Establishing your business is a great first step. But what do you do when it’s time to expand? You may need continued business funding for expansion or even just to keep your small company operational. Doing some market research into new products or services can help you determine whether expansion is logical and feasible. Take a look at this basic guide on how to get a small business loan.
Establish why your business needs more funding
Any lender or other potential source of revenue will start by asking the same question: Why do you need more funding? Be proactive by preparing your answer in advance. You might need new funding for several good reasons, including:
- Launching new products or services
- Opening additional locations
- Purchasing and installing new equipment
- Expanding your staff
- Managing cash flow or handling unexpected expenses
- Getting through a business downturn, especially if your company is in a seasonal or cyclical field
The better your reason and explanation for new funding, the stronger your chances are of securing it.
Determine how much business funding you’ll need
Understanding your goals is key to determining how much capital your business needs. Are you planning to open a second location? If so, do the research to calculate the costs involved and decide whether to buy or lease. A new location also involves new inventory, equipment, and furnishings, as well as the need to hire and train new workers.
Use the financial data from your current business to determine what funding you may need to expand, keeping in mind any hidden costs and adding a buffer for the unexpected. In addition, determine what it will take to reach a break-even point for your expansion. You’ll need all this information when approaching lenders or investors.
Update your business plan
Many investors or grant-funding organizations will want to see your updated business plan before they discuss possible financing with you. As you revise your existing business plan, make sure to address the following key points:
- The products and/or services you offer, and how they solve an existing problem in your market
- Your specific target market
- Your competition
- What you offer that is unique in meeting the needs of your target market
Gather your financial paperwork
Whether you’re seeking business funding from a bank, an organization that provides grants, or another financing source, you’ll need to produce some documentation showing that your finances are in order. Such paperwork might include:
- Your most recent financial statements
- Your Articles of Incorporation or other founding documents
- Proof of insurance
- Your business license
- A business credit report
- A forecast showing anticipated revenue and expenses
If your business hasn’t been thriving, consider crafting a statement explaining how additional funding will help you become profitable. In addition, consider consulting a business appraiser to get a valuation of your business, just as you would do if you were about to sell it.
Determine your funding source
You may have several possible sources for business funding. Take a look at some of the possibilities and choices:
As an established business, you may find it easier to get a bank loan than you would have as a start-up. Among the options that may be available to you through your bank are:
- Line-of-credit loan. This type of loan is especially useful for paying for inventory and operations. Your bank attaches the credit to your checking account, with interest accruing from the time you borrow an amount until you pay it back.
- Secured loan. If you purchase equipment, this type of loan is often secured by the equipment itself. You may also be able to secure the loan with your receivables or inventory. This means that if you default on your loan the property used to secure it could get repossessed.
- Unsecured loan. You’ll only be able to get an unsecured loan if the bank considers you low-risk. Expect to pay more in interest than you would with a secured loan.
- Installment loan. These loans establish a payment plan when you take them out, with each of the equal payments going to both principal and interest.
- Interim loan. This type of loan is typically used for the construction of new facilities. Once the construction is completed, the bank issues a mortgage on the building and uses it to pay off the interim loan.
- Balloon loan. These loans require small, interest-only payments through the life of the loan, with a large balloon payment due at the end of the loan’s term. Choose a balloon loan to tide you over when you know you have a large payment coming on a specific date.
The Small Business Administration (SBA) doesn’t lend money directly to small businesses. Instead, it provides guidelines and guarantees that make lenders more comfortable making loans to small businesses. SBA loan types include:
- 7(a) Loans. SBA 7(a) loans of up to $5 million can be used as working capital, to refinance business debt, and to purchase supplies, furniture, and fixtures. U.S. for-profit small businesses may qualify if they have reasonable equity, have used alternative financial resources before seeking the loan, and need the funds for a sound business purpose.
- 504 Loans. If you need funding to buy or construct buildings, to modernize existing facilities, or to make long-term investments in machinery or equipment, an SBA 504 loan might be the right choice. They cannot be used for working capital, inventory, debt retirement, or investment in rental real estate. These loans are made through Certified Development Companies, which are SBA community-based partners. Eligible U.S. for-profit companies must have a net worth of under $15 million and an average net income of under $5 million.
- 7(m) Microloans. These SBA loans of up to $50,000 can be used for working capital, inventory, furniture and fixtures, equipment, and supplies. They may not be used to pay debts or purchase real estate. Lending requirements vary; collateral is typically required.
Sell some ownership stake
Your company can sell an ownership stake to raise funds. If you have an LLC or partnership, you’ll have to add new members, who will make an investment to gain partial ownership. Corporations simply need to sell shares of the company. Check your operating agreement or corporate bylaws to make sure you’re handling the transaction properly, and report the changes to your state’s Secretary of State.
Use your own funds
Many start-up founders put their own money into their businesses at the beginning, and you can continue to do so as you expand. Among the personal sources of financing, you may want to consider are credit cards and other personal lines of credit, your own savings, a home equity loan on your residence, loans taken from your retirement accounts, and loans against your life insurance.
Friends and Family
If you have friends and family who are willing to invest in your business’s growth, you may find yourself with easy financing that offers flexible repayment terms, possibly without interest. Consider offering a small ownership interest to these investors. The one caveat to friends and family financing: if you’re not able to repay their loan, you could damage personal relationships.
Find a venture capitalist
Venture capitalists often back high-growth companies with large investments — but you should expect to give up significant ownership stakes for that capital. Venture capitalists often want to invest in companies that can go public or be sold within a few years, and typically expect a very high rate of return on their investment, as much as 50%. If you’re a firm with proprietary technology or products of some kind, this funding route may suit your situation.
Find an angel investor
Angel investors are generally driven not by profit but by the desire to help entrepreneurs succeed, especially in fields they’re interested in. They typically invest their own money, usually in start-ups, and demand little control over how it’s used. Sites such as Gust and Angel List specialize in connecting angel investors with entrepreneurs in need of funding.
SBA investment programs
The SBA offers several investment programs that offer funding to meet specific needs. You may be able to obtain funding from:
- Small Business Investment Company (SBIC). The SBA licenses and regulates these privately owned funds, which make equity and debt investments in small businesses.
- Small Business Innovation Research (SBIR). This program hosts competitive awards that encourage small businesses to conduct research and development with commercial applications.
- Small Business Technology Transfer (STTR). In this program, small businesses team up with nonprofit research institutions at the start-up stage to conduct innovative technology R&D.
Apply for a grant
Small business grants can come from nonprofits, private businesses, and federal, state, and local government agencies. Such entities may want to support research or entrepreneurship in a certain field, or they may want to open doors to certain populations, such as women, veterans, or minorities. This money doesn’t have to be repaid, but since it’s provided for very specific purposes, most grant-giving entities request regular reports on your progress. You can seek out grants at a variety of websites, including Grants.gov and Candid.
Crowdfunding is a type of financing that relies on prospective customers to make micro-investments in a business or brand. These businesses use platforms such as Kickstarter to raise money from and offer incentives to their micro-investors, who then become brand ambassadors to spread the word about new products.
Visit an SBA resource center
The SBA features hundreds of resource and development centers located throughout the country and staffed by financing experts. Go to the SBA website to find an SBA resource center in your area.
Whether you’re looking to grow your business or ready to start a new venture, ZenBusiness can help you get going. Our business formation plans take the paperwork off your desk so you can focus on the decisions and tasks that only you can do.
Business Funding FAQs
How do I get funds to help my business if it’s impacted by COVID-19?
One of the key funding sources for businesses affected by COVID-19 is the Paycheck Protection Program (PPP), which is taking applications until May 31, 2021. While the SBA administers the program, loans are made through participating banks. Check with the bank where your company does business since many banks are only working with existing customers. If you’re applying for the first time, use SBA Form 2483.
Other SBA grant programs include the Shuttered Venue Operators Grant to help performing arts institutions and theaters shuttered by COVID-19 and the Targeted Economic Injury Disaster Loan Advance (EIDL) program for affected small businesses in low-income communities. In addition, payment of principal and interest is extended for recipients of loans from the SBA 7(a), 504, and microloan programs.
Are SBA loans difficult to get?
The application process for SBA loans isn’t easy, and qualifying for a loan is also not guaranteed. Businesses with a poor track record, no collateral, or poor credit scores may find it difficult to secure an SBA loan.
Will SBA loans be forgiven?
PPP loans taken out during the COVID-19 period are designed to be 100% forgiven. To qualify for forgiveness, a business must use the funds for eligible expenses and meet all required employee retention criteria.
Other SBA loans aren’t intended to be forgiven. EIDL loans have a 30-year repayment period, so payments are very low. Other SBA loans, including 7(a) loans, may be able to undergo an Offer in Compromise process, under which up to 75% of the loan may be forgiven in cases of extreme financial hardship.
How do I get a disaster loan?
Small businesses, including some agricultural businesses, can apply for the SBA EIDL disaster loans at the SBA website. These loans may be used for working capital and operating expenses, and collateral is required for loans of $25,000 and up.
How do I know when to expand my business?
The decision to expand your business is one to take only after assessing the costs, risks, and possibilities. Consider whether your current customers will support a new location or other expansion. Talking with a business mentor who has been through expansions before may help you evaluate the viability of expansion.
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