You can fund growth without selling equity by matching each part of the expansion to the right kind of debt: a term loan or SBA loan for long lived investments, a line of credit or asset based facility for working capital, and revenue based financing when your margins are high and you want payments that move with sales. Lenders say yes when your existing business already earns enough to carry the new payment, even before the growth arrives.
Match the money to the use
Growth plans usually mix several needs. Lenders approve faster when you split them and ask for the right product for each one.
| What you are funding | Best fit | Lender types to approach |
|---|---|---|
| New location, build out, real estate | SBA 7(a), SBA 504, commercial mortgage | SBA lender, bank, CRE lender |
| Equipment or vehicles | Equipment loan or lease | Equipment lessor, bank |
| Hiring and marketing | Term loan, revenue based financing | Bank, online lender, revenue based funder |
| Inventory and receivables for larger orders | Line of credit, asset based lending | Bank, asset based lender, factor |
| Acquiring a competitor | Acquisition loan | SBA lender, bank |
Long term assets belong on long term debt. Funding a build out with a short line of credit, or hiring with daily payment money, is the most common way growth plans run out of cash.
Who says yes and who does not
Banks and credit unions finance growth for businesses with two or more years of profitable tax returns, steady cash flow and moderate existing debt. They want to see that today's earnings cover the new payment. They are cautious when the plan depends on revenue that does not exist yet. A bank is the lowest cost source when you qualify.
SBA lenders say yes to growth plans that a bank finds slightly too risky: longer terms, lower down payments and less collateral. They fit expansions, new locations and owner occupied real estate. Expect a longer process and more paperwork. In Canada, the Canada Small Business Financing Program covers equipment, leaseholds and real property through participating lenders, and the Business Development Bank of Canada lends for growth alongside the banks. Read more on SBA 7(a).
Online lenders approve faster with less paperwork and accept shorter histories, but terms are shorter and payments higher. They fit near term hiring or marketing pushes where speed matters more than cost.
Revenue based funders advance capital in exchange for a share of monthly revenue until a set amount is repaid. They suit software, ecommerce and subscription businesses with strong gross margins and predictable revenue. They are a poor fit for low margin businesses, because the repayment share eats the profit the growth was meant to create. See revenue based financing.
Asset based lenders lend against receivables and inventory, and the facility grows as those assets grow. They fit distributors, manufacturers and wholesalers taking on bigger orders. See asset based lenders.
CDFIs finance growth for businesses that banks pass on, especially in underserved communities, and often pair the loan with advising.
Lenders who will not help are those whose product does not match the use. Merchant cash advances are built for short gaps, not expansion, and their cost tends to consume the margin growth depends on.
How lenders judge a growth plan
Lenders do not lend on your forecast. They lend on your history and treat the forecast as support.
- Historical cash flow. The core test is whether your last full year of earnings covers existing debt plus the new payment. A debt service coverage ratio of 1.25 or better is the usual bar.
- Equity in the project. Most lenders want you to put in 10 to 20 percent of the project cost from cash or retained earnings.
- Track record of past growth. If you have opened a location or launched a product line before and it worked, show the numbers.
- Concentration. A plan that depends on one large customer contract gets more scrutiny. Have the contract ready.
- Management depth. Who runs the existing business while you build the new piece.
What to prepare
- Two to three years of business tax returns and financial statements
- Year to date profit and loss, balance sheet and an accounts receivable aging report
- A schedule of existing debt with balances, payments and maturity dates
- A use of funds breakdown with quotes for equipment, build out or real estate
- A two year projection with the assumptions written out
- Personal financial statements and tax returns for owners with 20 percent or more
- Signed contracts or purchase orders that support the growth, if you have them
- For new locations, the lease or purchase agreement and site details
The order to approach lenders
- Split the plan by use. Decide which pieces need long term debt, which need working capital, and which can wait for cash flow.
- Start with your own bank or credit union. Ask for a term loan for the investment and a line of credit for working capital. Your existing relationship carries weight.
- Bring in an SBA lender for the long term pieces the bank declines. Real estate, build outs and bigger expansions often fit SBA terms better.
- Add an asset based lender if growth is inventory or receivables driven. A facility that scales with the balance sheet avoids repeated borrowing requests.
- Use online lenders or revenue based funders for speed or for high margin revenue growth. Keep these sized to what the business can repay quickly.
- Revisit annually. As earnings grow, refinance shorter, costlier debt into longer bank or SBA terms.
Find growth lenders by place, such as Washington, Georgia or British Columbia.
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