Funding expansion to fuel a growth opportunity is a reason many business owners look for extra capital. When a business owner decides to pursue an expansion loan, it’s important to recognize that sometimes what seems like the right loan, but at the wrong time, can negatively impact a business—so it’s critical to evaluate your current situation to ensure a business expansion loan makes sense and that the timing is right.
Here are some suggestions to help you evaluate whether or not a loan to finance expansion is a good idea:
Is your business ready?
The right answer will require an honest evaluation of your current situation. Does your business currently have the cash flow to repay a loan? A lender wants to know that your business is not only capable of supporting the debt, but that you’ll make regular and timely payments. A healthy business and a business with a strong credit profile will be in a better position to approach a lender and find success.
Do you know how your credit profile looks today?
Most business owners are familiar with their personal credit score, but don’t know much about their business credit profile. Before you talk to a lender, you should know your personal credit score as well as know what’s in your business profile. To find your personal credit score the credit bureaus (Experian, Equifax, and Transunion are the three biggest) can be a good place to start, but there are also other online resources that will give you access to your personal score. The three major business-reporting bureaus are Dunn and Bradstreet, Experian, and Equifax.
Do you have a sound business plan for expansion?
Do you know how much capital you need and can you articulate what you’ll do with it. As a lender, “As much as I can get,” is not the answer they really like to hear. You’ll have much more success if you have figured out just what the expansion will cost and can articulate what you’ll do with the funds.
Knowing where to look will save you time
There was a time when the bank around the corner was the one-stop-shop for a loan, that’s not the case any more. In fact, depending on how much money you’re looking for, how long you’ve been in business, the industry you’re in, and your business credit profile, there are likely some lenders that will make more sense than others. In addition to the bank, there are a number of online options that could be a better fit.
For example, banks are most likely to be interested in working with a business with a track record that is at least a few years old, has $1 million in annual revenues, a business owner with a strong personal credit score, and is looking for a half-million dollars or more. If that describes you and your expansion project, the bank could be a good fit. Many online lenders, like OnDeck, will work with a business owner with only a year in business and $100,000 in annual revenues. Your current situation will help you determine where your search might have the greatest odds of success.
Consider loan term length
Depending on the nature of your expansion plans, you should also consider which loan terms make the most sense. Is a short-term loan of a year or less a good option, or is the expansion going to require a longer commitment of three, five, or even 10 years. For example, expanding the outdoor serving area of a restaurant might be a good fit for a short-term loan while adding another 3,000 or 4,000 feet of warehouse space might be a better fit for a longer-term loan—they are both very different expansion projects.
The shorter-term loan will likely have a higher periodic payment, but the overall interest cost of the loan could be less, while the longer-term loan will probably have a lower payment but include a higher total cost of financing over the course of the loan. The cost of the expansion, the potential ROI, along with other factors will impact how you make that decision.
What type of loan makes sense for your business?
Financing options to help you grow your business
If you’ve ever heard the adage, “It takes money to make money,” you must be a small business owner. Fortunately, there are more small business loan options available today than ever before—you just need to know where to look and what to look for. You don’t need to be a financing expert to build a successful business, but you do need to consider all the business loan options available to determine which one is best to meet your business need.
Unsecured Small Business Loans
An unsecured business loan is simply a loan from a lender that does not require any form of collateral from a business or a business owner. This is based solely upon the creditworthiness of the applicant.
Many small business owners are interested in a loan for their business but don’t have the specific collateral a bank may require, such as specifically-identified real estate, inventory or other hard assets. Fortunately, there are lenders like OnDeck that do not require that their loans be secured by specific collateral, relying instead on a general lien on the assets of the business. These may be good options for many businesses.
Secured Small Business Loans
Banks generally prefer secured—rather than unsecured—business loans. Secured loans are loans that are backed with some sort of collateral like real estate, equipment, or other valuable business assets the bank can seize and sell if the loan is not repaid.
Banks (or other lenders that require specific collateral) commonly determine what they refer to as the loan-to-value ratio of your collateral based upon the nature of the asset. In other words, your banker may allow you to borrow against 75 percent of the value of appraised real estate or 60 percent to 80 percent of the value of what they call ready-to-go inventory. Because lenders might consider their loan-to-value ratios differently, you’ll need to ask any potential lender how they intend to set that value.
Small Business Loans for Different Industries
As a business owner, your needs may be industry-specific such as ordering kitchen supplies upfront or bridging cash flow while you wait for insurance reimbursement. At OnDeck, we understand and we offer tailored loan options (with multiple loan types, amounts, and repayment terms), so you can get a loan best suited for your industry and business. Here are some of the most common industries we work with and the small business financing options available to them.