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Business Expansion Loans: What They Are and What Your Best Options Are

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What is a business expansion loan?

Expanding your business generally means finding new ways to generate revenue. Expansion loans provide you with funds to invest in the growth of your small business. While you may be subject to certain restrictions depending on the lender and the type of loan, most of these business loans can fund a variety of expansion plans.

Common uses for business expansion loans include:

  • Hire new employees to expand your team.

  • Purchase new equipment or upgrade existing equipment to improve your operations.

  • Renovate existing stores to accommodate increased foot traffic, offer new products or services, and improve efficiency.

  • Open new locations to reach a larger customer base and expand your geographic reach.

  • Create and launch new products and services to attract new customers or better serve existing ones.

  • Expand into new markets, reach more customers and increase revenue.

Types of business expansion loans

Business Lines of Credit

Like a credit card, a business line of credit is a revolving source of funds, which means you can use it up to a certain limit and only pay interest on the amount you withdraw. Once you've paid off the balance, you can continue to draw from the same line.
Business lines of credit are available from banks and online lenders and are generally good for covering cash flow shortfalls and short-term needs, but they can also be used to grow your business by making business acquisitions, purchasing equipment, expanding your inventory or product line, and more.

Equipment Loans

An equipment loan is a business loan used to purchase large equipment or machinery. It is available through banks, online lenders, and specialty lenders. An equipment loan is a type of asset-backed loan, where the equipment you are purchasing is used as collateral, making it a relatively low-risk loan for the lender.

Equipment loans can help your business acquire assets that increase its revenue-generating capacity, making them a great long-term investment for business growth.

Commercial Real Estate Loans

Commercial real estate loans function similarly to consumer mortgages and are used to purchase business property such as office space, warehouses, storefronts, etc. Financing for commercial property purchases can come from banks and credit unions, online lenders, CDFIs, and SBA lenders.

Owning commercial real estate can help you grow your business by providing space for expanding operations, save on commercial lease costs, and even earn rental income with an investment property.

Where can I get a business expansion loan?

Banks and Credit Unions

Banks and credit unions can offer a variety of business expansion loans, including long-term loans, business lines of credit, and equipment loans. These lenders typically offer low interest rates, long repayment terms, and high maximum loan amounts. For example, unsecured business loans from Bank of America have fixed interest rates as low as 7.50% and loan terms up to five years.
However, to access bank loans and low interest rates, you must meet strict eligibility criteria, such as good credit, a strong financial standing, and several years of business history. Also, some loans may require you to pledge collateral to secure the loan.

SBA Lending Institutions

SBA loans are issued by participating financial institutions (usually banks or credit unions) and are partially guaranteed by the U.S. Small Business Administration. Several types of SBA loans, such as 7(a) loans and 504/CDC loans, can be used to expand or grow your business.

SBA 7(a) loans can be used for a variety of purposes and provide loan amounts up to $5 million with repayment terms up to 25 years.

On the other hand, SBA 504/CDC loans must be used to purchase existing buildings and land, new facilities, machinery, and equipment. These loans are capped at $5 million (up to $5.5 million for certain projects) and have repayment terms of up to 25 years.

Interest rates for these loans vary but follow guidelines set by the SBA. Currently, interest rates for SBA 7(a) loans are

11.5

to %

15

%.

Compared to bank loans, SBA loans are easier to obtain, but in most cases you'll need good credit, solid financials, and a multi-year business track record to qualify.

Online Lenders

Online lenders also offer a variety of financing options that you can use to expand your business, including long-term loans, short-term loans, business lines of credit, equipment loans, etc. Compared to banks and SBA lenders, online lenders usually have a streamlined application process and can disburse your loan within a few days.

The maximum loan amounts, repayment terms, and interest rates for these loans vary widely from lender to lender. To get the most competitive rates and terms from online lenders, you usually need good credit, strong financials, and several years of business history. However, many online lenders have more flexible requirements and are willing to work with new businesses and those with fair or bad credit.

If you're looking to finance a major expansion project, be aware of how a loan with a higher interest rate and shorter repayment period could affect your cash flow. Before you take on debt, make sure you can afford the amount and frequency of payments.

Non-profit lending institutions

Nonprofit lenders typically provide loans to borrowers from traditionally underserved communities, such as women, veterans, and minorities. These organizations often make small loans (microloans) but are open to working with new businesses and those with fair or poor credit.
If you're looking to finance a small expansion project or don't qualify for other loan options, a local nonprofit lender could be a good option. For example, Accion Opportunity Fund considers credit scores as well as other factors and offers loans from $5,000 to $250,000 with interest rates as low as 8.49%.

Additionally, in addition to providing funding, nonprofit lenders typically also provide business assistance such as training, coaching, and other educational resources.

The pros and cons of business expansion loans

Strong Points

Cons

How to Get a Business Expansion Loan

1. Determine if you're ready to expand

Before you look for an expansion loan, you need to be sure your business is positioned to grow and ready to take advantage of new financing. Ask yourself a few questions that will help you make that decision.

  • Do you have detailed plans for expansion? Your plan should specify how you will use potential loan funds and how your growth plans will impact your business in the long term.

  • Do you have a stable cash flow? You need a steady cash flow to pay off debt and manage regular business expenses, and if your cash flow can't support your expansion plans, it might be worth waiting until you can fit a loan payment into your budget.

  • Is your business in demand? Ideally, you'll want to expand your business when you're seeing increased sales and a growing customer base, and you see an opportunity to continue this momentum.

Once you’ve decided you’re ready for a business expansion loan, you’ll need to determine how much funding you need and decide what type of business loan will suit your needs.

2. Evaluate your qualifications

Most lenders will consider your personal credit score, business history, and annual revenue when reviewing your loan application. If you are taking out a business expansion loan to purchase real estate or equipment, your lender may require an appraisal or valuation of the property and equipment.

Some lenders may also consider criteria like cash flow, financial accounts, available collateral, etc. You should check up front about the eligibility of your business and know where you stand.

3. Compare lenders

You should research and compare multiple lenders to find the best business expansion loan that fits your needs. As you explore different options, consider factors such as business loan interest rates, repayment terms, loan amount, speed of funding, and customer service. It can also be helpful to research the lender and read reviews from other small business owners.

4. Submit your application

The business loan application process varies by lender. Online lenders usually require minimal documentation, while banks and SBA lenders ask for more detailed documentation.

In general, you will need to provide the following:

  • Basic information about your business, such as your company name and tax ID number.

  • Business and personal bank statements.

  • Business and personal tax returns.

  • Corporate financial statements such as income statements and balance sheets.

  • Basic information about the business owner, such as social security number and address.

Once you submit your application, it may take anywhere from a few days to a few weeks or longer to receive your funds. Online lenders may be able to grant you a business expansion loan within a few days, while banks and SBA lenders may take anywhere from a few weeks to a few months.

Finding the Right Business Loan

Generally, the best business loans are the ones with the lowest interest rates and the most ideal terms. However, other factors, like how long it will take to get funding and your business's qualifications, will also help you decide which option you should choose. NerdWallet recommends comparing small business loans to find the best fit for your business.



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