Finance new equipment. Sometimes, your team is big enough, and your location size is sufficient, but your equipment needs an upgrade. For example, a restaurant could meet customer demands better with a new oven, or a manufacturing business could increase production with higher-capacity machinery.
Launch a new product. If you started your business with just one or two products and found a good market for them, your business might benefit from adding a new one to the line. Expanding a product line can be expensive, though. You’ll need to invest in research and development, pay for material and manufacturing costs, and so on. A business expansion loan can help you afford those costs without draining your retained earnings.
Expand to a new market. Say you’ve found success with your current product or service, but the current market you’re in is saturated or you see a new market with less competition. An expansion loan can help you cover the costs associated with that jump to a new market.
Understand your motivation. Just because you can borrow money for your business doesn’t mean you should.
“You need to recognize why you’re expanding,” says Fleming. “Are you expanding just for the sake of expansion? Some people do that, where they run before they walk.”
It’s important to be honest with yourself about why you want to grow your business. If you don’t feel like you have a handle on things as they stand, expanding could cause you to lose control entirely.
Do the math. While a business expansion loan may be easier to get than a startup loan, you’ll still need to provide lenders with a good reason to give you the money. This means that your expansion idea needs to be profitable. If you’re looking to expand to a new location, for instance, start looking at potential options. Price it out, and consider all of the costs involved. Do the process for a few different locations in case your top option falls through. Then run the numbers for how much a new location would boost your bottom line to make sure the return on investment is worth it.
Make sure you can manage the growth. Even if your expansion idea is profitable, be clear about how you’re going to manage your new product line, location or team. If you’re the only business owner, you may need to bring in a partner or hire someone with management skills to avoid putting the full burden on yourself.
What You’ll Need to Apply
Once you’ve done your due diligence, the next step is to get your plans and documents together to apply for a small business expansion loan.
Here’s a quick summary of what you should have ready to go before you apply:
Tax returns: You’ll typically need to submit your personal and business tax returns for the past three years. These provide the lender with an idea of whether your company has a good track record of profitability.
Financial statements: This may include your balance sheet, income statement and cash flow statement. It shows lenders the state of your business. “Lenders are going to want to make sure [you have] sufficient cash flow to cover any new debt payments,” says Patrick O’Keefe, CEO of Grow Michigan, a fund established by a group of banks to help Michigan-based small businesses.
Business plan: Share some details about your business, how you plan to use the funds and how you’ll make it profitable.
Collateral: Even with an established business, lenders may require collateral to protect themselves against default. Consider which tangible business assets you could use to secure the loan.
Business credit report: If you’ve established a good credit history for your business, it can improve your chances of getting approved. If your business credit is poor, though, or you haven’t established a credit history, you may have a hard time securing a loan.
Legal documents: Lenders may require various legal documents for your business, such as your business license, articles of incorporation, third-party contracts, franchise agreements and commercial leases.
Where to Go for a Small Business Expansion Loan
There’s no shortage of small business lenders, so it’s important to know what your options are and the benefits and drawbacks of each.