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Thinking about expanding your business? It’s common for business owners to get the itch for growth, but how do they do it? Unfortunately, it often takes money to make money, so you’ll likely need financing to give you that extra push to make the expansion happen.
Some reasons people choose to expand their business are staff shortages, inventory gaps, unfilled orders, untapped markets, edging out the competition, or changes in the respective industry.
One of the biggest mistakes business owners make is waiting too long to expand their business—waiting until they hit a certain milestone or accumulate a certain amount of working capital. But by then, it may be too late, with demands for the business unable to be met. Businesses sometimes never recover from failing to deliver on growth demands.
Financing a business expansion can prevent this by giving you the cash to pay for the tools you need to handle additional business. Small business expansion loans help you better manage your business’s growth—and can have the added effect of propelling even more growth along with it.
Options vary but include adding staff, expanding an online presence, remodeling, expanding physical space, new equipment, moving locations, franchising, producing new products, expanding to a new market, acquiring another business, and more.
Whatever the reason, make sure you build out a comprehensive growth plan for yourself and the lender. Know what your business needs, its greatest potential growth opportunities, and establish how much you borrow versus how much you expect to make on return. For example, if getting a $100,000 loan to buy more efficient equipment will net you $500,000 in the next couple of years, it’s probably a worthwhile investment.
There is more than one way to go about it, of course. Of the many types of financing options, some are better than others for business expansion. It’s important to find financing that works for the needs of your business, so we’ve broken down the best loan options for business expansion below.
The most common type of loan is suitable for a wide range of business purposes, including business expansion. With a traditional-term business loan, you are lent a set amount upfront, which you pay back (along with interest and fees) over a set period of time.
This option works best if you’re business’s credit is really good, you have plenty of revenue, and other financials look promising as well.
An SBA loan is a government-guaranteed, long-term funding option made by Small Business Administration (SBA) approved lenders that let businesses that might have been turned down by the bank to receive low-interest rate funding. The funding can be used for many business purposes, including expansion.
If you’re looking to finance the expansion of a small business, there are two types of SBA loans to consider—one for larger borrowing needs up to $5 million and one for smaller needs up to $350,000. But both can be used for expansion depending on how much you need.
These loans are ideal for many businesses, but you need relatively good credit (650 and up) and other solid financials to make the cut. The application process can also take weeks, so this is not an option if you’re looking to expand immediately.
With equipment financing, the lender will upfront you cash to help purchase the equipment outright. You then pay back the total amount lent, plus fees, for a set period of time.
This is a great option if you know that your expansion requires new equipment, as the loan amount will cover just that cost. It’s also slightly easier to obtain since the equipment you buy is used as collateral if you default on the loan.
With a business line of credit, a financial institution gives you a credit limit, or a maximum amount of capital you are able to draw on at any given time. Just like a credit card, you only pay interest on the amount you use. These funds can be used for a variety of business purposes, including expansion, and can be immediately accessed as you desire. Just make sure you monitor how much you are taking out on the credit line.
You might want to consider the option of revolving or non-revolving credit lines. A revolving credit line automatically replenishes once the debt is paid off. A non-revolving credit line does not, which can help keep you from borrowing too much at a given time.
With a short-term small business loan, you are lent a set amount upfront, which you quickly pay back (along with fees) over a short period of time, typically 3-18 months.
Payments are sometimes required daily or weekly. The amount you can borrow will be lower and interest rates will be higher, but you will pay off the loan faster. These loans are not typically given by banks, but rather alternative online lenders who have more lenient requirements for securing financing.
Merchant cash advances are not your typical small business loan. With an MCA, financing companies upfront you a set amount of cash and then you repay the advance (plus a fee) with a set percent of your daily credit card sales.
This is a good option if you’re running a retail business or deal with a lot of credit card transactions. Merchant cash advances are often provided through online financing companies. They are the most expensive product on the market, so you might want to compare an MCA with something like a short-term loan. The upside is that you won’t have to worry about making active payments as they are automatically deducted.
Invoice financing lets you sell your invoices to a lender, who then fronts you a large majority of the invoice amount. The lender will hold a remaining percent (usually around 20%) until the invoice is paid. Once it’s paid, the rest of the funds will be released, minus any factor fees.
If you’re looking to expand, this allows you to not be held back by your unpaid invoices. You can move ahead on your own time.