- Posted by: Jackee Lu
- Category: Articles
What Is a Small Business Expansion Loan?
Business expansion loans are small business loans that provide business owners with the capital they need to make investments in their companies, often through physical expansion.
Some reasons entrepreneurs choose to pursue business expansion loans include staff shortages, inventory gaps, unfilled orders, untapped markets, edging out the competition, or changes in the respective industry. One of the biggest mistakes business owners make is waiting too long to expand their business—waiting until they hit a certain milestone or accumulate a certain amount of working capital. But by then, it may be too late, with demands for the business unable to be met. Businesses sometimes never recover from failing to deliver on growth demands.
Financing a business expansion can prevent this by giving you the cash to pay for the tools you need to handle additional business. Small business expansion loans help you better manage your business’s growth—and can have the added effect of propelling even more growth along with it.
There are a variety of different types of business expansion loans, and the right loan for you depends on your specific business situation. In this guide, we’ll walk through exactly what business expansion loans are, but let’s start with the top small business loans for expansion:
- Traditional term loan
- SBA loan
- Equipment financing
- Business line of credit
- Short-term loan
- Merchant cash advance
- Invoice financing
The Best Business Expansion Loans on the Market
Ready to expand your business?
It’s important to find financing that works for the needs of your business, so we’ve broken down the best loan options for business expansion below.
Traditional Term Loans
A traditional term loan is suitable for a wide range of business purposes, including business expansion. With a traditional term business loan, you are lent a set amount of money upfront, which you pay back (along with interest and fees) over a set period of time.
Term loans work for general working capital needs, renovations, inventory investments, workforce investments, and so on. Really, they’re some of the most usable business expansion loans out there.
Here are the term loan fast facts:
- Maximum loan amount: $25,000 to $500,000
- Term: One to five years
- Interest rates: 7% to 30%
- Speed: As little as two days, but as long as two weeks
How to Qualify
Generally, a minimum credit score of 620, an annual revenue above $100,000, and at least two years in business is required to qualify for a traditional term loan.
If you’re an extremely qualified borrower, then the best lender for you to work with is a traditional bank lender.
However, if you don’t qualify for a bank loan just yet, a medium-term loan offered by an online lender like Funding Circle, Lending Club, or Fundation would be a good fit. All three offer similarly large loans structured like bank loans but are slightly easier to qualify for.
An SBA loan is a government-guaranteed, long-term funding option made by SBA-approved lenders that let businesses that might have been turned down for traditional bank loans receive low-interest funding. The funding can be used for many business purposes, including expansion.
If you’re looking to finance the expansion of a small business, there are two types of SBA loans to consider. An SBA 7(a) loan offers funding amounts up to $5 million for smaller business expansion needs. The SBA 504 loan program can offer loan amounts up to $20 million for the purchase of real estate, equipment, and machinery.
These loans are ideal for many businesses, but you need relatively good credit (680 and up) and other solid financials to make the cut. The application process can also take weeks, so this is not an option if you’re looking to expand immediately.
Here are the SBA loan fast facts:
- Maximum loan amount: $5,000 to $25 million
- Term: Five to 25 years
- Interest rates: Starting at 6.5%
- Speed: As little as three weeks
How to Qualify
As we mentioned before, qualifying for an SBA loan can be challenging. Generally, lenders will want to see an annual business revenue over $180,000, at least a 680 credit score, and four years of business history on the books.
SBA loans are not actually offered by the Small Business Administration. Instead, they’re offered by SBA-approved lenders. SBA lenders are typically traditional banks who’ve partnered with the SBA.
With equipment financing, the lender will give you cash upfront to help purchase the equipment you need outright. You then pay back the total amount lent, plus fees, for a set period of time.
This is a great option if you know that your expansion requires new equipment, as the loan amount will cover just that cost.
It’s also slightly easier to obtain since the equipment you buy is used as collateral if you default on the loan.
Here are the equipment loan fast facts:
- Maximum loan amount: Up to 100% of equipment value
- Term: Expected life of the equipment
- Interest rates: 8% to 30%
- Speed: As little as two days
How to Qualify
To qualify for equipment financing, you’ll need annual revenues exceeding $130,000, a minimum credit score of 630, and about two years of business history on the books.
Traditional banks typically offer an equipment financing option.
Another option is to look for lenders specializing in financing the specific type of equipment you’re purchasing. This is a good option specifically for vehicle and truck financing.
Business Line of Credit
With a business line of credit, a financial institution gives you a credit limit, or a maximum amount of capital you are able to draw on at any given time. Just like a credit card, you only pay interest on the amount you use. These funds can be used for a variety of business purposes, including expansion, and can be immediately accessed as you desire. Just make sure you monitor how much you are taking out on the credit line.
You may want to consider the pros and cons of a revolving credit line versus a non-revolving line. A revolving credit line automatically replenishes once you pay off the amount you used. A non-revolving credit line does not, which can help keep you from borrowing too much at a given time.
Here are the line of credit fast facts:
- Maximum loan amount: $10,000 to over $1 million
- Term: Six months to five years
- Interest rates: 7% to 25%
- Speed: As little as one day
How to Qualify
Qualifying for a business line of credit requires having annual revenues in excess of $180,000, having a minimum 630 credit score, and have at least one year of time in business.
Business lines of credit are traditionally offered by commercial banks. However, like term loans, these bank loans can be very hard to qualify for.
Another option is to pursue alternative, accessible, and shorter-term lines of credit from lenders like Kabbage or OnDeck. These two companies work well for businesses that don’t qualify for many other financing options.
With a short-term small business loan, you are lent a set amount of capital upfront, which you quickly pay back (along with fees) over a short period of time, typically three to 18 months.
Payments are sometimes required daily or weekly. The amount you can borrow will be lower and interest rates will be higher than regular term loans, but you will pay off the loan faster. These loans are not typically given by banks, but rather alternative online lenders that have more lenient requirements for securing financing.
Here are the short-term loan fast facts:
- Maximum loan amount: $25,000 to $250,000
- Term: Three to 18 months
- Interest rates: Starting at 10%
- Speed: As little as one day
How to Qualify
A short-term loan is generally easier to qualify for than a longer-term loan. Lenders will want to see annual revenues of at least $150,000, a 600 credit score, and over two years of business history.
Merchant Cash Advance
A merchant cash advance (MCA) is not your typical small business loan. With an MCA, financing companies front you a set amount of cash and then you repay the advance (plus a fee) with a set percentage of your daily credit and debit card sales.
This is a good option if you’re running a retail business or deal with a lot of credit card transactions. Merchant cash advances are often provided through online financing companies. They are the most expensive product on the market, so you might want to compare an MCA with something like a short-term loan. The upside is that you won’t have to worry about making active payments as they are automatically deducted from your merchant account.
Here are the merchant cash advance fast facts:
- Maximum loan amount: $2,500 to $250,000
- Term: Automatically deducted each day through your merchant account
- Factor fee: 1.14 to 1.18
- Speed: About one week
How to Qualify
To qualify for a merchant cash advance, you’ll only need a credit score of 550 or higher. However, some financing companies will want to see revenues upward of $180,000, and at least two years in business.
Like short-term loans, MCAs are only offered by online financing companies.
There are many merchant cash advance companies out there, and some of them offer ridiculously high rates. Be sure to compare your options fully before working with the first MCA provider you come across. Two companies we recommend are CAN Capital and Rapid Finance.
With invoice financing, you sell your invoices to a lender, who then fronts you a large majority of the invoice amount. The lender will hold a remaining percent (usually around 20%) until the invoice is paid. Once it’s paid, the rest of the funds will be released, minus the lender’s fees.
If you’re looking to expand, this allows you to not be held back by your unpaid invoices. You can move ahead on your own time.
Here are the invoice financing fast facts:
- Maximum loan amount: Approximately 50% to 90% of the total invoice amount
- Term: When your customer pays the invoice, you receive the remaining 10% to 50% reserve amount, minus lender fees
- Factor fee: Approximately 3% + 1% every week the invoice is outstanding
- Speed: As little as one day
How to Qualify
To get invoice financing, you need just $130,000 in annual business revenues, a 600 credit score, and one year of business history.
The invoice factoring companies are typically non-bank lenders that you can apply to online, like Fundbox and BlueVine.
These companies are really only concerned with the terms of your outstanding invoices, so they’ll mainly look at those details during the loan underwriting process. With online, streamlined applications, you can typically be approved within the same day you apply.
What Can You Use a Business Expansion Loan For?
There are variety of use cases for business expansion loans.
When it comes down to it, it’s about taking action to grow your business. However, growing your business can take many forms.
Here’s a list of just a few of the reasons why business owners look for business expansion loans, and what you can use this type of financing for.
Grow the Team
You might have just started your business with you and a few employees. As your business grows, you’ll inevitably need to continue to grow your team. You’ll get busier, and you’ll need to keep up with increasing demand.
If you don’t have the capital on hand to pay for top-notch employees, you could consider using business expansion loans to afford payroll right off the bat. This is only a good idea when you’re confident that adding staff and employees will contribute significantly to your revenue. This way, you’ll know that you can pay off the business expansion loan and not continue to take on debt to meet payroll in the future.
Expand to a New Market
Nailed your first trial in your current market? Your first product launch in one market might have been so successful that branching out to a new one is a no-brainer.
New market expansion is a common use for business expansion loans. This makes sense to take on when you know there’s significant revenue-earning potential in a market that you’re ready to tap into.
Expand a Product Line
You might have just started off with one product, and made a killing selling it. Now, you can serve your customers even better by offering another product.
Expanding product lines and offering more and more types of products costs money, though. You’ll likely need to invest resources in research and development, and could have material costs, manufacturing costs, and so on. Business owners often afford the cost of product development with business expansion loans.
Remodel or Pursue Commercial Real Estate
Business expansion loans might help you literally expand your business.
When you’ve outgrown your current storefront and need another, you might pursue commercial property loans.
You might only need to renovate your current space to bring it to the next level. This can still be an expensive undertaking, and business expansion loans can help you cover your construction bills.
Buy New Equipment
A common way to expand a business is by buying new equipment and machinery. You might need new delivery vans, commercial trucks, ovens, forklifts, and so on.
These pieces of equipment that you’ll continue to need more of as you grow are expensive.
Business expansion loans, namely equipment loans, can help you meet your equipment goals.
How to Prepare for an Expansion Loan
Whatever the reason you take on a business expansion loan for, you need to be fully prepared before you set out to apply for these loans.
It goes for any small business loan: Lenders want to see that you’re prepared.
Here’s what you need to do before you set out on a business expansion loan search.
Make a Realistic Growth Plan
Make sure you build out a comprehensive growth plan for yourself and the commercial finance company.
Know exactly what your business needs, its greatest potential growth opportunities, and establish how much you borrow versus how much you expect to make on return.
For example, if getting a $100,000 loan to buy more efficient equipment will net you $500,000 in the next couple of years, it’s probably a worthwhile investment. Both you and your lender can be confident that you’ll be able to pay the loan back.
On the other hand, if you set out for a business expansion loan with a half-baked expansion plan, then the lender might not be ready to invest in your growth.
Know What You Qualify For
Another important aspect of growing your business with expansion loans is knowing what you qualify for before you set out for a loan search.
Well, you wouldn’t want to waste time pursuing a business expansion loan that only works for borrowers with at least two years in business when you only have six months.
It takes time to fully prepare a business loan application, and time and effort spent on applications you would never qualify for is time and effort wasted.
So before you dive right into the search, be prepared by checking your credit score and seeing where your business’s financials stands.
How to Apply
The documentation you’ll need to apply depends on the loan product you are pursuing and the lender you are working with. Banks and the SBA will likely want to see a lot of paperwork, which can sometimes draw out the process. Alternative lenders, on the other hand, require less paperwork. Regardless, you should have every document you could possibly need ready. Depending on your specific business situation, documents you might need to provide include:
- Form of valid ID
- Personal background
- Business plan
- Industry type
- Time in business
- Business license
- Proof of ownership
- Customer list
- A/R aging statement
- Bank statements
- Balance sheet
- Profit and loss statements
- Tax returns
- Business credit score
- Personal credit score
- Business debt schedule
- Rent/real estate schedule
- Landlord subordination form
- Latest accounts payable statement
The Bottom Line
A business expansion loan comes in many forms. Before you acquire any type of financing, know exactly what you want to use the money for. This will help your loan application, and also guarantee you use the money responsibly once you secure it. Don’t make the mistake of waiting too long to expand your business. You should always be on the lookout for an opportunity and ready to capitalize with a business expansion loan.