If your business has a loyal customer base and a strong cash flow, then it’s time to expand your business. It can happen in multiple directions; for example, you can open your business in a second location, address a new target group with your existing product, start a new product line, or invest in better equipment. Business expansion requires a lot of research on products, potential customers, competition, and risk management, but the most important step is coming up with a solid financial plan to externally fund your expansion project. You must explore various business expansion loans to find the best option for your business.
What Are Business Expansion Loans?
Business expansion loans can take your business to the next level. There are different types of loans that you can choose from, but term loans and business line of credit are the most popular ones for massive expansion. The type of loan you will choose depends on the business size, growth plan, financial position, and some other criteria.
🔶 Term Loans
In this type of loan, you can borrow a large amount of money up front. You need to repay the loan monthly over a certain number of years. Term loans may have either a variable or a fixed interest rate. This type of loan is ideal for equipment purchases or refurbishments. You can get this loan from traditional banks, private companies, credit unions, or online lenders. You must consider the interest rates from these lenders and decide which is the best option. Knowing the terms and conditions is also important. Your business plan must be flawless to increase your chance of getting the big loan.
🔶 Business Line Of Credit
This is a flexible type of loan that lets you draw funds as you need. There is a pre-approved limit up to which you can take the loan. You need to pay interest on the amount of the loan you use for expansion. The terms and conditions of this type of loan are similar to those of business credit cards. Your business can borrow a certain amount of money and pay it on time.
Business line of credit is reusable; that is, after you have paid back the money, you can again borrow it up to the credit limit provided to you. The lender decides on the limit by evaluating your credit score, business revenue, and payment history. A business line of credit is ideal for businesses that need to buy new inventory or equipment. This type of loan can be secured or unsecured. The secured form needs business equipment or inventory as collateral. On the other hand, the unsecured loan doesn’t need any collateral. This option makes it easy for business owners to get a loan for their expansion.
Just like the term loans, to get a business line of credit, you need a good credit score and good business revenue. You can get this loan from a traditional bank or an online lender. The interest rate in this loan is variable; that is, it will increase or decrease depending on the prime rate.
Which Loan To Consider: Term Loan vs Business Line Of Credit
The type of business expansion loans you choose depends on the type of business and the expansion you are planning. Here are some key differences between term loan and business line of credit.
☑️ Kind Of Expansion
If you want to buy new equipment or inventory that requires a fixed amount, a term loan is a good option. But if you are expanding your sales team or moving office to a new location that requires flexible funding, the business line of credit is preferred. You can also use a combination of a term loan and a line of credit for your business expansion project. For instance, if you want to expand your sales team for a new range of products, then you can take a term loan to buy the products and a business line of credit to pay for the training and other costs of your new sales team.
☑️ How Quickly Do You Need The Funds
If you need quicker access to funds for the immediate expansion of your business, the business line of credit is a better option. The term loans often have a longer approval process as they need more documentation.
☑️ Ease Of Getting a Loan
A business line of credit is easier to get, as you may get it without any collateral. The terms and conditions are also less strict than those of term loans. The application process of the business line of credit is streamlined; some lenders often offer real-time reviews to make the funds available within days.
☑️ Amount Of Funds Needed
If you need a large amount of funds for expansion, then the term loan is a better option. Term loans can give you up to $25 million, whereas, business line of credit up to $1 million.
☑️ Repayment Time
For a term loan, repayment time is usually 5 years to 25 years. On the other hand, the business line of credit has a shorter repayment time, about 6 months to 5 years. The interest rate of a line of credit can vary from 7% to 25% depending on the lender. The term loan normally has an interest rate of around 13% to 15%. The interest rate for term loan varies depending on borrower type, purpose, and bank.
☑️ Flexibility
Line of credit is flexible; you can take any amount up to your credit limit. You will only need to pay interest on the amount you used. On the other hand, the term loan has a fixed amount with fixed interest rates. If you need a loan again, you don’t need to make a new application in case of a line of credit. As long as you repay the amount you have used, you can continuously take funds up to your credit limit. But in the case of a term loan, if you need more money, you will have to go through the vigorous application process again.
In case of both types of business expansion loans, you must pay back the amount you have borrowed on time, else it will affect your credit score and lower your chance of securing further business loans in the future. If you can handle your finances well, then you can easily get a loan for growing your business.
