Qualifying for a small business loan to expand your business requires a different approach than taking a loan to simply maintain your business. When it comes to expansion, you can deplete cash flows each time you acquire a new company or open a new location, and it’ll take time to staff up in addition to building a customer base. With a standard business loan, you use your company’s history with current operations, so it is easy to show you’re a low-risk borrower.
However, as you open a new location, start a new brand, or acquire a business, there are unknown factors, and you’re investing your current cash flow, so you need to present yourself as “low risk” in a different way. This means:
- Creating a business plan with profitability forecasts.
- Increasing cash flow on hand.
- Operating “lean” to increase profits by cutting waste.
- Reducing long-term debt burden.
Creating a business plan with profitability forecasts
When you apply for a regular business loan, you show how the funds will be used in your current business that has a track record. When applying for a business loan to expand your business, you need to account for financing your current company and the new locations or brands.
Your business plan for business expansion loans should show how:
- The loan will help your current company get back to profitability as you invest money in the new locations.
- Having the asset will lead to strong cash flows so you can pay back the loan.
- It will enable you to grow while keeping cash flow stable, ensuring you can pay back the loan.
As you move into a growth or expansion phase, your new business plan needs to:
- Demonstrate your cash on hand will be able to cover loan payments while you invest in more staff, inventory, equipment, and processes.
- Forecast when each new location or acquisition will begin bringing in profits and tie those numbers into the cash flow on hand so you can cover your loan payments.
- Share ways you’ll be getting the new locations or expanded footprint profitable through marketing and advertising, contracts and agreements customers have committed to, and other confidence builders for the lender.
High demand for your current locations can show how new equipment or increased inventory will grow your business. If you’re expanding to a new location where there is no history, you have to show why there is a need in that location, how quickly you will meet that demand, and when the lender can expect your business to become profitable.
A consulting practice could share letters of intent from a few brands saying that they’ll close deals once the practice opens a local office. A restaurant opening a new location can show how the demographics are similar to existing locations, but competition is lower.
If there are people coming in and making reservations or ordering delivery to the new location, use this data to show there are customers ready to dine or shop. The same applies to a retail shop that sells online and wants to open in a new city.
The goal is to make the lender know that even when you deplete cash flow early in the expansion, you will still be able to repay the loan.
The business plan portion of your application for a business loan to expand your operations should include:
- An overview of why it makes sense to expand now and how your current business can be replicated (and optimized) for success in the new markets.
- How many locations you plan on opening and the timeline.
- The projected time to break even and to be profitable with the location.
- What the expenses are and how they’ll be covered with the impact on cash flow.
- Projections for sales and growth with how this impacts cash flow so you can easily pay back the loan.
This information addresses the lender’s concern for how you keep cash flow strong and lets them know you have both your company’s growth and their bottom line in mind.
This makes you a lower-risk borrower and is where cost cutting and debt reduction increase existing cash flow to help fund the expansion or build a safety net.
Increasing cash flow to your business bank account
Increasing cash flow to your business bank account makes you a more attractive borrower because you can put down a larger deposit, decreasing the lender’s risk. Having more liquid assets in your account shows lenders you have a buffer to keep your company stable while you grow.
There will always be unexpected surprises as your company expands. Having the cash flow to cover them provides you and the lender with assurance you can overcome them.
There are two ways you can increase cash flow based on your revenue numbers, including:
- Changing your price points
- Speeding up accounts receivable conversions
The goal is to remove obstacles that prevent revenue (total sales or accounts receivable that are not always cash) from becoming cash in your bank account. It starts with testing a different price point.
Price changes
Any price hike or cut will change the quantity customers order, so the impact to cash flows depends on the revenue formula:
- Revenue = Price x Quantity.
Start by testing how price changes impact customer demand to make sure you’re managing cash flow in the best way. Here’s an example with two different scenarios. The formula to calculate change to revenue based on changes to price and quantity is:
- Change to Revenue = (1 + Price Change) x (1 + Quantity Change)
| Scenario 1 | Scenario 2 | |
| Price change | +10% | -10% |
| Change to demand | 5% decrease | 20% increase |
| Change to revenue | +4.5% | +8% |
The increased demand in Scenario 2 compensates for the price decrease and sets you up with better cash flow, making you a more attractive candidate for a business expansion loan. An added benefit is showing lenders the increased market share when the competition’s customers switch to you because of the price decrease. This could make it more likely that you’ll get the small business loan to expand.
You can always try this in reverse with a higher price point, but be careful as you don’t want to lose customers and have to win them back through advertising and promotions that eat up your cash flow. You could also wind up with a reputation for being a high-cost company as you’re expanding, hurting the new market’s perception of your brand.
Accounts receivable conversion
While having accounts receivable is normal, cash flow management suffers if the time to convert these transactions gets longer. That’s a red flag for lenders because it’s likely to get even longer as your business tries to expand. There are multiple options to speed up receivables conversion, such as by implementing process improvements or by factoring.
Getting software that automates the receivables process or hiring a proactive accountant can help fix cash conversion problems due to process issues. This may not help if the problem stems from not wanting to pester customers for payment, which is when receivables factoring comes in.
Receivables factoring is where you sell accounts receivable to a factoring company for a cash payment. You’ll get less cash than the total amount of the accounts receivable because the factoring company has to collect. However, you get the immediate boost to cash flow without having to worry about how long the collection process will drag on.
By using this method, at least during the growth phase, you can keep cash flows strong, reduce the amount of time chasing down accounts receivable, and focus on getting your new locations profitable.
Leaner operations increase profits by cutting waste
Leaner operations immediately free up cash and lead to increased profits by reducing necessary expenses and cutting unnecessary ones. This allows you to reinvest cash in the expansion or save it as a buffer.
The 5-step process below can help you identify immediate savings opportunities to make your business look more attractive to lenders.
- Go through your chart of accounts line by line so you know exactly how cash is leaving the business.
- Match cash payments to itemized invoices (i.e. $5,000 CRM monthly payment for 10 licenses).
- Compare itemized payments to business needs (i.e. you don’t need 10 licenses with 5 salespeople).
- Classify each expense as “necessary,” “nice to have,” or “unnecessary.”
- Develop negotiation plans for necessary expenses; figure out substitutes for nice to have expenses; and immediately cut anything that’s unnecessary.
Slashing unnecessary expenses will be easy once you’ve matched the business need to the itemized expense, and here are examples for how to better manage cash flows with necessary and nice to have expenses:
Negotiation with suppliers for necessary expenses
Including your major suppliers in the planning process for your expansion plan lets them immediately feel the promise of more business, making it easier for you to negotiate a lower price. If they can’t lower prices, try negotiating longer payment terms to free up cash flow.
When you pay suppliers on net-90 terms, but your customers pay you net-30, you have free cash flow for 60 days to reinvest into ads for more sales or to stick in a high-yield savings account to earn interest.
Alternatives for nice-to-have expenses
Travel and entertainment is an expense that is more often nice to have than necessary, and can boost cash flows with smart changes:
- Swap business class for premium economy on long trips.
- Skip the trip altogether when video conferencing works fine (i.e. sales discovery calls).
- Treat clients to unique, local food they can talk about later instead of the same expensive chain steakhouse.
- Negotiate flat fees or custom deals with hotel chains in the cities your team stays in the most.
- It can be room price, breakfast included, and other expenses associated with travel.
With a little extra thought, time, and effort, you’ll forge a deeper connection with customers in addition to increasing cash on hand. The personal touch of a unique dining experience vs. a chain restaurant can also leave a positive impression, so the client wants to engage again.
Reducing long-term debt burden
There are 3 main strategies to reduce the burden of long-term debt as a way to free up and increase your cash flow. An increased cash flow will also help to improve your debt service coverage ratio, making lenders more likely to provide you with a business expansion loan. Here are the 3 ways:
- Refinance high-interest loans.
- Use a debt consolidation loan.
- Pay off or refactor debt with cash on hand.
Refinancing
When your business has grown and your business credit score has improved since getting the original loan, try refinancing for a lower rate to reduce your monthly payments. If your original loan was $250,000 for 10 years at 15%, then you’ll have $169,541 remaining after 5 years. Imagine you now qualify for 10%. Cash flow will improve by $431.12 each month.
| Term remaining | Rate | Cash flow required per month | |
| $250,000 Original Loan | 10 years | 15% | $4,033.37 |
| $169,541 Refinanced | 5 years | 10% | $3,602.25 |
Consolidation
Debt consolidation loans can work the same way by lowering the interest rate you pay across multiple loans. The extra benefit they have is lowering the monthly cash burden by extending your payback period. Take a look at these two scenarios where a 5-year debt consolidation loan pays off three existing loans.
| Scenario 1 | Term remaining | Rate | Cash flow required per month |
| Existing loan 1 @ $200,000 | 4 years | 12% | $5,266.77 |
| Existing loan 2 @ $150,000 | 3 years | 10% | $4,840.08 |
| Existing loan 3 @ $100,000 | 2 years | 13% | $4,754.18 |
| Scenario 2 (two options) | $14,861.03 | ||
| Debt consolidation @ 13% | 5 years | 13% | $10,238.88 |
| Debt consolidation @ 10% | 5 years | 10% | $9,561.17 |
Consolidating your existing loans into a new 5-year term saves $4,622.15 in cash flow each month, even at the highest rate from your current debt, because of the longer term. Consolidating loans at the lower end of your rates conserves $5,299.86 every month.
Refactoring
Debt refactoring is the third way to reduce long-term debt burden for improved cash flow by using idle cash sitting in bank accounts for a lump-sum payment and amortizing the remaining loan amount across the remaining term. Making a $20,000 lump-sum payment on a current $100,000 loan with 3 years remaining can help you save $608.44 each month in cash flow.
| Principal remaining | Term remaining | Rate | Cash flow required per month | |
| Current loan | $100,000 | 3 years | 6% | $3,042.19
|
| Refactor after $20,000 lump-sum payment | $80,000 | 3 years | 6% | $2,433.75
|
Pro-tip: When cash on hand isn’t an option, sell idle assets like an old building or out-of-style inventory and use the funds to refactor debt.
Before you apply for a business expansion loan, you want to make sure your cash flow can cover your current costs and expenses so that the lender feels confident they’ll get their money back. You’ll also want to ensure that you’re able to keep your current business running as your new location or extension eats up cash flow.
Lenders will be looking for your plan to make the new business profitable so you can make interest payments. This is where having more cash on hand by decreasing expenses, reducing long-term debt, etc. is recommended to build and keep lender confidence high so that your business expansion seems like a wise investment.
