved. You’ll also generally need to provide collateral to secure the loan.
Credit unions: If you need a smaller loan, it may be worth checking with your local credit union. Credit unions often provide lower interest rates and fees than traditional banks, and a credit union may approve your loan more quickly. But not all credit unions offer business services, so it can be harder to keep everything under one roof. You also generally need to be a member of the credit union to apply for a loan.
Online lenders: If you need your cash fast and want to avoid an intense underwriting process, online business lenders may be worth considering. They usually require less documentation and offer a quicker turnaround time. The downside is that you could end up paying a higher interest rate. And you may need to put up collateral plus provide a personal guarantee in case your business can’t repay the debt.
Questions to Ask Potential Business Lenders
The best thing you can do for your business is to shop around for the right business expansion loan. Each lender has different criteria for determining your loan terms, and you may get a better deal by comparing different offers.
Specifically, here are some questions to ask the lenders you review:
What are their minimum requirements? Some lenders require that you be in business for a certain amount of time or have a minimum revenue amount. By asking this question up front, you’ll avoid wasting your time with lenders whose basic requirements you don’t meet.
What is their average loan size? Smaller lenders might not be used to lending the amount you need. By asking this question, you’ll know if you need to ask for less or if you should work with a lender that can better handle your request.
How long does it take? If your plans are already in motion and you need the funds soon, you may not want to work with a lender that can’t deliver the cash when you need it. If, however, you have time, you could be more flexible about your options.
What are the rates and fees? You might not get a clear answer about your interest rate until you officially apply, but you may be able to at least get a range. As for fees, you’ll want to know before you apply if each lender charges a closing fee, prepayment penalty or any other fee that would increase the total cost of the loan.
Do they require collateral or a personal guarantee? Many business lenders require collateral, and some require a personal guarantee. But that’s not always true. If you want to protect your personal assets, consider working with a lender that won’t require that you personally pay off the loan if your business can’t.
[Read: The Best Unsecured Business Loans of 2018.]
How long is their commitment to fund? If you don’t need the funds immediately but want to secure them for the future, you may be able to get a commitment letter from the lender to fund your loan at a later date.
“If [the commitment] is only going to be there for 90 days, it’s not good, because nothing happens within 90 days,” says O’Keefe. “If it’s for two years, that would give you an ability to work through a cycle to show additional profitability and look to see if there’s cheaper financing available.”
Do Your Research to Get the Right Loan
A small business expansion loan can provide your business with the means necessary to grow, but it’s important to avoid taking the decision to apply for one lightly.
In addition to vetting your business to ensure that it’s ready for a new loan, take the time to examine several lenders and their loan offerings to pick the one that best addresses your business’s needs. This process can take time, but it’s worth it to ensure your business stays healthy.
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How to Get a Small Business Expansion Loan originally appeared on usnews.com
