For many small businesses, having access to additional capital may be the difference between survival and shuttering operations. Some companies have strong demand, a capable team, a clear marketing strategy, and plenty of opportunities, but they lack the funding to take advantage of those things. SBA loans may be an important part of scaling a small business, but they may also be a means of survival when things get tough.
SBA-backed financing may give eligible businesses another way to fund those investments. Rather than viewing an SBA loan only as a way to cover a short-term shortfall, business owners may use qualifying financing for a range of business purposes that support expansion and long-term growth. The key is understanding what the capital is intended to accomplish and making sure the business may be able to comfortably support the debt.
What changes when a business has access to growth capital?
Growth situations may present themselves before a small business has the funds necessary to take advantage of them. For instance, a busy season may require more inventory, additional staffing, and new marketing campaigns. These requirements come with a cost that may need to be paid before they generate additional revenue. When a small business has access to the funds it needs, it may be better positioned to take advantage of these growth opportunities. An SBA loan doesn't create demand or guarantee growth, but it may provide eligible businesses with capital to invest in opportunities that their current cash position may not be able to support.
Turn demand into capacity
When demand outpaces capacity, your business may be in its best position to grow. However, increased demand typically requires additional funding. When demand exceeds your current capacity, customers may be waiting longer for orders, projects may be booked further in advance, or the business may be turning away opportunities because it doesn't have the resources to handle them.
Additional capital may help address those constraints. Depending on the business, financing might support equipment purchases, additional inventory, facility improvements, or other qualifying expenses that allow the company to increase its output.
As a business owner, you should ask if additional funding will genuinely solve a capacity constraint. Borrowing simply to grow larger is not really a viable strategy. However, doing so in order to address a documented bottleneck with a reasonable path to additional revenue may be much more compelling.
Expand into a larger or better location
As your business grows, its physical space may become an obstacle. A retailer may need more floor space, a manufacturer may need additional production capacity, or a service business may need a facility that may accommodate a larger team. In some cases, SBA financing may be used to help fund commercial real estate purchases or improvements. An expansion may also involve expenses related to preparing a new location for operations.
Before you commit to expanding, it's a good idea to evaluate the full cost, including the purchase or lease, increased utilities, property taxes, and other expenses. The goal is to make sure the new location supports sustainable growth rather than simply increasing overhead.
Invest in equipment and technology
Outdated or insufficient equipment may prevent a growing company from serving customers efficiently. Conversely, new equipment may be able to increase production capacity, improve efficiency, or allow a business to offer services it couldn't previously provide. Technology plays a similar role in how a small business operates.
Financing may allow you to invest in improvements to equipment and technology without burning through your working capital all at once. Business owners should still evaluate the expected return, useful life, and ongoing costs of an investment before taking on debt to fund it.
Build the working capital to support growth
Revenue growth doesn't always translate into immediate cash in the bank. A business will often need to pay employees, suppliers, and other expenses before customers pay their invoices. Working capital financing may help eligible businesses manage those timing differences. This may be particularly important during periods of rapid growth, when expenses may increase faster than collected revenue.
Hire ahead of growth
Hiring additional staff may create another timing challenge. Businesses often need additional employees before the work generates enough revenue to cover their costs. Additional funding may help provide your business with more flexibility to make strategic hires when there’s a clear reason to expect increased demand.
However, hiring ahead of growth carries risk. Payroll is an ongoing expense, so business owners should have a realistic understanding of how long the business may support additional employees if projected revenue takes longer than expected to materialize.
Take on larger contracts and opportunities
A major contract may represent a significant growth opportunity, but it also has the potential to put some additional strain on your cash flow. You may need to purchase additional materials, hire more staff members, or increase production before the customer pays for their larger order.
Access to working capital often helps a business manage that gap. Instead of turning down an opportunity because existing cash isn't sufficient to fulfill the contract, you may be able to use financing to support the upfront costs.
Refinance debt and create more room to grow
In some cases, refinancing existing debt may help improve financial flexibility. Depending on the loan and the business's qualifications, refinancing may allow a business to restructure existing obligations or potentially improve its cash flow.
If refinancing results in lower monthly payments, that may improve cash-flow flexibility, but that’s not the only thing to consider.Business owners should consider the total cost of the new financing, repayment period, interest rate, and other applicable terms. In some cases, making existing debt more manageable might free up enough additional cash to help fund growth opportunities.
Acquire another business
SBA loans may also be used if you want to purchase another business. Growth doesn't always have to come from opening a new location or increasing organic sales. Acquiring an existing business may provide access to customers, employees, equipment, intellectual property, or other assets.
The financing is only one part of the equation. Business owners should determine whether the acquisition fits their strategy and whether the combined company may generate enough cash flow to support the new debt.
Know when financing can actually help you scale
Financing is most effective when it’s paired with a clear business objective. Before applying for financing, identify what you're trying to accomplish, how much capital you need, how the funds will be used, and how the investment is expected to affect revenue, expenses, and cash flow. Once you’ve answered those questions, SmartBiz Bank® may be able to help.
Find out if you pre-qualify for an SBA loan today.
FAQs
What can an SBA loan be used for?
SBA loan proceeds may be used for eligible business purposes, although the specific uses depend on the SBA program and the lender. For example, SBA 7(a) financing may be used for things like working capital, equipment, certain debt refinancing, and more. Borrowers should confirm that their intended use of proceeds meets current SBA requirements.
How can an SBA loan help a small business grow?
An SBA loan may provide capital for investments that increase a business's capacity or support expansion. Depending on the program and circumstances, that may include equipment, working capital, hiring, inventory, acquisitions, or other qualifying business expenses.
Can an SBA loan be used to expand a business?
Yes. SBA loans may support several types of business expansion, including acquiring or improving commercial real estate, purchasing equipment, funding working capital, and acquiring another business. The specific use must meet the requirements of the applicable SBA program and lender.
Can an SBA loan be used for working capital?
Yes. Working capital is a common use of SBA 7(a) loan proceeds for eligible businesses. It may help a company manage the timing between paying operating expenses and collecting revenue, particularly when growth temporarily increases its cash needs.
Can an SBA loan be used to buy equipment or real estate?
Yes. Depending on the SBA program and transaction, financing may be used for qualifying equipment purchases and commercial real estate. SBA 504 loans, for example, are specifically designed to support major fixed assets, while SBA 7(a) loans offer broader flexibility for eligible business purposes.
Is an SBA loan a good option for a growing business?
SBA loans may be good for a growing business, especially when they have enough cash flow to support repayment and have a qualifying use for the proceeds in mind. However, an SBA loan isn't automatically the best choice for every business. Compare the loan's amount, costs, repayment terms, and requirements with your business's needs and other available financing options before deciding.
