Worst advice for business expansion loans

Dreaming Too Big

We hear it all the time.  “It is time for me to open another location,” or “We have so much business, we’re outgrowing our current location.”  In this case, we had a client who purchased a warehouse in a prime location for expansion.  This location had it all – the square footage, in the nice part of town, visible from the freeway, and no other vendors in the same industry nearby.  Then, the economy crashed.  This business owner was stuck with a massive industrial warehouse/showroom with no customers.  With contractors out of work,  no one was purchasing as much.  Do your due diligence and market research prior to expanding.  Don’t go out and buy the biggest baddest asset – think it through.

Hiring Too Many Employees

Hiring more employees when others in the company can handle the extra work can hurt your business. With too many new hires come pitfalls.  Make sure to consider the costs associated with hiring staff.  New hires will increase your costs and dig into your profits.  Before hiring new employees, think it through and make sure that there is a need and you are not just adding employees to put cheeks in seats.  Some positions may be outsourced, such as CPA, marketing, graphics, etc.  You may have to lower your own personal compensation for new hires.  Are you willing to lower your standard of living for the greater good of the company?  Think it through and look at the big picture.

Dipping Into Reserves

Using cash reserves for your expansion comes with pros and cons.  One pro is that you do not need a loan.  Congratulations!  Your company is looking pretty with tons of cash in reserves.  Should you use this hard earned cash to fund your expansion plans?  Think long and hard and explore all options.  If you intend to use these funds for expansion, make sure that you keep additional reserves for suppliers, vendors, payroll, etc, in case the business faces hard times, especially if you experience slow pays from partners.  Ideally, you should only use a small portion of reserves to fund the expansion so your business does not struggle during tough times.

Too Much Paperwork

Borrowers complain about all the documentation that they have to bring to the bank to obtain a business expansion loan: personal tax returns (for all owners/signers with 20% or more ownership in the business), business tax returns, profit and loss balance sheets, personal financial statements, and applications.  However, step back for a second and look at what you are trying to do.  You are trying to obtain financing to expand your business.  Even though you do not see your business as a risk and believe that the amount is “only $XYZ,” that is a lot of money.  Lenders will not give you financing just because you have a pretty smile and a perceived great idea.  Give them the necessary documents so they can see if your deal makes sense.

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