As your business grows, you may need financing to achieve your goals. Expansion financing refers to all types of financing used to grow your business. There is no one type of financing that is the best. Here we will cover the types of expansion financing that may be available and which may be right for your business.
What is expansion funding used for?
Expansion funds are intended to help you grow your business. You’ll use the funding for everything your business needs to take to the next level. This may include:
- Opening a new location
- Launch of a new product line
- Enter a new market (including export)
- Establish an online presence
- Increase your customer base through advertising
- Hire more employees
- Invest in new and better equipment
Because expansion funds can be used for so many things, it’s a good idea to have an up-to-date business plan for your growing business. Having a clear plan that shows you know how your funds are going to help your business continue to grow is a plus. It shows lenders, angel investors, or venture capitalists that you’ve thought through your strategy and have clear plans for expansion.
What type of financing is typically used for small business expansion?
Most small business lenders prefer to lend to businesses with at least two years in business and solid income, as evidenced by bank statements and/or business tax returns. Most businesses looking for business expansion loans have the advantage of being able to show investors, banks, etc. a profitable business as well as a proof of concept.
Being able to present documents showing that your business is financially stable and doing well can help you negotiate loan terms, credit increases and new leases.
Many lenders also check credit. You may need good personal credit and/or good business credit. (If you haven’t established trade credit, here’s how.)
There are several types of small business financing to consider to grow your small business:
Lines of credit
Lines of credit give you access to funds that you can borrow if needed. You will only pay interest on the amount you borrow. They are best for short-term borrowing needs such as inventory or working capital.
Term loans offer a fixed amount of financing with a fixed repayment period. Term loans can be short-term loans (less than two years) or long-term loans (2 to 25 years). There are a variety of options available, including online loans, bank loans, and SBA loans.
If your business needs equipment to grow, consider equipment financing. Pay for equipment over time and increase cash flow in the meantime.
Business credit cards
Business credit cards are a relatively simple financing option. As long as you have good personal credit scores and meet minimum income requirements, you may qualify. Unlike other types of financing, credit cards are often available to startups. However, you may need to get multiple cards in order to get enough available credit, and the costs can be high. (Consider a 0% APR credit card.)
Microcredits are a type of loan but deserve a mention. They are often made by non-profit lenders such as Community Development Financial Institutions (CDFIs) and are available to entrepreneurs who have difficulty obtaining financing. They come with attractive terms and lower interest rates, not to mention that they usually offer mentorship to borrowers. However, the amounts can be smaller ($50,000 or less), which may not provide enough capital for some businesses.
Other types of financing
Grants provide money that does not have to be repaid. Some grants are for relatively small amounts, while government grants can offer large amounts of funding. Many small business owners want grants, which means they are competitive. However, if you are able to get one, it is basically free expansion capital.
Crowdfunding comes in many forms, including debt funding, investor (equity) crowdfunding, and reward crowdfunding. Raising money through crowdfunding takes work, but it can be an attractive way for some start-ups and established businesses to obtain funds to grow.
The benefits of financing a business expansion
If your business balance sheet is strong, you have strong cash flow and ample working capital, you might be tempted to forgo the hassle of getting a small business loan. But it’s important to weigh the pros and cons of self-financing versus financing through a lender.
Advantages of self-financing:
- No interest charged
- No monthly payments
- Good credit score not required
Benefits of getting a business expansion loan:
- Keep funds available for working capital or other needs
- Grow faster than with self-financing
- Some types of funding may come with mentorship or other benefits
If your business is growing, consider business expansion financing to help your business get the capital it needs to reach the next level of success. Nav can help your business find the right options based on your job qualifications.
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