What to Know before Taking a Loan to Expand Your Business

A career banker, Julio M. Herrera Velutini leads an international bank based in Latin America. Supportive of free enterprise, Julio Herrera Velutini advances loans to help small businesses expand and grow.

One reason small business owners take loans is to finance expansion, which assumes various forms. For example, if a grocery store is too small to support the influx of customers, an expansion entails enlargement of the location. If a restaurant’s business is booming largely on account of customers drawn from another town, its expansion will involve opening a new location. If a shoe manufacturer needs additional equipment to facilitate a huge backlog of orders, expansion entails the purchase of new machinery. If a company to which business is outsourced needs additional customer care staff, an expansion will involve a staff increase.

Often, lenders are happy to advance loans for expansion because it means business is good; the company is generating profits and its cash flow is positive. However, for the business owner, expansion without prior planning can kill profitability. It is important to assess the effects of expansion critically. For example, what would be the expected change in revenue from the expansion? Will it be enough to repay the loan plus interest and still make a profit? A good practice is to forecast the expected revenue using your current balance sheet to see whether the expansion makes positive economic sense. If it does, then the loan should perhaps be taken. If it does not, consider other options for raising capital.