Small Business Finances: Borrowing to Fund Expansion

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Your typical small business owner wants to eventually get to the point of expansion. After all, expansion means growth. Growth means additional revenues and, hopefully, higher profits. Yet expansion is seldom easy. One of the biggest challenges is coming up with the money to pay for it.

Imagining owning a brick-and-mortar retail business. Things are going swimmingly. One day it dawns on you that customers have been asking for products you don’t carry. You realize you could increase revenues substantially by expanding your inventory. But in order to accommodate customer requests, you are looking at more retail space and a bigger warehouse area.

Your problem is a good problem to have, but that doesn’t mean it’s any easier to manage financially. Where are you going to get the money to expand your physical footprint? Moreover, are you going to build or rent additional space? You are going to need money either way.

Small Business Loans

Small business owners often turn to local banks because they don’t know where else to go. They seek out small business loans in hopes of securing enough funding to reach their expansion goals. This is probably the worst way to go. Why? There are several reasons.

First, getting approved for a small business loan is not easy. Business owners have to jump through all sorts of hoops to satisfy bank underwriters. Sometimes they even have to put up their own personal assets. When approval is finally realized, small business loans often come with high interest rates and a litany of fees and charges.

Commercial Real Estate Loans

Another option is the commercial real estate loan. This type of loan is probably the most appropriate for business owners looking to buy new or add to existing buildings. Indeed, that’s what these loans are designed to cover. They are easier to come by than small business loans because there is real property involved.

Unfortunately, commercial real estate loans can be just as expensive. High interest rates and excessive fees and charges are not uncommon. As such, small business owners have to think long and hard about how a commercial real estate loan will ultimately affect the bottom line.

Hard Money Loans

Next up are hard money loans. According to Salt Lake City’s Actium Partners, the big difference between hard money loans and the two other kinds of loans previously discussed is how approval is determined. Small business and commercial real estate loans are based on the borrower’s credit and financial health. Hard money loans are based primarily on collateral.

A small business owner looking for a hard money loan to fund expansion would be required to put up some sort of asset as collateral. More often than not, this means property. The lender’s decision will be based almost entirely on an appraisal of that property as compared to the amount of money being requested.

Grants and Government Loans

Last but not least are grants and government loans. They are out there, but they are extremely hard to come by. Also note that any type of government business subsidy in the form of grants and loans will come from the states, not the federal government. Despite what you may have read online or seen on television, Uncle Sam does not give away free money to small businesses.

The need to expand is a good problem to have. As you can see, small business owners have a number of different options for funding expansion plans. Those options have to be considered on a case-by-case basis. What is good for one business owner may not be good for another.


David Cohen

Rachel Cohen: Rachel is a sustainability consultant who blogs about corporate social responsibility and sustainable business practices.

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