What Is a Business Expansion Loan?
A business expansion loan is defined as loan financing that is intended to boost financial growth using various means. Business owners can apply business expansion loans to boost working capital which reciprocates elevated business growth. It can be utilized to launch new products, attract new customers, and physically expansion of business premises.
Most investors have applied for expansion loans when they have shortages of employees, unfilled orders when their market status is deteriorating, or even when tweaking with contemporary market trends. This is because it may be quite difficult for businesses to thrive without adequate capital funding. It is also an essential move that enables one to match the competition in the market.
Loans for Business Expansion
Expansion loans help business owners propel growth in numerous sectors. Below is a discussion of the five most recommended expansion loans offered by banks and other financial institutions.
Term loans are the most common type of business loan and can be used for a wide array of business purposes. These are traditional loans where lenders issue a large sum of funds for a fixed duration. Investors can use term loans in business expansion, boosting capital, inventory investments, workforce, and henceforth.
Most lenders have loan limits ranging between $25,000 to $500,000 and have an average interest rate of 7% to 30%. Interest rates depend on the principal amount that one borrows. Funds can be available within two days after application and have a payment period of one to five years. Term loans require a credit score of 620 and a record of at least two years in business.
Equipment financing allows owners to expand their businesses by purchasing new equipment. Borrowers are required to pay the initial amount plus the interest and fees over the stipulated period. It is classified as a more accessible loan as the equipment purchased is used as collateral if one defaults on the loan.
One can acquire a maximum loan amount of up to 100% of the purchased equipment value. Equipment financing loans have an interest rate ranging between 8% to 30%. The funding can be available within two days and have a term of the designated life of the equipment.
Line of Credit
Line of credit loans allows business owners to acquire fixed amounts of funds that help them execute daily business roles. Thus, they may be an ideal financing option for business expansion, and they are available anytime. It is similar to credit cards, where one pays the interest and the principal amount.
Loans can go up to $1 million and have an interest rate of 7% to 25%. The payment period ranges between 6 months and five years. Another great advantage of a line of credit loans is that they can be availed within one day. Most lenders require a credit score of 630 and at least a year with annual revenues.
As the name suggests, borrowers can acquire fixed business loans over a short timeframe. Short-term loans have a period of three to eighteen months, and payments can be made daily or weekly based on the consensus with the lender.
Nonetheless, short-term business expansion loans have lower limits and higher interest rates compared to regular term loans. Banks rarely provide short-term loans, but online lenders have consumer-friendly requirements. Short-term loans have a financing range of between $25,000 to $250,000, and interest rates begin at 10%. A short-term loan has lenient qualification thresholds and requires a credit score of 600 and over two years of business records.
In invoice financing, the borrower sells invoices to the lender to acquire a loan that makes up a substantial lot of the invoice. The loan amount can cover up to 90% of the invoice. The lender takes approximately 20% of the invoice until the loan is fully paid. After payment, the lender releases the rest of the funds but obtains a small percentage covering the fees.
The fees are roughly 3% and a 1% weekly fee until the borrower completes the payment. One can acquire the loan within one day of application, and lenders require a credit score of 600 and one year of business records.
Factors that Influence Business Expansion
There are numerous reasons that may cause investors to seek business growth. The most common ones include inventory gaps, shortage of staff, unfilled orders, or extreme market competition. Boosting the business’s financial status at the appropriate time can ensure that you combat any potential risks. Read on to discover other reasons that influence business expansion:
- Fulfilling a business plan- When investors start a business, they mostly design a blueprint to manage the business. However, some states may require extra financing due to inevitable circumstances that may hinder business growth. Such factors include the addition of new employees to cope with business demands.
- Business marketing- This is an essential tool that helps spread awareness of one’s business. Some marketing tactics may be quite expensive and may require mediation from business expansion loans.
- Expand the product line- Most businesses incept with a single or few products. After catching up, advancing to more products line becomes a necessity. This may push the owner to seek business expansion financing.
- Purchasing new equipment- As the business progresses, the need to purchase cutting-edge equipment becomes more demanding. It is imperative as it aids in managing and growing business orders.
- Remodeling the business- Renovating the current working space can elevate the business to the next level. It can be an expensive endeavor that may require support from business expansion loans that aid in a seamless business remodeling.
- Reinvesting- Quality capital is required when one has thoughts of expanding their business. This is due to purchasing new merchandise and acquiring a new market.