How to Get Business Expansion Loans

As businesses grow, the question often arises regarding how to get business expansion loans. While similar to personal loans, there are things that are specific to business loans.
You will discover rather quickly that business loans require a lot of planning and paper work - more so than personal loans. And, many times the amount of money that is needed can be significantly higher than, say, an unsecured consumer loan. You will need to make sure that you have your business finances in order in preparation for the task of applying for a loan. Here is what you should expect.

Considerations for persons who need to know how to get business expansion loans
Step 1 - Determine the purpose
There are questions that you must answer as the process begins. Defining the purpose of the loan will help you determine the direction your loan pursuit will take. It also helps to define your need and whether it is legitimate.

Is your cash flow management the problem, or do you really require an infusion of capital? If you are having problems covering operating expenses, then you need to take a hard look at your income vs. expenses. Reductions in recurring monthly expenses will go a long way to helping you be able to bring expenses under your income threshold. If it is capital that you require for equipment purchases or other large outlays, then you can proceed towards obtaining financing.

Is risk management becoming an issue? Many times businesses are in a transitional state, going from small to medium, and if they do not move ahead, they stand to lose business or stagnate. Financing a transition can be helpful, but also carries its own inherent risk if the additional business does not materialize.

How is the industry faring? What trends are prevalent? Is there on-going growth or is there an overall pull-back? Who are the major players? What is your competition doing? These are questions that help to clarify financial needs. If the industry is down, but your business is up, then what are the reasons? What about the opposite?

Does your business operate in cyclical patterns? Seasonal businesses are difficult to plan for when it comes to systematic and sustainable growth. When the business comes back from its off-season cycle, how much higher will it be than the previous year? Here is where a good track record must be established by having several years of data on which to rely for growth projections. Without it, it is difficult to forecast business and the ability to obtain financing is restricted.

Are economic conditions contributing to difficult times? Economic forces cannot be ignored when the swings are drastic enough to cause major business struggles. Estimating the length of economic downturns is hard, but leading indicators can help judge with some accuracy. Taking out a loan to ride out a tough economic time is hard to justify.

Do you have a sound business plan? How does obtaining financing fit within your business plan? Most business plans do not include this factor, but they should before they even start asking how to get business expansion loans. Eventualities must be examined including the need for funding for growth and sustainability.

Step 2 - Determine the type

There are two basic types of financing: equity and debt. Equity is the money that is invested into the company as a part of financing the ongoing concern of the business. It represents an owner's investment of good faith that shows a desire for the business to succeed. Debt financing is exactly as the term suggests.

The balance between the two is what is called debt to equity ratio and represents the correlation between money borrowed and money invested.

Equity financing can come from within the business. For example, equity financing can come from the owner's personal money or that from family and friends. Or equity financing can come from venture capitalists.

Debt financing is the more traditional type and is most often borne by financial institutions such as banks, commercial finance companies, savings and loans, credit unions or the Small Business Administration. Obtaining this type of financing often requires a showing of adequate personal guarantees and a measure of equity build up by owners to prove their stake in the business. This also gives the lending institutions collateral which guarantees their loans.

Step 3 - Determine the amount

Sometimes the amount can be tied to a specific type of investment or asset that is being sought to add to the operations but that is not always the case. Debt financing is figured by looking at all of the business financial data to insure that the amount does not overwhelm and throttle the business moving forward.

Step 4 - Determine credit worthiness

Businesses, like consumers, have a credit report from which credit worthiness is determined.  This comes from multiple agencies including Dunn & Bradstreet. Often, the business owner's personal finances are also examined as to their condition when applying for a business loan. If personal money is going to be used to help secure the loan, then it, too, must undergo the normal reviews to which consumer loans are subject. This is necessary in the process of examining how to get business expansion loans.

Step 5 - Do the paperwork

Be prepared to have Income Statements and Balance Sheets in order to provide a look at your business by lending institutions. Then, once those are complete, you can begin the application process, following carefully the requests of the lender in providing information. This is often a slow methodical process as opposed to the quick turnaround times experienced in obtaining consumer loans.

Answering the question of how to get business expansion loans is an involved and somewhat complex process. Making sure that you know what you are getting yourself into before you begin helps set realistic expectations while providing a good idea of whether or not you will be successful in obtaining the loan that you seek.