Almost every single business at one point needs a loan to function. Some firms require financing to purchase inventory, often needing a fast and reliable credit source. In contrast, others need access to immense loans with term lengths of several decades to pay for massive purchases, such as a factory. Business expansion loans focus on the latter group of companies.
What is a Business Expansion Loan?
A business expansion loan is a loan created for established businesses that are growing and in need of capital to finance that growth. This type of funding is usually acquired to facilitate large-scale expansion operations that require a considerable infusion of cash. Business expansion funding is long-term in nature, with some loans covering periods of 10 to 20 years.
Business expansion funding works in the following way:
- You fill out an application, providing basic information about yourself and your business.
- The lender will review your application and contact you if you’re approved.
- You will be allowed to review your loan options. Here, you can get acquainted with the loan terms, conditions, interest rates, fees, and other details.
- Once you select your loan, the lender will transfer the funds to you. Depending on the lender, you could receive the money in just one day.
- You’ll be responsible for making regular payments on the loan. Your lender will also conduct annual reviews on the loan’s performance and monitor your company’s financial condition to ensure the loan’s default risk remains low.
Check out how you can secure your loan with an asset.
What Kind of Expenses Can a Business Expansion Loan Cover?
Business expansion loans are generally attained to help pay for costly outlays. Some common areas that this funding can cover includes:
- The opening of a new location
- A major renovation for an existing location
- The hiring and training of more staff
- The purchase of new equipment
- Marketing campaigns
- An expansion into a new market
- The development and launch of a new product.
- An increase in inventory orders
Where Can You Get a Business Expansion Loan?
If you’re seeking business expansion funding, there are many options available. Below are some of the most common sources of financing.
| Amount | APR | Term (months) | ||
 | 1k-300k | Fee-Based: Starting at 9% | 12- 60 | Learn more |
 | 5k-300k | 8% – 29% | 6-18 | Learn more |
 | 1k-500k | +5.9% | 3-60 | Learn more |
 | Up to 300k | 8%-22% | 6-12 | Learn more |
 | 5k-500k | - | 6-18 | Learn more |
 | 100K + | 6.05% + | 60 | Learn more |
 | 5K-100k | 15%+ | 12-18 | Learn more |
How to Qualify For a Business Expansion Loan?
Though lenders vary when it comes to their approval process, the following are some of the most common eligibility requirements for obtaining a business expansion loan.
Credit Score
Your business should have a solid credit score, typically 600 or higher. Should your businesses’ credit score not satisfy the lender’s criteria, you may be able to use your personal credit instead. If you’re anticipating the need for a long-term business loan, strive to pay your bills on time and avoid overusing your credit lines.
Financial Performance
Lenders will scrutinize your company’s financial standing using various metrics. They need assurances that you’ll be able to service the loan comfortably. Some of the most common financial metrics include:
- Revenue – This figure shows how much money your business earned by selling its products or services. It doesn’t include expenses. Consistent revenue over several years is a critical factor that lenders evaluate.
- Cash flow – This represents the amount of cash that enters and leaves your business, measured over different periods of time. Cash flow is crucial as it indicates your ability to meet short-term and long-term debt obligations.
- Net income – This figure indicates your business’ earnings after all deductions. It’s calculated as revenues minus expenses, interest, and taxes. Net income is one of the best indicators of profitability.
- Gross Margin – Your businesses’ gross margin is the amount of money left over after subtracting the direct costs associated with delivering your product or service. The higher your gross margin, the better, as more cash is available to service debt payments.
Collateral
In some cases, the lender will require you to put up your company’s assets as collateral. The lending institution will appraise your assets and approve your application on the condition that they can take ownership of them if you default on your loan. Collateral is a crucial priority for a lender if your business has bad credit.
Business Plan
To secure a business expansion loan, you must create and submit a business plan. The lender will need to know how you intend to use the money and assess if your project is economically viable. They need to understand the risks and opportunities of your plan to determine its chances of success. They will examine several factors, including your sales forecasts, projected growth, your staff’s experience, marketing strategy, your competition, and the state of the economy.
Documents Needed to Apply For a Business Expansion Loan
Be prepared to present the following documents to a lender:
- Hand-signed business loan agreement
- Business bank statements (usually the last 3 – 12 months)
- Two years of financial statements, including your income statement and balance sheet
- Government-issued picture ID of all company owners
- Business mortgage statement or business lease agreement
Pros and Cons of a Business Expansion Loan
Before starting an application for a business expansion loan, ensure you examine the pros and cons to determine if this type of financing is suitable for your businesses’ needs.
Pros
- Low-interest rates and fees – Long-term business loans offer attractive interest rates with minimal fees. They’re a cost-effective way of growing your business compared with other business financing options.
- Fixed monthly payments – You’ll have the benefit of a predictable payment schedule, allowing you to focus on your business without having to worry about unexpected changes with terms and interest rates.
Cons
- More documentation may be required – Obtaining a long-term business loan requires you to undergo a rigorous approval process. You’ll have to submit many documents to prove your business qualifies.
- Fixed payments can be hard to keep up – You may run into trouble making regular loan payments if your business experiences seasonality or has volatile revenues and cash flow.
- Harder to qualify – Getting approval for a business expansion loan can be difficult. Lenders’ criteria can be too demanding for businesses that don’t have a history of steady sales, high-profit margins, and reliable cash flow. In some cases, you’ll have to pledge your company’s assets as collateral before you can secure a loan.
Other Types of Loans You Can Use to Expand Your Business
Suppose you believe that a long-term business expansion loan is not the right solution for you. In that case, there are other types of loans available.
Equipment Financing
This type of financing provides businesses with the capital necessary to purchase equipment. To secure the loan, the company must put up the equipment purchased as collateral. This financing arrangement can help a company expand because they can buy the equipment immediately without using cash that sustains its day-to-day operations. Obtaining and upgrading equipment swiftly is especially critical for companies that operate in industries where technology becomes obsolete rapidly.
Commercial Property Loan
A commercial property loan is essentially a mortgage issued for a commercial property rather than a residential property. They help companies that are growing by enabling them to purchase a new property or to renovate an existing property they own. Many lenders exist in the commercial lending industry, all offering a wide variety of terms and interest rates.
Short-term Business Loan
If your business has only recently started operations, you’re unlikely to qualify for a business expansion loan. A preferable option would be a short-term business loan, which can quickly provide you with capital and allow for greater flexibility. This type of financing is advantageous if your business experiences fluctuating revenues and unstable cash flow. A short-term loan is relatively easy to qualify for; there is little paperwork, and you don’t need to have a super credit score.
Learn more about how to qualify for a business loan.
Final Thoughts
Business expansion loans are excellent financing sources for companies that are experiencing rapid growth or those wishing to increase their operating capacity. They provide tremendous leverage if utilized correctly and can help business owners grow their firms without relying on outside investors, who may demand a sizable equity stake.
If you’re at the stage where the cash flow in your company is steady and reliable, and sales are skyrocketing, a long-term business expansion loan might be just what you need to reach the next level. Loans Canada can help match you with the right lender.
Glossary
| TERM | DEFINITION |
|---|---|
| Accounts Payable | Money that is owed in relation to a product or service to a creditor. Because the money is owed to an individual or entity, accounts payable are considered to be an obligation. |
| Accounts Receivable | Money that is owed in relation to a product or service from a borrower. Because the money is due to an individual or entity, accounts receivable are considered to be an asset. |
| Appreciation | The increase in an asset’s value over time. Appreciation is often the result of an increase in demand, weakening supply and/or changes in the economy. |
| Arrears | Money that should have been paid and is now overdue. |
| Audit | The process of an impartial, independent individual or entity inspecting completed work in relation to a specific framework. Audits are commonly performed on financial statements to ensure that they are accurate, fair and align with accounting rules and regulations. |
| Balance Sheet | A formal financial statement that communicates the current financial position of a business at a specific point in time. Assets, liabilities and equity are all reflected on a balance sheet as well as net income (or loss) earned over a previous period of time. |
| Ballon Loan | Unlike regular loans, a balloon loan isn’t fully amortized over a particular period of time. Instead, only part of the loan is amortized over the loan’s term and the remainder of the loan becomes due at the end of the loan’s term. The loan’s term tends to be short and this type of financing is considered to be aggressive. |
| Better Business Bureau (BBB) | A non-profit organization that assigns rankings to businesses, charities and non-for-profit corporations. The BBB collects and stores data regarding companies to set rankings. Their goal is to prevent businesses from failing to meet defined standards of operation. |
| Book Value | The value of an asset on a company’s books. In other words, the value of the asset on the balance sheet. |
| Broker | A person who buys and sells goods and services on behalf of another person in exchange for a fee. |
| Budget | A best guess of an individual or entity’s income and expenses for a specific period of time. |
| Business Credit Report | A detailed report that is meant to provide potential lenders with information to allow them to determine the business’ creditworthiness before extending credit. There is much more information in a business credit report when compared to an individual’s credit report. Business credit reports are generated and regulated by the credit bureau. |
| Business Credit Score | A number that represents a business’ creditworthiness based on information within the credit report. The credit bureau calculates and regulates business credit scores. |
| Cash Flow | The cash that comes in and goes out of a business. Cash flow is poor when more cash is going out than in. Cash flow is good when more cash is coming in than out. |
| Compound Interest | Earned interest that is added to the principal amount when interest for the next period is calculated. In other words, compound interest is interest earned on interest. |
| Debt Service Coverage Ratio | The ratio of operating income available for use to debt servicing. Debt servicing includes interest, principal and lease payments. The main goal is to determine whether or not a business is producing enough cash to cover their debt obligations. |
| Deferment | The act of pushing something off to a later time. In terms of finances, this means paying a debt later than when it’s due or creating an arrangement where the customer receives the product or service now but pays later. |
| Depreciation | The decrease in an asset’s value over time. Depreciation is most commonly a result of wear and tear from use, but can also be a result of a decrease in demand, increasing supply and/or changes in the economy. |
| TERM | DEFINITION |
|---|---|
| Earned Income | Money that is received or receivable resulting from finished, paid work. |
| Employer Identification Number (EIN) | A number used to identify a business regardless of whether they are a sole proprietorship, partnership, corporation or other non-personal entity. An EIN is the American version of a Canadian business number. |
| Escrow | Something, such as money, a document or an asset, kept in the custody of a neutral, third party until a specific condition has been met. |
| Financial Statements | Formal records depicting the financial position and activities of a business, individual or entity. Financial statements are very structured and are subject to rules and regulations. Usually, financial statements include a balance sheet, income statement and statement of cash flows. |
| Fixed Expense | A cost that does not fluctuate when there is an increase or decrease in business activity, such as sales or production. Examples of fixed expenses include a full-time employee’s salary, rent and insurance, among others. |
| Gross Profit | The amount of money earned after considering expenses directly related to producing a product or service. Gross profit is typically calculated on a company’s income statement by taking revenue and subtracting cost of goods sold. |
| TERM | DEFINITION |
|---|---|
| Incentive Stock Option (ISO) | A company benefit that gives an employee of that company the right to buy stock shares at a lower price than the fair market value. There is also the added benefit of a tax break on any profits earned from the stock share purchase. |
| Income Statement | A formal financial statement that communicates the income, expenses and net income (or loss) for a business over a particular period of time. |
| Incorporated | The state of being formed into a legal corporation. |
| Inflation | A general increase in prices of goods and services in addition to a decrease in the purchasing power of a nation’s currency. |
| Liability | The state of being responsible for something particular. In the business world, this typically refers to legal and financial responsibilities. |
| TERM | DEFINITION |
|---|---|
| Market Value | The amount that an asset is worth or can be sold for in a particular market place. |
| Micro-Loan | A small amount of money lent to new businesses with a low-interest rate. Micro-loans are typically issued by individuals as opposed to large lending bodies like banks or credit unions. |
| Partnership | A type of business where two or more individuals share ownership, pool resources and split responsibility for the company’s operations. Partnerships can be classified as general or limited. |
| Profit | The difference between the amount of money earned and the amount of money spent to earn the money. |
| TERM | DEFINITION |
|---|---|
| Retained Earnings | The amount of net income left over after a business has paid out dividends to their shareholders. Often, the retained earnings are used within the business for investment, growth or capital purchase purposes. |
| Sole Proprietor | An individual who is the only owner of a business known as a sole proprietorship. That individual is entitled to all of the profits after all liabilities and taxes have been paid. |
| Tax Refund | An amount owed to or received by a taxpayer from the government resulting from taxation. A tax refund typically occurs when an individual has paid more income tax throughout the year than what was owed, has large tax credits or did not earn enough income to be required to pay tax by law. |
| Tax Return | A legal form which is completed by a taxpayer to determine tax payable to the government or tax receivable from the government. Tax returns require information about the taxpayer, such as annual income, annual expenses, personal information and financial information, to determine the tax asset or liability. |
