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 best. Here we cover the types of expansion financing that may be available and which ones are right for your business.
What is expansion financing used for?
Expansion funds are designed to help you grow your business. You use the funding for everything your business needs to take it to the next level. This can include:
- Open new location
- Introduction of a new product line
- Entry into a new market (including export)
- Building an online presence
- Increase your customer base through advertising
- Hire more employees
- Investing in new and better equipment
Because expansion funds can be used for so many things, it’s a good idea to have an updated business plan for your growing business. Having a clear plan that shows you know how your funds will help your business continue to grow is beneficial. It shows lenders, angel investors or venture capital firms that you have 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 that have been in business for at least two years and have solid revenues, as evidenced by company bank statements and/or tax returns. Most companies looking for business expansion loans have the benefit of being able to show investors, banks, etc. a profitable business along with a proof of concept.
Being able to provide documentation that shows your business is financially stable and doing well can help you negotiate loan terms, loan increases, and new leases.
Many lenders also check creditworthiness. You may need good personal credit and/or good business credit. (If you haven’t set up business credit yet, follow these steps.)
There are several types of small business financing to consider for expanding your small business:
lines of credit
Lines of credit give you access to funds that you can borrow when you need them. You only pay interest on the amount borrowed. They are best suited 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 (2-25 years). There are a variety of options including online loans, bank loans, and SBA loans.
If your business needs equipment to grow, consider equipment financing. Pay for equipment over time and meanwhile increase cash flow.
business credit cards
Corporate credit cards are a relatively easy option for financing businesses. As long as you have good personal credit and meet the minimum income requirements, you may qualify. Unlike other types of financing, startups often have credit cards available. However, you may need to get multiple cards to get enough available balance and the cost can be high. (Consider a 0% APR credit card.)
Microcredit is one type of credit, but it deserves a mention. Often issued by nonprofit lenders such as Community Development Financial Institutions (CDFIs), they are available to entrepreneurs who are struggling to obtain financing. They offer attractive terms and lower interest rates, not to mention that they usually offer mentoring to borrowers. However, amounts can be on the small side ($50,000 or less), which may not provide enough capital for some businesses.
Other types of financing
Scholarships offer money that does not have to be repaid. Some grants are for relatively small amounts, while government grants can provide 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 essentially free expansion capital.
Crowdfunding comes in several forms, including debt funding, investor (equity) crowdfunding, and reward crowdfunding. Raising funds through crowdfunding takes work, but can be an attractive way for some young and established companies to raise funds to grow.
The benefits of financing a business expansion
If your company’s balance sheet is in good shape, you have good cash flow and plenty of working capital, you may be tempted to forgo the hassle of a small business loan. But it’s important to weigh the pros and cons of financing yourself versus financing through a lender.
Advantages of self-financing:
- No interest charged
- No monthly payments
- Good credit not required
Benefits of a business expansion loan:
- Have funds ready for working capital or other needs
- Expand faster than with self-financing
- Some types of funding may come with mentoring or other benefits
As your business grows, consider business expansion financing to help your business get the capital it needs to reach the next level of success. Nav can help your company find the right options based on your business credentials.
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