When a business successfully passes its start-up infancy period, and, gains some traction during the tenuous early times, it is likely an appropriate time to celebrate (just a little) and to start planning for the business’ next steps — the more intermediate-term objectives denoted in the business’ original business plan.
Businesses looking to finance a well-thought-out expansion plan are advised to check out a specific financial instrument designed for this specific purpose — the Business Expansion Loan. The narrative that follows details the ways in which a small, newer business can obtain the working capital required to implement the necessary steps towards expansion.
It is noted that securing financing at this stage in the business cycle is often much less restrictive (and often less expensive) than when the business first opened. A business interested in borrowing money that has even a limited amount of verifiable success is always preferred to a business with none.
What Is a Business Expansion Loan?
The purpose of a business expansion loan is to provide the funds — the working capital — for a business to manage its organic growth or to strategically implement a business expansion plan in accordance with its schedule.
Business expansion loans are great financing options for any size (or any type) of business; however, they are most often used by small businesses. The primary underwriting requirement for business expansion loans is that the business being financed must be deemed as established.
Borrowers/businesses are advised to carefully research the requirements for available business expansion loans because the term “established” is a relative one. Stay vigilant as the definition of an established business may differ from lender to lender.
Business Expansion Loan Documentation Requirements
When a small business owner or entrepreneur has finished his or her due diligence (regarding their selection of expansion loan programs) and planning (in terms of the business’ expansion), he or she is ready to begin the loan application process. The first step is to gather the paperwork required for an underwriter to make a final loan decision. This required documentation generally includes –
A Business Expansion Plan. It is critical for business owners to clearly document the business’ original plans and the business’ expansion plans. These documents reveal to the lender the business’ exact intentions.
The Business’ Legal Documents. Lending institutions generally want to confirm that a business is operating within the legal limits of the law. However, it is noted that the required paperwork differs for corporations, partnerships, limited liability partnerships, and sole proprietorships, as well as other legal entities. Legal documents typically include a business license (if required), and any other relevant executed contract or commercial lease.
Available Collateral (if any). Some lending institutions require the pledging of an asset as collateral, however, many offer funding without a collateral requirement. Before applying for a business expansion loan, verify what assets, if any, may be available if the collateral is required.
Tax Returns. Lenders generally require the submission of business and personal returns to cover the last 3 years. Tax returns provide underwriters with the information required to make a sound, underwriting decision.
A Business Credit Report. A verifiable, solid business credit history is enormously helpful towards gaining an expansion loan approval. If you have not already begun to establish a business credit history, now is the time to begin.
The Business’ Financial Statements. Financial statements reveal the most current snapshot of the business’ current financial health. Financial statements include a Profit/Loss Statement, a Cash Flow Statement, and a Balance Sheet, among others.
Finding a Business Expansion Loan
There are many lenders who specialize in financing small businesses at the many stages of a business’ life cycle. They include the following lenders –
Commercial Lenders. Most large Commercial Banks operate with a lending division that offers business services and loans to businesses of any size. An established business often begins its loan search about an expansion loan with the bank they currently have an ongoing relationship with.
A commercial lender’s business expansion loans are –
- Offered with competitive fees and interest rates.
- Typically, approved with excellent credit histories for the business, as well as the business owners who are responsible for the debt.
- Likely to request some form of collateral.
Small Business Administration (SBA) Loans. The Small Business Administration is an independent agency of the United States federal government. One of its essential missions is to provide cost-effective financing for small businesses throughout the country. SBA small business loans take some time to process, so borrowers are advised to expect up to three months before an approved is issued. And, SBA loans often include a collateral requirement.
Online Creditors. Online lenders offer a quick alternative to the standard processing time of most business expansion loan products. Additionally, online lenders also reduce the necessary documentation required for loan approval. However, a borrower pays for this reduced-doc, quick turnaround business expansion loan as the lender will increase the interest and may require collateral or a personal guarantee.
Credit Unions. Credit Unions are a great choice for smaller business expansion loans. While a credit union may be able to offer a competitive rate, many credit unions do not offer business services at all. To apply for a loan from a credit union, a borrower must join the credit union as a member.
Business Expansion Loans — Appropriate Funding Uses.
The reality is there are many ways in which to use the financing provided by a business expansion loan. However, small businesses that are still establishing a business’ strength, should remain ultra prudent in the ways they choose to use the monies. Here are a few helpful strategies –
Hire Employees. A new business can often take up most of the time of its owner. Adding assistants frees up the owner’s time to stay focused on the larger business picture.
Open a New Location. New businesses generally start small to keep costs down. When a business takes off, it often outgrows the business location first chosen to begin the business. Business owners can also opt to expand the outgrown location, rather than moving to a new location.
Buy Equipment. Small business expansion loans are a great way to buy new equipment or, to finance an upgrade of the current equipment.
Bring a Product or Service to a New Marketplace. Many businesses choose to expand by taking a successfully performing product to a new market. Although it may require a bit of re-branding and marketing to begin, a new marketplace opens oodles of possibilities for a small business to grow.
She has spent the last decade assisting entrepreneurs with starting new businesses, obtaining startup and working capital and growing their customer base.
She enjoys writing about her experiences as an entrepreneur and using data and information from reliable sources to back up what she writes about. Through her writing she aims to educate other entrepreneurs on how to obtain capital and build successful businesses doing what they love.