How to Get a Small Business Expansion Loan

Here’s what you need to know about getting cash to go from small to bigger.

“A lot of times you can get an expansion loan without coming up with any cash injection.” (Getty Images)

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.

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.”

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.

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