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5 Business Expansion Loans to Grow Your Business

Date published: January 17, 2024
Are you ready to take your business to new heights but lack the financial backing to do so? Business expansion loans might be your ticket to success. Keep reading to learn more.
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The year is 1965, and in a modest Connecticut town, a young entrepreneur named Fred DeLuca had a simple goal: to fund his college education. He borrowed $1,000 from a family friend to start a submarine sandwich shop to help him earn money. As it turned out, this wasn’t just a loan: it was the seed that started Subway, now a global sandwich empire.

Business expansion As you consider the growth of your own business, think about how a business expansion loan could unlock similar potential for you. What transformative steps could you take to expand your operations, diversify your offerings, or enter new markets?

Let’s delve deeper into understanding business expansion loans and how they can serve as a catalyst for your business’s growth.

What is a Business Expansion Loan?

A business expansion loan is targeted funding for small business owners planning to grow their operations. It’s different from regular business loans due to its specific focus on expansion activities like opening new locations, buying new equipment, or hiring more staff.

Expansion loans for business owners come in various forms, such as term loans, lines of credit, or equipment financing. The choice depends on your specific expansion goals. The lenders usually determine repayment terms and interest rates based on factors like your business’s credit health, your credit history, and the type of loan.

When applying for a business expansion loan, presenting a well-thought-out plan for your business’s growth is a key factor. An expansion plan helps lenders understand how you will utilize the funds and the likelihood of your business meeting its growth objectives.

5 Types of Loans for Business Expansion

Expanding a business requires capital. Each of these loan types comes with its own set of features, benefits, and conditions and is suitable for different expansion needs. Let’s explore five common types of small business loans for expansion below:

Traditional Term Loans

Traditional term loans are a flexible financing option for business expansion. They provide a lump sum of money, which businesses repay over a set period, typically one to five years.

Traditional term loans are a go-to solution for businesses looking to finance various expansion activities like renovations, inventory enhancements, or workforce expansion. The fixed repayment schedule provides predictability in financial planning, enabling businesses to manage their cash flow while integrating new investments or operational changes.

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Term loans are usually offered by banks and are generally more accessible to businesses with a solid financial history. Key requirements often include a minimum credit score of 620 or higher, an established business history of two years or more, and proof of consistent revenue.

  • Loan Amount: between $25,000 and $500,000
  • Loan Term: one to five years
  • Interest Rates: vary between 7% to 30%
  • Speed of Funding: two business days to two weeks

SBA Loans

SBA loans are long-term loans that are partially guaranteed by the Small Business Administration. These loans are known for their relatively low interest rates and extended repayment periods, making them suitable for significant, long-term business expansion plans. They are especially beneficial for funding large projects like purchasing real estate, heavy machinery, or undertaking major renovations.

There are different types of SBA loans, but the most popular for expansion are the 7(a) and 504 loan programs. An SBA 7(a) loan is a flexible loan that can be used for various business purposes, including expansion, working capital, and refinancing existing debts. In contrast, a 504 loan is specifically aimed at financing major fixed assets such as real estate or large equipment, making it ideal for long-term business expansion projects involving these assets.

Many entrepreneurs turn to SBA loans when looking to expand their operations for one primary reason: the SBA's partial guarantee of the loan. If approved, the SBA will guarantee between 75% and 85% of the loan amount to the lender. This often translates to more competitive terms and interest rates for the borrower.

Despite the guarantee, the business will still need to have a solid financial record, a minimum credit score of 680, and a track record of profitability to be considered eligible for an SBA loan. Finally, SBA loans also typically require a 10% to 20% down payment and collateral, such as equipment or real estate.

  • Loan Amount: between $5,000 to $25 million
  • Loan Term: five to 25 years
  • Interest Rates: start at around 6.5%
  • Speed of Funding: about three weeks

Equipment Financing

Equipment financing is specifically designed to purchase business-related equipment. This can include anything from office technology to heavy machinery, making it an ideal choice for companies looking to expand their operational capacity or update their equipment.

Office equipment like computers, phones, and headsetsOne of the main advantages of equipment financing is that the equipment itself typically serves as collateral for the loan, which can help secure more favorable terms and rates. This type of financing allows businesses to acquire new or upgraded equipment without the burden of a large upfront purchase, thereby preserving cash flow for other expansion activities.

It’s a practical solution for businesses aiming to modernize operations, increase productivity, or expand service offerings. Some lenders may require a 10% to 20% down payment.

  • Loan Amount: up to 100% of equipment value
  • Loan Term: expected life of the equipment
  • Interest Rates: 8% to 30%
  • Speed of Funding: as little as two days

Business Line of Credit

A business line of credit provides a flexible financing option for businesses, functioning similarly to a credit card. It offers a predetermined credit limit from which companies can draw funds as needed, making it a versatile tool for managing business expansion.

The key advantage of this type of financing is its adaptability to a business’s changing financial needs. Businesses can use the funds for various purposes, including purchasing inventory or other expenses related to expansion. You only pay interest on the amount you draw, not on the total credit line. This flexibility is beneficial for businesses experiencing fluctuating capital needs during their expansion phase, as it allows for more agile financial management.

  • Loan Amount: between $10,000 and $1 million
  • Loan Term: six months to five years
  • Interest Rates: 7% to 25%
  • Speed of Funding: as little as one day

Invoice Financing

Invoice financing involves selling your outstanding invoices to a lender in exchange for immediate capital. It can be particularly useful for businesses that operate with delayed payment terms but need immediate funds for expansion.

The primary benefit of invoice financing is improved cash flow. By converting invoices into immediate cash, businesses can quickly access funds necessary for growth initiatives without waiting for customer payments. This is especially valuable for covering short-term expansion costs like payroll, inventory purchases, or marketing campaigns. It’s a practical solution for businesses seeking growth opportunities without cash flow restrictions.

  • Loan Amount: up to 80% or 90% of the total invoice value
  • Loan Term: typically aligns with the invoice due dates
  • Interest Rates: usually a factor fee of 3% plus 1% every week the invoice is outstanding
  • Speed of Funding: as little as one day

What Can an Expansion Loan Be Used For?

Expansion loans offer businesses a pathway to growth, catering to various needs associated with scalability in business. For instance, Starbucks began by pooling money, but soon took out loans to expand beyond selling coffee beans, venturing into tea and coffee cups. This financing step was instrumental in Starbucks’ evolution from a local coffee bean seller to a global coffeehouse chain.

Employee working in warehouseSome loan types, like equipment financing, are meant to be used for specific purposes. If an equipment financing loan is used for other purposes, it could be considered a breach of the loan agreement, leading to loan recall, negative impacts on your business credit, and even legal action.

For other loan types, like traditional term loans and SBA loans, the usage is typically more flexible. Here’s an overview of how you can effectively utilize these loans:

  • Opening New Locations: Beyond funding the initial acquisition of new premises, business expansion financing can equip these spaces to fit your business’s requirements. This might include renovations and installations of specialized equipment and technology.
  • Purchasing Equipment: When it’s time to increase production or improve operational efficiency, expansion funding can facilitate the acquisition of new machinery. This could involve replacing outdated equipment or investing in new technology with more advanced capabilities.
  • Hiring Additional Staff: As your business grows, so does the need for a larger workforce. An expansion loan can assist in covering the costs of recruiting, training, and paying new employees.
  • Marketing and Advertising: To reach a wider audience and penetrate new markets, these loans can finance new marketing campaigns, digital advertising efforts, or promotional activities.
  • Increasing Inventory: Meeting rising customer demand often means increasing stock levels. A business expansion loan can provide the funds to purchase additional inventory, helping you satisfy customer needs without interruption.
  • Refinancing Existing Debt: Consolidating existing debts with an expansion loan can lead to more favorable repayment terms. This can help streamline your finances and possibly reduce monthly outgoings, freeing up cash for other growth-oriented activities.

How to Prepare for Applying for Expansion Loan

Thinking about applying for an expansion loan? Hold that thought. There’s more than just filling out an application. It’s a strategic process that requires thoughtful planning and a deep understanding of your business’s needs and capabilities. Let’s walk through the key steps below:

Evaluate Your Expansion Readiness

Start by assessing whether your business is genuinely ready to expand. Analyze your current market position, growth potential, and the scalability of your operations. What are your goals for expansion? Are you expanding to meet growing customer demand, or are you seeking to tap into new markets? Ensure that your reasons for expansion align with your long-term strategy.

Research Appropriate Loan Options

Explore different loan types and understand their specific requirements. Choose one that best aligns with your expansion goals and financial situation. For instance, if you’re planning a large-scale expansion, such as acquiring a new facility, an SBA loan might be your best bet due to its large loan amounts. For more immediate or flexible needs, such as bridging a cash flow gap, a business line of credit could be more advantageous for its quick funding.

Develop a Comprehensive Business Plan

Your business plan should clearly articulate the purpose of the expansion, detailing how the loan will be utilized.

Business plan paperworkInclude market research, financial projections for the next three to five years, and an analysis of how the expansion will help you grow. This plan will demonstrate your expansion approach to lenders.

Organize Financial Documentation

Most lenders will scrutinize your financial health, so prepare all relevant financial documents. This includes income statements, balance sheets, tax returns, and cash flow statements. Showing strong financial health and a track record of profitability can make your loan application more compelling and instill trust among lenders.

Consult with Experts

When in doubt, turn to the pros. Financial advisors and loan specialists can offer invaluable insights and guide you through the maze of loan applications. Consider consulting at local banks, Small Business Development Centers, or through online platforms like Fundera and Nav, which offer resources and connections to specialized financial professionals.

Final Thoughts

As we reflect on the transformative journey from a simple loan to a global empire like Subway, it’s clear that a loan to expand a business can be a powerful catalyst for growth. However, each step, from choosing the right short-term business loan to meticulously planning your growth strategy, demands careful thought and consideration. Remember, expansion should align with your long-term vision and not just be a pursuit of growth for its own sake.

Ethan James   Lead Writer
Ethan James is an experienced Financial Writer at Lendza with over a decade of experience.