Deciding when and if you should expand your business is tough. How you fund that expansion is just as important. The decisions you make about funding your business’s growth with a business loan can have ramifications for the speed at which you grow, your customer relationships, and your financial future.
Here are five smart options for funding for business expansion based on your needs and business stage.
1. SBA Loan Programs
SBA loans are an attractive option for funding business expansion, but because the government administers them, they do have tough lending criteria.
It’s important to note that the SBA does not lend money, rather it uses federal money to guarantee a portion of the loan. This removes some of the risk from traditional banks and encourages them to support small businesses with lower-rate financing. That includes low down payments, longer repayment terms, and lower interest rates.
SBA loans can cater to almost any business need. The popular 7(a) loan is ideal for general financing up to $5 million for activities such as expanding working capital, refinancing debt, expansion, renovation, start-up costs, and more.
SBA loans do have some downsides. A lengthy and complicated application process means that you will need to set aside some significant time to apply. Even if you’re approved, you may not receive funds for 30-60 days or longer. Banks also have stringent credit requirements and will review both your personal and business credit as well as other financial statements. You may also need collateral to secure the loan. Finally, most banks require that you have been in business for two years, which can disqualify younger businesses.
2. Business Line of Credit
If you’re for looking for more flexible access to credit to support you as you expand, consider a business line of credit. Unlike a loan, you can use this pre-agreed amount of money as and when you need it, up to your limit, for things such as one-time purchases or other expenses. You can typically repay your credit line at any time.
If you’re anticipating a large influx of orders, you can draw on your credit line to cover the cost of goods, funds for new equipment, and so on. It can also support your expansion marketing efforts. A line of credit can also act as a safety net during your expansion.
If you think you won’t qualify or don’t have time to wait for a traditional bank loan, you may want to consider a microloan.
A microloan is typically a small term loan between $5,000 and $50,000, which you can use in the early stages of your business to pay for inventory, machines, office and business supplies and equipment, and working capital.
A microloan could be the right choice for you if you don’t have a credit record or otherwise don’t qualify for a traditional small business loan from a bank. Microloans are generally low-interest short-term loans and are usually provided by small-business-friendly lending organizations such as banks or credit unions that work with the SBA.
The downsides of microloans include potentially higher interest rates than a traditional loan and limited borrowing amounts, which may mean you need to source funds elsewhere to cover your expenses.
4. Invoice Financing
Not to be confused with invoice factoring, invoice financing is a type of business financing that can be a valuable option for your growing small business.
All businesses struggle with cash flow, and this can impede expansion. Chief among the causes of cash flow woes are late payments from customers. According to one survey, 48% of net 30 invoices, 45% of net 60, and 35% of net 90 invoices are paid late.
Invoice financing can help because it lets you borrow against an unpaid invoice. You choose which invoices you want an advance payment on whenever you need the cash to fund growth (up to your approved credit limit). Depending on the financier you work with, you can get funds as fast as the next business day.
Invoice financing is a useful short-term financing solution that provides working capital to help get you over any cash flow gaps, so continuing to grow your business doesn’t have to wait until you get paid. And because you get your money quickly, you don’t have to wait on a traditional bank loan approval process.
If you’re in startup mode or are an early-stage small business, venture capital funding or angel investors can help provide equity to fund further growth. Investors often provide lump-sum payments in exchange for a share of your success.
Angel investors tend to be more hands-off than venture capitalists, who often expect a seat at the board, but both will expect a reasonable rate of return and will provide mentorship. If you need that kind of advice, paired with funding, this form of independent investment may be for you.