For many businesses, the opportunity to expand and develop is important. It’s also within reach for quite a number of companies when there’s access to loans.
Business expansion loans are a great way to help fund a business that’s registered and trading within the UK.
If you tick those boxes and you need the working capital to expand your business, then it’s certainly worth exploring these types of loans.
In this guide, you’ll get a better grasp of business expansions loans, how they work and how you can go about getting one yourself. By understanding these loans, you can make an informed decision over whether or not it’s the right choice for your business.
What Is a Business Expansion Loan?
Business expansion loans cover a range of areas that help scale up your business. This is with the intention to increase growth and revenue for the company. These increases can improve profits for the organisation and further expand the business opportunities available.
With SME’s accounting for 51.9% of the private sector turnover in the UK in 2020, it’s obvious that they are crucial for the country’s economy.
Whilst expansions are good in theory, they may not always pan out the way you’d hoped, especially with a lack of funds to work with. That’s why many businesses become reliant on expansion loans to help fund their business objectives.
It’s important to remember that all loans come with their risks and, ultimately, a hope that the opportunity pays off and allows you to pay that loan back – which it doesn’t always do.
Types of business expansion loans
There are different types of business expansion loans to choose from. Understanding what each of these is and what they offer can help you pick the right option for your business.
Small Business Administration (SBA) loans – SBA loans are typically low-cost and government-backed loans. These could be anything from £5,000 to £5 million, and you’d normally need to meet certain criteria to be eligible for this loan.
Term loans for expansion – Term loans are best suited for those who are established in their industry and hold a strong operating history. As such, the loan is to help with a specific purchase in mind. These loans range from £25,000 to £1 million for term periods of one to 10 years.
The loan offers flexibility for those looking for long-term growth, whether it’s minimal expansion opportunities or one big opportunity that’s worth investing in.
Equipment financing – For certain industries, equipment financing may be more integral when it comes to the umbrella of expansion loans.
These loans can offer up to 100% financing, but there may also be a down payment of 10-20%. The equipment you’re buying is seen as the collateral for your expansion loan, so there’s no additional risk of assets required on your part.
Short-term loans – Short-term loans are like long-term ones, but you have less time to pay them back. These expansion loans often carry higher interest.
Business line of credit – Business lines of credit are a preferred option for expansion financing. This is capital you draw over a period of time.
Invoice factoring – If you want to expand your business, but you’re reliant on invoice payments coming in earlier than planned, then invoice factoring loans are a good option. The lender provides the money and gets paid back with interest once the invoice is paid.
Merchant cash advance – A merchant cash advance is another short-term financing that means borrowing against your invoices, so whatever purchases are made, they’ll take a percentage until the loan is repaid.
How Can I Get a Business Expansion Loan?
In order to get a loan, you’ll need a number of documents and evidence to show to the lenders.
Firstly, you’ll want to get all the relevant paperwork together. This will include an up-to-date business plan and any key financial statements for your organisation. These key financial statements are essential to help the lender assess and review to ensure your business is financially sound.
Next up, you’ll need to check your credit. Some loans will require collateral and a certain amount of capital upfront. There will be some conditions on the loan, and you may be judged on the business as a character. Are you trustworthy and reliable?
Trust and reliability is something lenders are keen to establish, especially with lenders experiencing a 7.3% increase in small business fraud.
How Does Business Growth Financing Work?
Business growth financing works by supplying a loan to help make payments on projects and efforts in general that lead towards the expansion of the business. It might be that there’s not quite enough working capital to invest in these new growth opportunities, so financial lenders can help with that.
Lenders will charge interest on the money you borrow, which will be determined by the percentage of your unsecured loan and various factors surrounding your business profile.
What Can a Business Expansion Loan Be Used for?
There are many ways that a small business expansion loan can be used for your business. This includes several areas within the company, from physical expansion to marketing expansion.
Market Expansion
- Expanding to new channels.
- Engaging with audiences.
- Increasing sales through giveaways, competitions and referral discounts.
Product Expansion
- Expanding product lines or services.
- Conducting market research for new products or services.
These small business expansion loans can certainly be most effective through acquisitions of existing businesses. This could be merging with or acquiring another company.
Do I Qualify for a Business Expansion Loan?
When it comes to qualifying for business expansion capital, it’s important to have good credit and that your business profile ticks all the boxes for the lender. This particular type of business finance is only available to established businesses.
There’s no end to lender options out there, but when it comes to qualifying, the better your credit can be, the more choice you will have available.
When it comes to qualifying for bank loans, having more options will mean the interest rate you pay overall will be reduced for the most part.
What Are the Costs of a Business Expansion Loan?
Don’t skip the terms and conditions of the loans with each lender, as they’ll all likely be a little different, especially when it comes to costs.
There are a number of hidden fees that can often be associated with these loans. These could be underwriting fees, late payment fees, service fees and insufficient funds fees. Be aware of all the costs before signing for your loan.
Do I Have to Provide Security to Get a Business Expansion Loan?
In order to get this type of loan, you won’t need collateral for the most part. Most of these loans are unsecured, meaning there’s no additional risk for you as the business owner if you weren’t able to make the repayment terms originally agreed.
You may come across business loans that are secured loans, which means you will have to put up property or other assets as collateral or payment if you don’t make the payments requested on time.
Can I Get a Business Expansion Loan If I Have a Bad Credit Score?
It’s not a hard no, but it’s one that you’ll struggle with when it comes to most types of business finance. If you have a bad credit score, it limits the amount you get to choose from. That means higher interest rates which means your business is spending a lot more as a result.
The Pros and Cons of Business Expansion Loans
There are both advantages and disadvantages of these loans. These are worth weighing up before taking out the loan amount.
Pros:
- The lenders you borrow from don’t require any of your business profits.
- Loan repayments are easy to arrange and are comfortable for most businesses to afford.
- You can use the business loan however you see best for the expansion of your business.
- Applying is easy with funds received quickly and often within 24 hours.
Cons:
- There can often be strict eligibility criteria.
- Not suitable for ongoing expenses, such as day-to-day operations.
Choosing Between a Business Expansion Loan and Equity Finance
Expansion loans are slightly different to equity finance. However, both are beneficial if you’re looking to use them for your business in the near future or beyond. But which do you choose if you’re considering both?
What is equity finance?
Equity finance is known as growth capital or growth equity. This type of finance enables investors to invest in and provide capital for the business. Investors are only interested in this type of finance if the company has the potential for growth.
The benefits of equity finance
The benefits of equity finance are worth noting so that you can compare them to business expansion loans in general.
- Repayment terms for equity finance can be more flexible than business loans.
- Investors can help continue to provide finance which means your business could grow far beyond what you anticipated.
- You can acquire new business partners and more knowledge for the business.
- You help increase the number of people interested in the success of your business.
Equity finance is something to seriously consider as it might be a valid route to the expansion of your business.
Factors to Consider Before Applying for Business Growth Finance
It’s essential to weigh up your options by looking at the pros and cons of business growth finance. However, you should also factor in the business and whether it’s right for the organisation at this moment in time.
Are you ready for the expansion? It might be that you require the money for the project but that you’ve not actually got the resources or have any idea how to go about it. Doing the proper research before you go applying for a loan can be helpful to ensure the expansion’s success, whatever that may be.
Can you afford it? There will be some businesses that want to apply for business growth finance, but the general cash flow and operating history might not be as healthy as they could be.
Think about the bigger picture and the risks of taking out a loan of any kind. At the end of the day, whether the expansion is a success or not, you need to pay it back.
Who Offers Business Expansion Loans?
There are a number of business loan providers that offer these loans whether that’s the banks, private lenders, independent companies, angel investors or crowdfunding.
With so much out there and so many willing to lend, you’ll struggle not to find someone who wants to give you the money. It just depends on the terms of the loan and how much you’ll be able to borrow and be required to pay back.
Final Thoughts
If you’re thinking about expanding your business this year, then small business expansion loans are worth looking into. They can help kickstart a major opportunity for your business by boosting your cash flow or help gradually scale up the company in the future.
FAQs
How much can I borrow when taking out this type of business finance?
It depends on the lender when it comes to how much you can borrow. For most, it’s anywhere between £5,000 to £500,000. However, you can borrow into the millions if you’re a larger business with a track record.
How soon can I receive my business expansion funding?
A lot of lenders can deliver on the business expansion funding pretty quickly. It could be as little as 24 hours whereby you would then receive the funds straight into your business bank account. But usually it will take 3-4 weeks.
What is the difference between secured and unsecured business loans?
Secured business finance is where you put collateral such as property and other assets as payment if you can’t make repayments. Unsecured loans are the opposite, where no collateral is needed, which reduces the risk for the borrower.