Finance · May 08, 2023

Power Your Commercial Growth Plan With a Business Expansion Loan

Success builds on success. Once your business is making sales, you may see opportunities to expand even more. But there's a limit to how much you can grow by financing everything only through your revenue. A business expansion loan could be a way to get the money you need to accelerate your commercial growth plan.

Business expansion loan basics

While startup loans help launch a brand new company, expansion loans aim to grow a business that's already making sales. Some of the ways you can use funds from an expansion loan include:

  • Buying inventory and equipment
  • Renovating your facilities
  • Expanding to a new location
  • Hiring more staff
  • Paying for advertising

In these cases, the loan follows the same structure. You get funds upfront, which you can spend how you see fit. Then you'll need to make regular payments—including interest—to pay off the debt.

Loan factors to consider

When you apply for a commercial loan, you'll need to consider a few factors.

  • Loan size: How much do you need to borrow? Your revenue and credit score will determine if you qualify for a commercial loan and how much the lender is willing to give you. The lender may set minimum and maximum limits to its loans as well.
  • Loan term: This is how long you have to pay off the debt. It could range from 1 year for smaller loans to 20 years or longer for larger loans, like buying real estate. A longer loan term has lower monthly payments, but over time you'll owe more in total interest.
  • Interest rate: The lender will charge interest on your loan. The lower the interest rate, the less it costs to borrow over time.
  • Fixed or variable: The interest rate won't change with a fixed interest rate loan, so your monthly payments will stay the same. With a variable loan, the interest rate could go up or down based on market rates, which could change your payments.
  • Additional fees: Aside from interest, the lender could charge other fees like an application fee, an origination fee to launch the loan and a prepayment penalty if you pay off the loan early. Make sure you understand all borrowing costs.

The application process

While each lender has its own system for handling applications, the process typically follows some general steps.

  • Check your credit score: Before applying, check your annual credit report and make sure there are no mistakes accidentally dragging down your score.
  • Decide your desired loan terms: Have an idea in mind for what you'd like for your loan, including the amount, term and type of interest rate.
  • Ask the lender for a loan application: The lender will send you the necessary forms to start the application.
  • Provide the required documents: For a commercial loan, the lender could ask to see your business financial statements, past tax returns and commercial growth plan—including an explanation for how you'll use the loan funds for business expansion.
  • Receive the lender's decision: The lender will review your documents and credit score to make a decision. If they approve your application, they'll send you an offer with the loan terms.
  • Close the loan: If you're happy with the loan conditions, you can accept the offer and the lender will deposit the funds into your business checking account.

Strategic considerations

The best time to borrow is when your commercial growth strategy has a clear plan for using all the loan funds—whether it's buying new equipment and inventory, hiring new staff, expanding to a new location or anything else that will grow your sales.

Because borrowing has a cost—namely, the interest rate—you need to grow your business enough to justify the expense. Borrow enough to reach your growth plan goals, but not more than this amount. Avoid letting extra loan money sit unused in the bank. If you do, you'll be paying interest for financing you don't need.

As you consider the borrowing terms, make sure your business can safely keep up with the monthly debt payments. Based on your cash flow trends, can you safely cover the loan payments even during downswings?

You could also look at your debt-to-equity ratio, which is the amount of debt divided by the value of your business. A safe ratio is typically below two, though capital-intensive businesses like manufacturing may need to go higher to expand.

For help with this decision, consider meeting with a trusted business banker before applying. They can review your business expansion plans to ensure the financing you set up makes sense for your growth strategy.


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