Options To Financing Business Expansion
There comes a point when any growing or thriving small business sees an opportunity to grow if they have sufficient capital to help with the expansion. Sometimes these expansion opportunities have been planned long in advance, and other times these business expansion opportunities are spur of the moment. During those times, having expansion capital is crucial.
What is Expansion Financing
Quite simply, business expansion relates to any spending or action to increase the size of the company, increase sales, or increase profits of a small business. Increasing the size of the business can come in the form of capital investments, as well and labor investments (ie: hiring new employees). Generally, a business will look to expand when they feel they have strong enough systems and business infrastructure in place to support the expansion. After mastering their craft and trade, and when a business feels it can service the new influx of business, a company may look to expand. Another key to expansion is to make sure that the company’s customer base is solid enough to help aid during the high-growth period, but also make sure that the customer base continues to grow during the expansion to help offset or pay for the upfront and long-term costs related to the project. Also, since expansion generally costs money, there may be a need for working capital purposes to help aid during this period when funds are being directed elsewhere.
Why Would a Business Choose to Expand?
- Need facilities: A common reason for business expansion is when a company outgrows their current operating facility or supporting networks.
- Need equipment: As business growth ramps-up, so is the need for modern and fully-functioning equipment or machinery to help keep up with orders.
- Hire employees: As your business grows, the reliance on quality workers to support the growth, as well as hiring new workers to help the company with production and marketing.
- Working capital: When you find yourself reinvesting in larger facilities, equipment, marketing, hiring, etc. you may find that your liabilities begin to outweighs your income. During those times it may be crucial to obtain quality working capital financing
- Marketing: As with as businesses, if you have a great product or service, but no one knows about it, you won’t make much money. Therefore it takes money to make money. And investing in marketing to help grow your business grow is crucial.
- Purchase inventory: as your business grows, the need for adequate inventory is crucial. You only have one chance to make a first impression, and even if you mess up after a long relationship, it could be enough to ruin it. Therefore making sure your product is always in-stock is extremely important.
Can a Business Afford to Expand?
That’s the key question every small business must ask for investing in expansion. If you invest money in expanding your business, you want to make sure that at the end-of-the-day the expansion was worth it when it comes to the bottom line. So therefore proper cash-flow analysis and projections should be done to make sure your expansion plans are worth it.
- Analysis: Analyze your company’s financials as well as your marketing and expansion strategies to make sure that the opportunity for growth is there.
- Planning: carefully put together an execution plan on exactly you will expand and how the money will used to finance your company’s growth.
When is it Worth Expanding?
Business expansion is worth it whenever you have an opportunity to growth the business in a way where you costs of expansion will be less than the profits you make from expanding. So, if a company sees an opportunity in which hiring a new employee will speed up operations or make the operation more efficient, thus: leading to increase sales, it may be worth it. Or if moving into a larger facility will allow your company to ramp up production, or allow you to consolidate your manufacturing facility with your distribution facility, that could be worth it. Or maybe you’re a restaurant or other retail store that can increase the seating – and over number of sales – by building-out the facility to add extra seats.
What are the Expansion Financing Options?
The loan options available for expansion financing are numerous. Each loan has their own unique characteristics that have both pros and cons. The type of loan that is good for one company, may not be best for the next small business. If a company has lots of assets they can draw on those to help secure financing. But other company’s that lack lots of collateral (or any) can use their company’s cash-flow to obtain financing. Other times a company may prefer to get a true bank loan, but understand that the process may be extensive, and doesn’t want to miss an immediate expansion opportunity. Under those circumstances the merchant may opt for an alternative loan or cash-advance working capital loan. The options are plenty. We will discuss each below.
Comparing Expansion Loan Options
| Types | Rates | Terms | Funding |
|---|---|---|---|
| Bank | 6-10% | 3-7 years | 14-30 days |
| SBA | 6-10% | 3-7 years | 10-30 days |
| Line of Credit | 5-15% | 1 – 3 years | 7-30 days |
| Alternative | 6-25% | 1-5 years | 5-7 days |
| Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days |
| Asset Based | 8-20% | 1 – 3 years | 3-4 weeks |
Bank Loans For Expansion
Getting a term loan and/or a business lines-of-credit is almost always the most desired types of financing. The reason bank financing is so desired is because they offer the lowest rates and best terms of all business lenders. By paying the lowest rates on repayment, a business is able to sink as much money back into the business during expansion as possible.
- Rates: 5-8%
- Terms: 1-10 years
SBA Expansion Financing
SBA loans and lines of credit are a pretty good option for company’s looking to expand because the rates are very affordable, and the terms are very favorable — allowing the borrower to pay back the debt with comfort.
- Rates: 6-8%
- Terms: 3-25 years
Alternative Business Expansion Loans
Alternative business loans offer companies the ability to obtain quality financing if they lack ideal credit or don’t have enough documentation required by traditional lenders. The alternative lending process is usually very fast, with preapproval taking minutes and funding in less than two weeks.
- Rates: 8-25%
- Terms: 1-5 years
Equipment Financing
Equipment leasing allows expanding businesses the ability to obtain new or used business equipment without having to pay the full-costs of the business upfront. Instead of buying the equipment outright, the small business would have an equipment leasing company purchase the equipment, and then the equipment would be leased to the business for a period of time.
- Rates: 5-15%
- Terms: 1-10 years
Merchant Cash Advance
Merchant cash advances and ACH business loans can be a useful financing tool for an expanding business in need of immediate financing. Cash advances aren’t loans in the traditional sense. Instead, they are the sale of future revenue in return for immediate financing. Cash advances are usually paid back daily either through a percentage of a company’s credit card transactions, or through a set daily or weekly via ACH payment through the company’s bank accounts:
- Factor rates: 1.16-1.50
- Terms: 3-24 months
