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A Guide to Small Business Expansion Loans

A Guide to Small Business Expansion Loans
Lauren Ward

Lauren Ward

Updated March 7, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If your business is doing well, you may be thinking about taking it to the next level. And while expanding can be an exciting prospect, it typically comes with considerable costs. A small business expansion loan can give you access to the funds you need to expand without locking up cash flow or waiting until you can finance it yourself.Traditional medium- or long-term business loans are often called business expansion loans. However, any type of financing – even a business line of credit – that allows you to grow your business can be considered a business expansion loan. Wondering if the time is right to invest in – and expand –  your small business? Read on to learn how business expansion financing works and whether it might be a good option for your company.

What Are Small Business Expansion Loans?

Small business expansion loans are designed to help successful businesses boost growth, whether it’s by hiring additional staff, expanding a physical location, or purchasing new equipment. Ideally, the additional debt leads to an increase in monthly and yearly profits. Many small business loans are technically expansion loans. Whether it’s an SBA loan, equipment financing loan, or short-term loan from an online lender, if its purpose is to increase revenue, then it falls under the business expansion loan umbrella. Unlike startup loans, expansion loans are designed specifically for established businesses.

How Do Small Business Expansion Loans Work?

Here are some key things to know about business expansion loans. 

Typical Terms

Expansion loans are often traditional term loans, also called installment loans. With this type of loan, you receive the full amount of the loan (principal) up front. You then pay off the principal (plus interest) over a period of years. The length of a loan’s term will vary from one loan to the next. If you have a fixed interest rate, the repayment amount will be the same each time; if you have a variable interest rate, repayment amounts will fluctuate. Typically, loan repayments are automatically deducted from your bank account on a monthly basis.

Typical Costs

Most lenders charge a few different fees in exchange for giving you a loan.

Interest

Many things affect the interest rate you get, including the type of loan, the lender, your business’s qualifications, whether or not the loan is secured with collateral, and whether or not you sign a personal guarantee. The simple interest rate of a loan is the amount (expressed as a percentage) that a lender will charge on the principal. An annual percentage rate (APR) incorporates simple interest as well as additional fees, and is a more accurate reflection of how much a business loan costs.

Fees 

Depending on the lender and type of business loan, you may need to pay several different types of fees on top of your simple interest rate. These can include:
  • Documentation fees.
  • Origination fees
  • Loan processing fees
  • Late payment fees.
  • Account maintenance fees
  • Guarantee fees
  • Closing fees.
  • Prepayment penalties
These fees can range from 1% of the principal to 5% or more. Since this can significantly add to the cost of the loan, it’s a good idea to explore business loans and look at each loan’s APR to understand the true cost of the loan and make sure you're comparing products apples to apples.

What Business Expansion Loans Are Used for

There are a number of different ways you can use the funds from a small business expansion loan, so it's important to focus on what your business needs to grow. Here are a few ways you might use an expansion loan.

Hiring

Bringing on additional staff can be an essential step for growth, especially if you started out with just one or two employees. Generally, the more people you have pitching in, the better you will be able to execute your growth strategy. A larger team could also free you up to focus more on big-picture planning.

Opening New Locations or Renovating

If your business runs out of a physical location, opening an additional site can help you expand your market presence and profits. You could use an expansion loan to purchase a commercial property or buy land to develop. Or, you might want to invest in improving or expanding your existing location so that you can operate more efficiently or accommodate more customers.

Purchasing Another Business

Buying a business can be a way to eliminate the competition. It can also be a way to expand the focus of your business. And, if you purchase an established business, it allows you to avoid some of the initial costs that go along with starting something from scratch. Plus, you inherit their existing customer base.

Launching Products or Services

One way to expand your business is to start a new product line or add to your range of services. This can help attract new customers or increase what your current customers spend with your business. You can use a loan for the development and manufacturing expenses and keep your working capital for existing costs.

Buying Equipment

Whether it’s computer software or large machinery, new business equipment can be costly. If waiting and saving up to invest in new equipment is preventing growth, then a loan might make more sense than bootstrapping. An expansion loan allows you to pay for large-scale investments over time.

Purchasing Inventory

Rapid growth can lead to problems with inventory management. If you’re experiencing a sudden increase in demand and you don’t have enough money to scale up production, you will have to turn customers away. A loan to expand your business can be a good solution.

Expanding Into a New Market

Whether you’re thinking about physically moving into a new geographical location or looking to enter the e-commerce space, expanding into a new market can translate into more customers for your products or services. It can take a large amount of funds to get a good foothold, and an expansion loan can help you cover those costs.Recommended: Top Franchise Loans Options & Tips for Qualifying 

Pros and Cons of Small Business Expansion Loans

As with any financial product, there are both upsides and downsides to business loansOn the plus side, an expansion loan allows you to jumpstart your company’s growth and increase profits without having to wait until you have enough capital to do it yourself, and potentially lose out on an opportunity.An expansion loan also allows you to get an infusion of capital without bringing in investors and diluting your equity in the business. And, because expansion loans are targeted to established businesses (which represent less risk to the lender), they often offer competitive rates and favorable terms.On the downside, taking on debt always involves risk. If you put up an asset as collateral and end up defaulting on the loan, you could lose that asset. If you sign a personal guarantee, your personal assets, including your home, could be at risk. And while bank and SBA loans typically offer the best rates and terms for expansion loans, the application process can be extensive, and it can take several months to receive the funds.

When Does an Expansion Loan Make Sense?

There are many things to consider before applying for a business loan. To decide if an expansion loan makes sense for your business, it can be wise to make sure the following statements hold true for your business.
  • Your company’s cash flow is strong and predictable. Taking out a loan to expand business without the monthly revenue to pay for it isn’t usually a wise decision. Even if the purpose of it is to increase profits, you’ll want to make sure that your cash flow is in a healthy place before seeking out a loan. If the decision doesn’t pay off, you don’t want monthly loan payments to put your business in jeopardy.
  • You have a clear and realistic plan for expansion. What will you spend the money on and how much will it cost? Will the loan fund the entire endeavor or will you have to find additional capital elsewhere? Before taking out an expansion loan, you want to be sure you know exactly how you will use the money and how much you need. You’ll also want to make sure that your goals are realistic and achievable, based on where your business is now and the amount of time and money you will have to invest. 
  • You anticipate the loan to increase your business’s profits. How much do you expect profits to increase with accumulation of debt? Will the increase last all year long, or will it be a seasonal increase? Business expansion is generally worth it whenever you have an opportunity to grow the business in a way where the costs of expansion (including the cost of the loan) will be less than the profits you make from expanding.

Types of Small Business Expansion Loans

There are various business loans that can be used for the purposes of expanding your business. And, one might be a better fit than another depending on your specific growth goals.  Below are some different loan products to consider.

SBA Loan 

If you have strong credit, you may want to look into a loan backed by the U.S. Small Business Administration (SBA). SBA loans stand out among small business loans due to their favorable terms – low rates, high amounts, and long payback periods (up to 25 years). With the exception of microloans, most SBA loan programs are designed for established businesses. The funding can be used for many business purposes, including expansion.

Term Loan

A traditional term loan can be a good fit 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. The SBA loans mentioned above fall into this category, but you can also find term loans not backed by the SBA that may be easier to qualify for. 

Equipment Financing

Equipment loans are designed specifically for purchasing equipment. These loans can offer up to 100 percent financing, although some lenders may require a down payment of 10% to 20%. You then pay back the total amount lent, plus fees, for a set period of time. With this type of financing, the equipment you’re buying typically serves as collateral for the expansion loan, so you likely won’t have to put any of your assets on the line. Recommended: 8 Tips To Get Equipment Financing With Bad Credit

Short-term Business Loans

A short-term loan is a term loan that’s repaid over a period of months, rather than years. Short-term loans are often offered by online lenders and tend to be easier to qualify for. However, the amount is often less than a medium- or long-term loan, and the rates are often higher. Because short-term loans are repaid relatively quickly, they could be good for smaller expansion projects that don’t require as much capital. 

Business line of credit

If you’re interested in several expansion projects that will start at different points in time, a business line of credit might be a good fit. A business line of credit gives you a credit limit, or a maximum amount of capital you are able to draw on at any given time. You only pay interest on the amount of your credit line you’re using, unlike an expansion loan, which requires you to pay interest on the full amount you borrow. 

Invoice Factoring

If your company has a lot of unpaid invoices and you want access to that money to fund expansion right now, you might consider invoice factoring. With this type of 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.Invoice factoring can be one of the more expensive ways to borrow for expansion. But it's also one of the more accessible financing options, since credit is not usually a factor in the approval process.

Merchant Cash Advance

Another type of short-term financing is a merchant cash advance, which allows you to take a cash advance against your business’s future credit card receipts. You typically repay the advance (plus a fee) with a portion of your daily credit and debit card sales. You don’t need perfect credit or a lengthy business history to qualify for a merchant cash advance, but this type of financing tends to come at a high cost.

Alternatives to Small Business Expansion Loans

If your personal and/or business’s credit profile is thin or poor, you may want to look into some alternative sources of funding for expansion. Here’s a look at some alternatives.

Crowdfunding 

This involves raising small amounts of money from a large number of people via a crowdfunding platform. In some cases you don’t need to pay the money back. There are various types of crowdfunding, including:
  • Equity Crowdfunding
  • Donation-based Crowdfunding
  • Debt Crowdfunding
  • Reward-based Crowdfunding
The drawback to crowdfunding is that it can be difficult to reach your financial goals. It can also require a lot of work and marketing to have a successful crowdfunding campaign.

Direct Private Lenders 

A private lender is one that is not associated with a formal bank, which means they can offer highly individualized loan terms. However, finding a private lender that is willing to loan money to your business can be difficult. 

Peer-to-Peer (P2P) Lenders 

P2P lenders often lend money to borrowers that banks are unwilling to work with. The drawback is that borrowers often have to pay much higher interest rates. 

Angel investors 

These are wealthy individuals who use their own funds to invest in a business. They are typically looking for a high rate of return, and tolerate high risk. Bringing in an angel investor can help make your expansion plans become a reality, but will involve giving up equity, and possibly also some control of your business.

The Takeaway

Business expansion loans are small business loans that provide business owners with the capital they need to make investments in their companies.Business expansion financing comes in many forms. To narrow down your search, you’ll need to decide exactly how you’d like to expand your business and how much it will cost. This will help your loan application, and also guarantee that the funding will be put to good use once you secure it. If you’re interested in finding out what type of expansion financing you might qualify for, Lantern by Sofi can help. With our online loan comparison tool, you can quickly compare offers from multiple small business lenders without any obligation and just one application.
iStock/pixdeluxeThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1221010

Frequently Asked Questions

What are business expansion loan rates?
Are there loans specifically for business expansion?
Where do you find loans for business expansion?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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