Funding expansion to fuel a growth opportunity is a reason many business owners look for extra capital. When a business owner decides to pursue an expansion loan, it’s important to recognize that sometimes what seems like the right loan, but at the wrong time, can negatively impact a business—so it’s critical to evaluate your current situation to ensure a business expansion loan makes sense and that the timing is right.
Here are some suggestions to help you evaluate whether or not a loan to finance expansion is a good idea:
Is your business ready?
The right answer will require an honest evaluation of your current situation. Does your business currently have the cash flow to repay a loan? A lender wants to know that your business is not only capable of supporting the debt, but that you’ll make regular and timely payments. A healthy business and a business with a strong credit profile will be in a better position to approach a lender and find success.
Do you know how your credit profile looks today?
Most business owners are familiar with their personal credit score, but don’t know much about their business credit profile. Before you talk to a lender, you should know your personal credit score as well as know what’s in your business profile. To find your personal credit score the credit bureaus (Experian, Equifax, and Transunion are the three biggest) can be a good place to start, but there are also other online resources that will give you access to your personal score. The three major business-reporting bureaus are Dunn and Bradstreet, Experian, and Equifax.
Do you have a sound business plan for expansion?
Do you know how much capital you need and can you articulate what you’ll do with it. As a lender, “As much as I can get,” is not the answer they really like to hear. You’ll have much more success if you have figured out just what the expansion will cost and can articulate what you’ll do with the funds.
Knowing where to look will save you time
There was a time when the bank around the corner was the one-stop-shop for a loan, that’s not the case any more. In fact, depending on how much money you’re looking for, how long you’ve been in business, the industry you’re in, and your business credit profile, there are likely some lenders that will make more sense than others. In addition to the bank, there are a number of online options that could be a better fit.
For example, banks are most likely to be interested in working with a business with a track record that is at least a few years old, has $1 million in annual revenues, a business owner with a strong personal credit score, and is looking for a half-million dollars or more. If that describes you and your expansion project, the bank could be a good fit. Many online lenders, like OnDeck, will work with a business owner with only a year in business and $100,000 in annual revenues. Your current situation will help you determine where your search might have the greatest odds of success.
Consider loan term length
Depending on the nature of your expansion plans, you should also consider which loan terms make the most sense. Is a short-term loan of a year or less a good option, or is the expansion going to require a longer commitment of three, five, or even 10 years. For example, expanding the outdoor serving area of a restaurant might be a good fit for a short-term loan while adding another 3,000 or 4,000 feet of warehouse space might be a better fit for a longer-term loan—they are both very different expansion projects.
The shorter-term loan will likely have a higher periodic payment, but the overall interest cost of the loan could be less, while the longer-term loan will probably have a lower payment but include a higher total cost of financing over the course of the loan. The cost of the expansion, the potential ROI, along with other factors will impact how you make that decision.