Types of Business Expansion Loans
A variety of multipurpose business loan products are available in the Indian finance market. Some popular business expansion loans are as follows.
Traditional loans are secured and non-government-backed loans. Businesses must possess a good credit history and need to offer some collateral. Small businesses can access these loans to buy new machinery, meet working capital needs, or acquire real estate for expansion.
- Maximum loan amount: Varies substantially and can go up to Rs. 50 crore according to RBI’s master directives
- Loan term: Minimum 1 year and can go up to 15 years
- Interest rate: 7.65% onwards
- Funding speed: Disbursed within 7 to 10 days
Term loans are another great option if you are looking to expand your business. Capital is borrowed for a fixed period and has to be repaid with interest. Term loans are generally secured in nature.
- Maximum loan amount: Rs. 20 to 30 lakhs
- Loan term: Flexible terms ranging from 1 to 1o years and may go up to 3o years
- Interest rate: 10% to 26%p.a.
- Funding speed: The approval process and disbursal can happen within 2 to 3 days
Specially designed business loans are convenient financing options for businesses looking to purchase new equipment or machinery. Small businesses & medium and large enterprises can access these loans at attractive interest rates and tax benefits.
- Maximum loan amount: Rs. 50000 to Rs. 2 crores depending on the cost of the purchase
- Loan term: Tenures start from 1 month and can go up to 7 years
- Interest rate: Rates range from 10% to 22.5% p.a. and depend on the discretion of lenders
- Funding speed: Disbursed within 2 days
Line of Credit
Lines of credit are boons for any business that regularly needs funds. It is akin to a credit card for businesses, wherein business owners can draw upon any amount up to the credit limit. Access to finance from a line of credit can be secured or unsecured.
- Maximum loan amount: Depends on the lender and based on factors such as the borrower’s financial condition and cash flow.
- Loan term: This is a revolving credit, and the borrower needs to repay their debt within 6 months to 3 years.
- Interest rate: Rates range between 1% to 24% depending upon the lending institution.
- Funding speed: May take a couple of days; generally depends on the loan provider.
Short-term loans are smaller in amount and have shorter tenures than medium or long-term loans. Interest rates are, however, quite high.
- Maximum loan amount: Up to Rs. 1 crore
- Loan term: Up to 12 months
- Interest rate: 15% to 25%
- Funding speed: Disbursed within a day in certain cases
Using invoice financing, businesses get to borrow against their outstanding invoices. A lender will pay 80% to 90% of the total invoice amount. When businesses receive invoice payments, they pay that to the lender, who then disburses the rest 20% after exacting a factor fee.
- Maximum loan amount: Rs. 3 crore
- Loan term: Payable within 30 to 90 days
- Interest rate: 15% to 26%
- Funding speed: Businesses receive funds nearly instantly
Merchant Cash Advances
A merchant cash advance provides capital to a business in exchange for a portion of future sales. These loans best suit working capital needs and funding expansion plans.
- Maximum loan amount: Varies across lenders and the borrowing business’s annual turnover; many offer as much as Rs 1 crore
- Loan term: 6 to 18 months
- Interest rate: Around 25% or higher
- Funding speed: Sanctioned within 2 to 3 working days
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5 Reasons to Pursue a Business Expansion Loan
- Have more space to serve your customers: If your current property is no longer adequate, then further expansion on your current property and/or a new branch is the ideal solution. Business expansion loans can provide you with the necessary funding quickly.
- Offer new products or services: Adding new products or services to your business portfolio can help you reach newer customers and reinforce the current base. In such cases, you may need to buy new equipment, seek out new supply lines, and expand your inventory. A small business loan from traditional banks and NBFCs can help you acquire the necessary funds.
- Open a location in a different geographical area: Looking to open a new branch in another city or state? A business expansion loan is the best financing option available if you do not want to put an undue strain on your finances. Estimate the total cost, chalk out a proper plan, and then apply for small business expansion loans.
- Hire more employees: You will need more hands on deck to expand your business. Recruitment drives and paying for new employees increases overhead and may strain your working capital. A short-term loan can come in handy in such cases.
- Merge with or acquire another business: Mergers and acquisitions are common ways for businesses to grow. You acquire a new client base and get to impress your existing consumer base. Seamless mergers and acquisitions take time and money, and access to proper financing is essential. Make proper plans and then take out a small business expansion debt.
How Can I use a Business Expansion Loan?
- Buying an existing business: Merging or acquiring an existing business.
- Hiring new employees: Strengthening your workforce.
- Expanding to a new market or opening a new location: Opening a new branch or unit at a new location or tapping into a new market.
- Funding the purchase of new equipment or inventory: New machinery and tools, resources, raw materials, and stocking up the inventory
- Expanding a product line or developing new products: Pivoting to
- Remodelling or purchasing commercial real estate
Does An Expansion Loan make Sense for your Business?
Timing and planning are two key things to consider carefully if you decide to expand your business. Think clearly about the following.
Are your goals realistic?
Be clear about what you want to achieve and what you need to do. Set realistic goals, and think about where you will need money, how much you need, and how you will spend it.
How’s your cash flow?
Good profitability and a healthy cash flow are what every business aims for. If you avail of small business loans, you need to ensure that your business enjoys a good cash flow. Quite natural as you need to repay your debt timely with interest within a tenure.
A good cash flow will enable businesses to negotiate repayment terms.
Is the demand there?
There must be a good reason if you have decided to expand operations. Is your business experiencing a steadily increasing influx of new customers? Are your sales rising exponentially? And do you think such profitable circumstances will continue in the long run? If you answer yes, get access to business expansion loans and grow your business further as prospects are bright enough.
Factors that Influence Business Expansion
Demand for products and/or services: If there’s huge demand, then expansion becomes essential.
- Customer base and loyalty: An ever-expanding and loyal customer base is another major factor behind business growth.
- Market trends: Carry out thorough market research and determine whether trends & conditions are favourable for expansion.
- Business structure and model: Your business structure and model may need modifications to adapt to expansion strategies.
- Expansion goals: Clear, effective, agile, and future-proof goals are a must to carry out the successful expansion.
Other key influencing factors for medium & small businesses include:
- Available financing options
- Adoption of technology
- Annual revenue and cash flow
- Upgrading products & services or introducing new ones
Where to get a Business Expansion Loan?
Private & public commercial banks, credit unions, non-banking financing institutions, microfinancing institutions, Government SME loan schemes, and online lenders are so many options available to get business expansion loans in India.
How to get an Expansion Loan?
The entire application process and subsequent approval generally vary across lenders. Processes may also differ as per the scheme, the loan amount, and the credit & financial standing of the business.
- Determine if you’re ready to expand: A clear and effective plan is a prerequisite for successful business expansion. Think hard if you are ready to expand, whether you have substantial cash flow and enough demand for your product/services, and then chalk out a well-prepared plan.
- Evaluate your qualifications: A good credit score of above 750, impeccable credit history, good growth and strong financials– are key factors that every lender looks into during the underwriting process. Look at different business expansion loans and determine if your business qualifications match.
- Compare lenders: Explore, compare, and shortlist multiple lenders. Check eligibility criteria, loan terms, interest rates, and tenures before making your choice.
- Submit your application: Application processes differ from one lender to another. Online and offline application processes may differ somewhat. Necessary documentations include basic business information, bank statements, profit & loss statements, GST returns, balance sheets, and business owners’ personal information.
If you are sure expanding your business will increase your revenue & usher in prosperity for the long run, then go for small business expansion loans to boost your growth.
Disbursement periods vary greatly across lenders. The average time period ranges between 2 days to 2 weeks.
This value also differs across lending institutions and depends upon the loan scheme type, the loan amount, duration, and business credentials.