When your business is growing you may need financing to achieve your goals. Expansion financing refers to all types of financing that are used to grow your business. There isn’t a single type of financing that’s best. Here we’ll cover the types of expansion financing that may be available and which ones may be a fit for your business.
What is Expansion Financing Used For?
Expansion funds are meant to help you grow your business. You’ll use funding for whatever it is your business needs to get to the next level. This can include:
- Opening a new location
- Launching a new product line
- Entering a new market (including exporting)
- Establishing an online presence
- Increasing your customer base through advertising
- Hiring more employees
- Investing in new and better equipment
Because expansion funds can be used for so many things it is a good idea to have an updated business plan for your growing business. Having a clear plan that shows you know how your funds are going to help your business keep growing is an asset. It shows lenders, angel investors or venture capital firms that you have thought through your strategy, and have clear expansion plans.
What Type of Financing is Typically Used for Small Business Expansion?
Most small business lenders prefer to lend to businesses with at least two years in business and solid revenues, as evidenced with business bank statements and/or business tax returns. Most businesses looking for business expansion loans have the advantage of being able to show investors, banks, etc a profitable business along with proof of concept.
Being able to present documents showing your business is financially stable and is doing well can help you negotiate loan terms, credit increases, and new leases.
Many lenders also check credit. You may need good personal credit scores and/or good business credit. (If you haven’t established business credit, here’s how.)
There are several types of small business financing to consider for expanding your small business:
Lines of Credit
Lines of credit provide you with access to funds you can borrow from as needed. You’ll pay interest only on the amount you borrow. They are best for short-term borrowing needs such as inventory or working capital.
Term loans offer a fixed amount of financing with a fixed repayment period. Term loans may be short-term loans (less than two years) or long-term loans (2-25 years). There are a variety of options available including online loans, bank loans and SBA loans.
If your business needs equipment to grow, consider equipment financing. Pay for equipment over time and increase cash flow in the meantime.
Business Credit Cards
Business credit cards are a relatively easy business funding option. As long as you have good personal credit scores and meet minimum income requirements, you may qualify. Unlike other types of financing, credit cards are often available to startups. However, you may need to get multiple cards in order to get enough available credit, and costs may be high. (Consider a 0% APR credit card.)
Microloans are a type of loan but that deserve a mention. They often are made by non-profit lenders such as Community Development Financial Institutions (CDFIs) and are available to entrepreneurs who have difficulty getting financing. They come with attractive terms and lower interest rates, not to mention they usually provide mentorship to borrowers. However, amounts may be on the smaller side ($50,000 or less), which may not provide enough capital for some businesses.
Additional Types of Funding
Grants offer money that does not have to be repaid. Some grants are for relatively small amounts, while government grants can offer large amounts of funding. Lots of small business owners want grants, which means they are competitive. However, if you are able to get one that is essentially free expansion capital.
Crowdfunding comes in several forms including debt financing, investor (equity) crowdfunding, and rewards crowdfunding. Raising funds through crowdfunding takes work, but it can be an attractive way for some early stage and established businesses to get funding to grow.
The Benefits of Financing a Business Expansion
If your business’ balance sheet looks great, you have great cash flow and plenty of working capital you may be tempted to forgo the hassle of getting a small business loan. But it is important to weigh the pros and cons of self financing against financing through a lender.
Benefits of self financing:
- No interest charged
- No monthly payments
- Good credit score not required
Benefits of getting a business expansion loan:
- Keep funds available for working capital or other needs
- Expand more quickly than with self funding
- Some types of funding may come with mentoring or other benefits
If your business is growing, consider business expansion financing to help your business get the capital it needs to reach the next level of success. Nav can help your business find the right options based on your business qualifications.