How to Expand a Business: Understanding Your Financing Options

As you strategize on how to expand a business, consider the benefits of SBA expansion loans. If you have a well-defined approach for expansion and a proven business model, a business expansion loan could be an ideal fit to evolve your customer base and increase your profits. Investing in your business often requires extra capital to help you reach an untapped market, expand your physical location or generate new streams of revenue. Let Live Oak be your partner in taking your business to the next level.

Expansion loan options

Depending on your specific goals and path to expansion, you have multiple options for expansion loans. SBA expansion loans, including the 7(a) and 504 programs, are designed for established businesses and are based on cash flow analysis. Each SBA loan program has unique benefits and uses, so be sure to speak with your lender to understand the ideal loan type for your goals. SBA loans have specific maximum dollar amounts, so in certain scenarios, lenders may combine it with a conventional loan depending on your capital needs. That’s where a lender like Live Oak Bank comes in. We are experts in expansion financing and can help determine the best program to fit your needs.

Uses

There are many uses for a business expansion loan. Some examples include:

• Acquiring a competitor or related business
• Buying or constructing commercial real estate to grow your physical location
• Opening a new location to expand your footprint
• Renovating your existing location to operate more efficiently
• Entering a new market to boost your customer base
• Hiring employees to grow your team
• Releasing new products or expanding your current offerings
• Purchasing new equipment to improve your operations

Expansion loans offer flexibility and favorable terms because lenders can easily view the business’s historical performance to make decisions. Because you are an established business (and not a start-up), there are minimum equity injection requirements – which means less cash that you’ll have to put down. Two of the most common expansion financing uses are expansion through acquisition and expansion through commercial real estate.

Expansion through acquisition

When considering how to expand a business, evaluate acquisition as an option. The strategic acquisition of a competitor can be the key to gaining market share, expanding product lines, cross-selling to customers, increasing pricing power and obtaining vendor discounts via bulk ordering. Expanding also offers franchise business owners the ability to grow their footprint, as many franchises are exclusively licensed based on geographical area. You may not be required to inject equity, which is the leading advantage of expansion through acquisition. The following criteria must be met for the project to be considered an expansion instead of an acquisition:

• The existing operation needs to be in business for at least one year
• The existing entity needs to be the borrower if it is the buyer — if a new entity is the buyer, then both the existing entity and new entity need to be co-borrowers
• If a new entity is to be created, it needs to have the same ownership structure as the existing entity
• The existing business model needs to be similar to the target business (i.e., buyout of the same franchise, a direct competitor, operations are alike, etc.)

Expansion through commercial real estate

There are many opportunities to utilize expansion financing for commercial real estate, including:

• Buying or constructing commercial real estate to grow your physical location
• Opening a new location to expand your footprint
• Renovating your existing location to operate more efficiently
• Entering a new market to boost your customer base

The main benefit of an expansion loan for commercial real estate is the zero to minimal down payment (subject to credit approval). As an established business owner, you are not required to contribute a large amount of cash up front. This means more money in your pocket and a solid cash flow for your business.

Another benefit is Live Oak’s attractive maturity rate of up to 25 years, plus the construction period. If 51% or more of loan proceeds are used for commercial real estate, including construction and soft costs, the loan qualifies for a 25-year repayment term. If the loan will be used for a combination of purposes, we utilize what’s known as a blended maturity depending on the mix of loan proceeds.

Additionally, borrowers can set up an interest reserve for the construction phase of their real estate. A portion of proceeds will be set aside to pay for interest during the construction period (i.e., 12 months), so the borrower doesn’t need to worry about payments during that time. An interest-only period is also available, where the borrower pays just the interest on the loan for a set amount of time. This can help a business looking to ramp up its cash flow before taking on the full principal and interest payments.

As a business owner, it’s crucial to ask yourself the right questions and determine if now is the right time to grow your business. Applying for a loan without a fully baked plan is not a wise idea, so take time to strategize. You’ll need to be sure that you can manage the anticipated growth by addressing the following:

• Ensure that your cash flow is stable enough to support additional debt, both currently and down the road.
• Understand how you’ll use the funds for growth and have a clear plan to help you execute that strategy.
• Identify a pattern of growing demand – without increasing sales and customers, a business expansion loan may not make sense.

Once you have your strategy fully defined, reach out to us. Live Oak can serve as your guide in structuring the deal — we are experts at structuring SBA loans to finance a business expansion.