Every business needs capital to expand their growth and broaden their potential for success. One major problem is that many startups don’t always have easy access to the money or the support to raise the necessary funds and grow their expert ideas. It’s one reason why nearly 80% of startups fail before surpassing their first five years. 

Yet, applying for business expansion financing can ultimately help save your company from becoming another statistic in the funeral pile of dead business enterprises. From companies like Lighter Capital that offer revenue-based loans to services like Bolstr that help small businesses raise capital from investors, knowing your company’s monetary worth is essential when seeking financial help.

These four tips to secure business expansion financing can help save your small business empire while setting your financial ducks in a row:

1. Review the Lender’s Requirements Before Striking a Deal

Before preparing your application, small business owners should review the lender’s requirements to determine what works best for your business’ expansion. Since the process can be extremely long and tedious, both parties could waste time and energy if they haven’t reviewed the lender’s policies to see if it’s the best fit for their business. Make sure you review the financial metrics used by a specific lender or banking institution so you understand how they make lending decisions before you apply for the loan. As you apply for expansion financing, you’ll need to demonstrate to lenders that your small business generates a positive cash flow and that you can repay any debts in the future. Lenders also want to make sure you don’t have too much debt. Often, lenders use the debt service coverage ratio, a quick ratio, and a current ratio to calculate a company’s liquidity and ability to repay their debts. However, small businesses can determine these ratios beforehand so they can appear more desirable and confident before securing a loan. These liquidity ratios can help entrepreneurs manage their assets clearly. Ways to determine these finance rations are as follows:

Current Ratio: Find your company’s current assets and liabilities. Divide the assets by the liabilities to get the ratio.

Quick Ratio: Find your current assets, liabilities, and inventory value on your company’s balance sheet. Subtract the inventory from current assets. Then divide the result by the current liabilities.

Cash Ratio: On your balance sheet, determine the current liabilities, marketable securities, and cash. Add the cash value to marketable securities. Divide the result by current liabilities.

2. Clean up your Finances

Many entrepreneurs make the mistake of not having their financial statements in order before they try to secure their loans. In the early stages of business, many companies try to use self-finance methods or limit spending. However, try to invest in an accountant and/or accountant software before seeking expansion financing. Even if it’s for a limited time, hiring an accountant can help you get your financial affairs in order and keep track of your cash flow. If your records show disorganized bookkeeping, it’s hard for financial lenders to see how the business performs. Some businesses don’t require audited financial statements, but offering insight into accurate financial statements can help both parties consider how they will use and stabilize their business with expansion financing. Maintaining and keeping track of a clean financial portfolio can help speed up the application process and improve your chances of securing capital.

3. Prepare the Essential Documents

When you go to apply for a loan at a bank or a lending institution, make sure you’re prepared and organized. Acquiring and filling out the essential documents will help small business owners look prepared and well-organized. Having the correct information for a lender when they ask for a detailed status of your business finances is essential. It also helps show lenders that you’re conscientious to complete the process responsibly. It’s crucial to prepare financial statements and financial projections for 12-18 months in the future. This information helps highlight how finances can produce cash flow to repay loans.

4. Borrow the Minimum Amount

A word of advice to emerging businesses; only borrow the least amount of money you need to avoid unnecessary, excess debt. In fact, it’s common to let finances get out of control. Today, 49% of all small business owners are in debt. Roughly 20% or less of your sales should go to debt servicing. Any debt repayment above 20% is considered a warning sign for small businesses since your cash flow is repaying debts and not reinvesting it back into your business. It’s reasonable to assess alternate routes to gain capital instead of securing a loan to expand your enterprise. You may want to consider improving terms with suppliers, throwing fundraising events or setting up online funding campaigns. Selling equipment and materials or downsizing your location are ways to finance improved operations and save money. In addition, looking for investors in your company can be a crucial way to secure networking connections and capital at the same time. However, various alternate ways to secure capital include:

  • Small Business Loan Programs: SBA loan programs are frequently utilized by new businesses. The 7(a) Loan Program offers up to $750,000 from your local 7(a) lender, backed by a partial guarantee from the SBA. See if your business fits the eligibility guidelines. The SBA Express program focuses on lenders with a good SBA-lending track record. It's a way for small business owners to gain money —  in up to $250,000 —  quickly. In addition, the 504 Loan Program offers funds for asset purchases, such as land or equipment. If you’re looking for a small loan of up to $35,000, the 7(m) Microloan Program might be the way to go.
  • Trade Credit: A trade credit can be a beneficial tool for financing expansion. Trade credit allows businesses to buy now and pay suppliers later. Using trade credit can have some drawbacks like interest, so make sure to communicate ways to negotiate terms with your suppliers.
  • Direct Public Offerings (DPOs): DPOs allow you to sell stocks directly to the public without registration and reporting requirements. It’s specifically designed to allow small businesses to access public capital markets at a lower cost and complexity than an IPO. In general, they raise less than $1 million, but in some cases can raise over $25 million.
  • Angel Investors: Finding an angel investor — individuals who offer financial support in exchange for ownership equity or convertible debt — can be a great guiding force for your business. Utilizing online lending networks and like Prosper or OnDeck, along with the Angel Capital Association, the Angel Investment Network, or even Chamber of Commerce directory to find an angel investor can help you secure capital.

It’s best to consider strategic alternatives before you settle on acquiring an expansion loan as a last resort.

Bonus Tip: Always Communicate Clearly

After you decide finding a lender is the right step, remember to be clear and specific about how you will use expansion funds when you speak with your financial lender. Offer insight into why the money is needed, why it’s needed, and what the plans to generate more income with the loan. For example, relate how the $20,000 you’re borrowing in loans is helping to raise $200,000 in sales. It’s important to highlight how the expansion finance can repay itself during the lifetime of the loan.

Once you determine expansion costs, you can find the correct type of loan plan for your small business. Whether it’s savings, angel investors, venture capitalist, or loans, there are many options for expansion financing. In time, a loan could help be the wind under the expansive wings of your business growth.

About the Author(s)

 Jake   Croman

Jake Croman is an entrepreneur, philanthropist and college student who currently attends the University of Michigan. Jake Croman's networking experience and logistical know-how extends to his work fundraising on behalf of charitable organizations such as St Judes Children's Hospital and the Eddie Croman Foundation.

Entrepreneur and Philanthropist, Student University of Michigan
4 Tips to Gain Business Expansion Financing