If you are looking to expand your business, it is important to position yourself for success by creating a structured plan. Financing the expansion plays a key role in your success. Below are some great tips on expansion loans.
Expanding Your Business Fast
One thing to think about is your expansion plan. How quickly are you looking to expand? Is the business stable enough to handle a dip in business? How much expansion do you want to do? If you are looking to add personnel, real estate, equipment, and working capital all at once, is that too much? Try to break your expansion plan into different phases and build out a timeline.
What Is The Return On Investment (ROI)?
The idea of expanding is great. Remember to calculate your return on investment (ROI) for the costs of the expansion. Know how long it will take to set the plan in motion, how long it will take to earn the additional revenue from the expansion, and what the additional revenue estimation will be. Then, decide if the business will support the transition or will you need more liquidity or stability.
Involve Real Estate
Does the business expansion involve real estate? If it does and it is a real estate purchase, then using it as collateral will help leverage successful financing. If the business expansion involves just leasing a property, then treat it like any other aspect. Purchasing real estate may complicate the deal but it helps improve your chances of financing.
Working Business Capital?
If the loan expansion is only for working capital, then consider a business line of credit rather than a term or bridge loan for expansions. This is advised because it is easier to qualify for a line of credit than a term loan. The additional bonus is, once approved, you can reuse the line when you need an additional influx of liquidity.
Dream Too Big
Don’t dream too big. Keep your dreams in check. One business expansion loan does not have to be swinging for the fences. Taking out smaller expansion loans for each phase of your expansion would help break the overall expansion into pieces that are easier to handle. Small loans are easier to pay off and can help snowball the next miniature business expansion phases.
Are you looking to turn your business model into a franchising opportunity for others? This could be considered an expansion loan on your current business because it is another vertical for income. Your company will need to be incredibly stable for a lender to go down this road so a line of credit might be the better option here. What would qualify as stable? Consistent revenue, no spikes in spending or losses, good business credit, and more than five years in business.
Length of Existence
Expansion loans require a business to have been in existence for a certain period of time. Unless your margins and cash flow are incredible, it will be hard for a bank to sign off on a business with less than two years of activity. Building the credit of your business is important and doing it as soon as possible will help with future loans, including expansion loans.
Dip Into Financial Reserves
Sometimes it is better to dip into your financial reserves than to take out an interest loan. Successful businesses should be setting aside 10-20% of their revenue and storing it for a rainy day. Many businesses use this to expand rather than taking out an expansion loan.
Eating Business Costs
One thing to think about is whether you business can eat the financial costs associated with the business expansion on a monthly basis until a positive ROI is achieved. Nothing ever happens as we expect it to, and everything takes longer than it should. Even conservative estimates should be scrutinized. Can the business eat the costs of the expansion if Murphy’s Law takes effect? Consider the loan payments, a dip in business during the expansion or construction, and anything else, like training new personnel.
Lots Of Paperwork
Business expansion loans require a lot of paperwork. More than typical loans, as you need to justify the expense and purpose of the funds.
This should help you decide whether expanding right now is the right thing to do or if it should be postponed until you are in a better position to leverage your business.