According to a 2017 U.S. Small Business Administration report on access to capital for small businesses, “only 12% of businesses use a loan for startup capital.” The rest rely heavily on credit cards, personal assets, funding from friends and family, and alternative lending options.
“Only 12% of businesses use a loan for startup capital.”
– U.S. Small Business Administration
Finding adequate financing is a consistent issue for SMB leaders, especially when they’re ready to grow and open a second business location. Before you start securing capital for your next shop, take a good look at all of the different types of funding available for business expansion.
Create a Budget
Before you start shopping for capital, you’ll need to create a budget for your second store. This will help you tally up the money you’ll need to get things started, as well as the ongoing overhead as you build new revenue.
Here’s a quick look at common expenses for second business locations.
You’ll likely need a security deposit for the lease and utilities, as well as the first month’s rent in advance. You may also need cash flow to cover the rent for the first few months while you build the business.
It’s rare that a retail space is perfect, so you’ll probably need to do a build-out to suit your business. This may include construction costs, fixtures, and signage.
Be prepared to add the new shop to your liability insurance and pay a higher monthly premium.
It can be expensive to initially stock the store, so make a detailed plan to find out exactly how much you need to budget to get set up.
This category includes POS systems, computers, phones, alarm systems, and tech support.
You’ll need to advertise to drum up business for your new shop, so plan on extra expenses for advertising, public relations, special events, and website updates.
A second business location means new staffing costs, which include payroll, taxes, and training.
Don’t forget the little things like hangers, office supplies, cleaning supplies, and all the items you need for day-to-day operations.
Write Your Business Plan
After you’ve crunched the numbers on anticipated expenses for your expansion, it’s time to prepare a business case. You should do this regardless of what kind of lending you’re going after.
Here are a few of the items you’ll need:
Current Business Overview
Include a brief history of your business, the current and projected demand, and an overview of your services and products, suppliers, and customers. Your market analysis and competitive research can also be included here.
Complete Financial Information
Gather up your personal and business tax returns, financial statements, and any other financial details that can prove you’re a safe bet. Don’t forget details about how you plan to use your capital funding for your second store.
Business Expansion Goals
Outline your business goals for the next three to five years and explain exactly how you plan to make a profit in your second business location. This is a great place to include your marketing plan.
You may not need all of these business plan details for every lender, but it’s smart to have them gathered from the get-go so you’re ready for any potential questions.
Research Capital Funding Options
Financial decisions are a big deal, so take your time doing the legwork to find the right funding or mix of funding to make your business plan a reality.
Don’t just think about how you can finance the next few months to get your second store off the ground. It’s wise to consider what kind of financing will ensure growth five years and beyond. Consider the following options.
Small Business Survival Rates
80% survive the first year
50% survive 5 years
30% survive 10+ years
Reported by the U.S. Small Business Administration
From venture capital to crowdfunding, getting help from investors can provide cash flow for your business operations. Investors typically don’t require a scheduled payback like a traditional small business loan, but you may have to offer equity in your business or some other reward.
Lance Eubanks, owner of Greenway Express Carwash, used investments from his family to fund his business and says, “If investors can share even a small amount of money, that can provide the down payment you need for a bigger business loan.”
Bottom line: Funding from investors offers flexibility in repayment, but the payments may be in the form of equity, services or goods. Also, if you borrow money from friends and family, the financial relationship could cause tension.
Small Business Loans
Getting a traditional small business loan from a credit union, bank or the Small Business Administration (SBA) can cover long-term expenses like real estate and large equipment costs that you’ll be paying over several years. The downside is that you have to jump through a lot of hoops to get approved.
Eubanks found that securing a traditional loan requires considerable effort and patience. “You’ll need collateral and they’ll look at all of your financials—personal and business. The approval process can take 90 days or longer, so you need to have a plan and get started early.”
There’s also the chance of not getting approved. Biz2Credit’s Small Business Lending Index shows that alternative lending might be a better choice than traditional loans.
Loan Approval Rate by Lender Type
Big Banks 23%
Credit Unions 42%
Small Banks 48.7%
Alternative Lenders 60.7%
Institutional Lenders 62.8%
If you have the time to pursue it, a Small Business Administration loan could be a great option. The SBA partners with lenders, micro-lending institutions, and community development organizations to offer loans with lower interest rates, lower down payments, and other perks.
Bottom line: Loans are great for businesses who have good credit, want a long-term loan, and need a large amount of money.
The SBA also offers grants to businesses who meet their criteria. Typically grants are awarded to companies who are doing research and development in specific fields or are minority-owned businesses.
The grant application process is rigorous, but the payoff is free money to fund your business. Check out grants.gov to see the variety of grant options available.
Bottom line: Getting free money from grants is definitely worth a try if you meet their strict requirements and have the patience to go through the application, approval and review process.
Many businesses find that getting a personal or business credit card is easier than getting a business loan from a bank. The drawback is that interest rates can be high and your credit card limit may not be high enough to cover all of your expenses. Also, there are some things you can’t pay with a credit card—like federal payroll taxes.
Bottom line: Credit cards represent an easy option to fund small amounts of cash. Just make sure you can pay off your balance quickly since interest rates can be higher than other funding types.
Merchant Cash Advances
A merchant cash advance (MCA) is a unique lending option that works well when you need a smaller amount of cash and have a good relationship with your merchant services provider. A merchant cash advance is not a loan. Instead, it’s an advance that is repaid through future credit card receivables.
An MCA works best for short-term borrowing when you expect to make revenue from the items you purchase with your cash advance. For example, using an MCA to buy inventory for your second store. As you sell the merchandise, you automatically pay back your cash advance through a percentage of your credit card receivables.
You get a quick, easy loan—and repayment doesn’t hit you hard because it happens a little at a time as you’re making a profit.
Bottom line: You can get cash quickly to pay short-term expenses like inventory, store build-out, payroll taxes, and marketing. Approval doesn’t require intense financial review or a great credit history.
Talk to Talus Pay
As you prepare to open your second store, Talus Pay is here as a small business resource. Our expert support team can help you evaluate your POS system, apply for a merchant cash advance, or find other resources for small business owners.
We work with all kinds of businesses and are always happy to share advice. Just reach out to us when you’re ready to supercharge your growth.