You’ve finally done it. The startup phase is over and you have real human customers to prove it. A business expansion loan is one way to make sure you don’t slip from your current financial position.

An expansion loan isn’t always about getting to rockstar status. Knowing how to determine whether your business is ready for an expansion loan is key.

Check out our guide to understanding and finding a small business expansion loan.

Is It Time to Expand?

Before you self diagnose that more debt is the answer to all your business problems, let’s take a look at the common ways to determine whether it’s time for your business to expand.

An expansion loan has many benefits but there are some issues that beg for additional financing more than others. Here are five key reasons you may need to pursue a loan:

1. You Sell Out Fast 

Having too many customers is a great problem for many businesses. It is a problem that requires a prompt solution, however. When your customers ask for more services or products than you’re able to reasonably offer it may be time to pursue business financing.

While many small businesses would leap at the idea of an overflowing list of customers, it’s only a great situation when you can still provide quality products and services. Making customers wait longer than they expect or for unidentified amounts of time can make them anxious.

According to the New York Times, Americans spend about 37 billion hours in line each year. The biggest problem with waiting isn’t the act of not having an order fulfilled but not feeling the wait is justified.

If you must make your customers wait, be sure that wait is fair. There is a number of customers for your business that makes fairness impossible. If your customers wait beyond a length of time they perceive to be fair for the value, they will seek out one of your competitors instead.

Seek expansion financing to meet growing demand and avoid burnout for your current employees.

2. You Make Desperate Decisions

The moment the bookkeeper begins sweeping floors you know you have a human resource problem. Teamwork does make the dream work but within the parameters of an agreed upon job description.

The minute you have unqualified employees taking on important duties, it is time to consider another round of hiring. Great talent makes your business sustainable in the long term.

Consider your own performance in delegating. Have you had time to assess employee strengths and weaknesses? When you are overworked, you are simply in survival mode.

Your own management habits can be a sign that you need help managing your business or need to take on less daily tasks.  Either way, you can benefit from a larger, qualified talent pool.

3. You Can’t Work

You have amazing products and services. Your employees are talented and customers are waiting in line to do business with you, but you can’t work.

Your office is a logistical nightmare. The phones never work properly and new employees are working in the conference room where you need to meet with clients because there is no other space.

An efficient workflow is an essential part of being in business. Consider expanding if you have a great team and good profit, but your space doesn’t allow your business to operate efficiently.

4. You Can’t Produce

There are many industries that must upgrade equipment or training based to remain compliant. If you can’t generate more products based on a new law, recall or simply to keep up with customer demands, it may be time to expand.

More equipment can bring up new operational dilemmas like increased space and maintenance costs. Take your time outlining the cost of the expansion to ensure no major expenses are missed.

5. You Move

Finding success in new markets can be scary. The process of establishing a customer base and finding employees you can trust takes time.

A business expansion loan is helpful in these cases to help you navigate the growing pains of a new market without taking resources from your established offices.

Types of Expansion Financing

Business expansion loans take on many forms. An expansion loan is any type of financing that supports the growth of an emerging business. Here are a few common sources for business expansion financing:

Banks

Getting a business loan as an emerging business is much different than the experience of a startup. With actual sales and collateral to offer, your options for financing increase.

Banks offer interim loans, installment loans, lines of credit and more to help businesses cover expenses. The type you choose depends on the purpose of the loan and the financial position of your small business.

Interim loans are best used for construction. When remodeling or building new facilities, interim financing allows you to cover the cost of construction and repay the debt using the new mortgage on the property.

A line of credit gives you access to a large lump sum of capital. Using checks or a purchase card, you can access the funds in the account to cover any expenses that come up. The benefit of using a line of credit is that you can use only what’s needed.

For example, if you get a $100,000 line of credit but spend $50,000 on expansion, you make payments only on $50,000. A line of credit works like a credit card in this way. When you repay the balance owed, the full amount of the line of credit is available to you again.

An installment loan is a traditional lump sum of money given at contract signing that must be repaid in equal amounts over a set period of time. Most loans consumers take out are installment loans.

An installment loan reveals all interest and fees up front so your payments are predictable. A line of credit can lead to varying payment amounts that can be hard to manage if your expansion plans aren’t carefully laid out.

SBA Loans

The Small Business Administration does not offer loans directly. It does back business loans that meet certain criteria as a guarantee of repayment.

Conventional bank loans typically favor the bank. The benefit of SBA backed loans is that they are created to stimulate economic growth which means they will offer perks that appeal to small business owners.

Look for 7(a) and 504 programs designed for emerging businesses. Though the perks may be helpful, the government will do a thorough check on all applicants that can take anywhere from 60 to 90 days.

Investors

Investors come in all shapes and sizes. Two types of investors you might encounter when expanding your business is a venture capitalist or an angel investor.

Venture capitalists generally make larger investments as they have higher expectations for profit than individual investors. Venture capital is expensive to borrow and can cost you autonomy.

An angel investor is an individual seeking profit potential but for reasons that could be based on personal interest or relationships. The biggest difference between a venture capitalist and an angel investor is that the angel investor spends his own money while venture capitalists invest other people’s money.

How to Prepare for an Expansion Loan

Expansion loans can be quick or tedious depending on the source of the money. Before you apply, get all your financial paperwork together to help expedite the process. Here is a quick list of documents to have on hand before beginning the loan application process:

Here’s a quick summary of what you should have ready to go before you apply:

Tax Returns

Gather both business and personal tax returns from the last three years. Tax returns help lenders see whether your business has a history of making a profit. Personal tax returns show assets that may act as collateral if your business doesn’t have any to offer.

Financial Statements

Consult with an accountant to prepare financial statements. A balance sheet, cash flow statements, and business income information are all helpful to have on hand. Lenders need to see that you can afford to repay a debt and that your business is, in fact, growing.

Business Plan

The financial statement cannot share the vision for your business you have in your head. A business plan describes for a lender or investor how you plan to continue growing your business. A business plan shows expertise and can help an investor see the profitability of your ideas.

Collateral

Collateral is used to secure a loan. It can include any tangible assets you have available that might be close or higher in value than the loan amount you are requesting.

Business Credit Report

Make sure you provide your financier with a copy of your business credit report. This credit report shows how well you repay your debts. It’s a great testament to your management skills and trustworthiness. If you don’t have business credit yet, apply with Dun and Bradstreet to secure a DUNS number to kickstart your credit history.

Legal Documents

Provide any documents required for compliance in your state like a business license or articles of incorporation. Businesses who do not have up to date records may be a red flag for a lender. Make sure all paperwork for your business reflects current filings.

Look Before You Leap

The decision to take out an expansion loan is a big commitment. It binds you to do the work necessary to make sure your business keeps its promises of profit.

This can mean extending your hours. managing more employees or making big changes to keep expenses low. If the information on your financial documents doesn’t look favorable, postpone your decision to apply for financing.

Your relationship with a lender depends on putting on your best presentation. For more information on finding the right financing for your business, visit our website.