business expansion loan

Funding Your Business Growth: An Overview of Business Expansion Loans

Ezra Cabrera | February 12, 2023



    Business expansion is a crucial step in the growth of any company, and it often requires significant investment. While many entrepreneurs invest their own money into their businesses, this may not always be enough to support growth.

    Business expansion loans are the capital businesses need to grow and succeed. In this guide, we'll provide a comprehensive overview of small business expansion loans so that you can make informed financial decisions.

    Key Takeaways

    • A business expansion loan provides you with the capital needed to expand your business. The loan can be used to purchase new equipment, expand production facilities, hire additional employees, purchase new inventory, or cover other expenses associated with business growth.
    • Small business expansion loans are typically offered by banks, financial institutions, or other online lenders and generally are secured or unsecured, depending on the lender's requirements, business cash flow, and borrower's creditworthiness.
    • You can use loans for business expansion by hiring additional staff, expanding to new markets, moving to another location, and more.

    How to Use a Business Expansion Loan

    How you use the loan depends on the lender and loan type you qualify for. Here are some of the ways you can use business expansion loans to grow your business:

    • Hire additional staff

    • Remodel and/or expand your physical space

    • Establish a strong online presence

    • Expand to new markets

    • Open a new location

    • Produce new products

    • Acquire new business

    • Franchising

    • Moving to another location

    Types of Business Expansion Loans

    Several small business loans are available for business expansion, each with unique features and benefits. Some of the most common types of loans for business expansion include:

    SBA Loan

    SBA loan programs are long-term loans where the Small Business Administration (SBA) guarantees a portion of the loan, which motivates SBA lenders to lend money to small business owners. There are 10-year working capital term lengths or 25-year real estate term lengths. Both term options are great business expansion opportunities for small business owners. The only difference is that you must use the 25-year term if commercial real estate is involved.

    The biggest benefit of SBA loans for a small business owner is the extended-term length. By stretching the length of the term, monthly expenses go down, freeing up working capital for business expansion.

    Multi-Year Term Loan

    A multi-year term loan is a short-term loan, often with a term of two to five years, with no restrictions on purchases. Because of the flexibility, multi-year term loans can be used for anything from business expansion to refinancing debt.

    Business Line of Credit

    A business line of credit is like a credit card, but with cash, your small business can withdraw. There are no restrictions on purchases, making a line of credit a great option to capitalize on expansion opportunities.

    A line of credit is revolving, meaning the amount available fluctuates up and down based on the amount spent and repaid. As you pay down the amount owed, the amount available rises back up. The line of credit allows a business owner to pursue new avenues for growth.

    Invoice Financing

    Invoice financing is the process of selling outstanding invoices for immediate capital. When your small business works with contracts or invoices, you can sell the accounts receivable to a factor and acquire secured money, allowing you to take advantage of expansion opportunities. Instead of waiting for your clients to follow through with payment, invoice financing allows you to utilize capital quickly.

    Equipment Financing

    Equipment financing refers to either an equipment loan or equipment leasing. Equipment loans are a lump sum borrowed from a lender to purchase used or new equipment. On the other hand, equipment leasing is essentially an equipment rental. At the end of the lease term, a business owner can buy the equipment outright from the lender, extend the term of the lease, or end the lease and return the equipment.

    Equipment financing also provides a great business expansion opportunity because it allows business owners to obtain new, state-of-the-art equipment without the burden of a large purchase. That means you can get that new piece of machinery or the new vehicle you need to increase performance and prepare for an expansion.

    How to Get a Business Expansion Loan

    Getting business loans for expansion typically involves several steps, including:

    Determine your funding needs

    The first step in securing a business expansion loan is determining how much funding you need and what you will use the funds for. This will help you choose the type of financing best for your business and the loan amount you need to borrow.

    Prepare a business plan

    A well-prepared business plan is critical to securing a loan for business expansion. Your business plan should include information about your business, financials, and growth plans.

    Gather financial documents

    To apply for a business expansion loan, you'll need to provide financial information, including tax returns, financial statements, and credit reports.

    • Basin business information

    • Business and personal tax returns

    • Personal information of the business owner

    • Business and personal bank statements

    • Business financial statements

    Choose a lender

    Many lenders offer some type of loan for business expansion plans, including traditional banks, credit unions, and online lenders. You'll want to research other options to find a lender that is the right fit for your business.

    Apply for the loan

    Once you have chosen a lender, you'll need to complete an application, which typically requires providing personal and business financial information and a description of how you plan to use the funds.

    Negotiate terms

    Once approved for a loan, you'll have the opportunity to negotiate the loan terms, including interest rates, repayment period, and other fees.

    Close the loan

    Once you have agreed to the terms of the loan, you'll sign a loan agreement, and the funds will be disbursed to your business.

    Getting a small business expansion loan can be a complex process, but careful planning and preparation can help you achieve your business growth goals. It's important to work with a trusted financial advisor or loan specialist who can help you navigate the underwriting process and find the right solution for your business.

    Growing Your Business with Expansion Business Loans

    Choosing which type of loan program works best for your business can be overwhelming. To help you get started, research the five types of loans mentioned above.

    If you want to expand your options, there are several alternatives to a business loan for expansion. For example, you can substitute invoice factoring with a merchant cash advance if you need immediate funding. Both of these loans are great options if you need short-term loans.

    Lenders will likely grant favorable rates and repayment terms if your business is in good financial standing and you've been thorough during the application. When choosing a loan, always be persistent and don't rush. The best business expansion loan can surely help in boosting the growth of your company.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.