To Expand Or Not To Expand: Four Considerations For Growing Companies
The Federal Reserve says that economic activity is strong, and the Labor Department reports that the economy keeps adding jobs across many sectors and unemployment remains low. Non-farm employment increased by 157,000 in July, led by professional and business services, manufacturing, healthcare and social assistance. Other sectors performing well are food & beverage, hospitality, construction and healthcare services industries.
Many of the new jobs now being filled have been created by small businesses. Further, optimism among small business owners remains high. All of these factors have combined to foster a robust small business finance atmosphere. Business owners continue to invest in the growth of their firms and are finding success in securing capital. Small business loan approval rates at big banks (assets of $10 billion+) reached another high point in July 2018.
According to the latest Biz2Credit Small Business Lending Index™, which examines more than 1,000 credit applications through the online platform, 26.3 percent of loan requests were approved by big banks last month. Loan approval percentages also rose at regional and community banks, which are granting almost half (49.7 percent) of the funding requests they receive. For small banks, it represents the highest figure since December 2014.
The Fed says that it will continue gradual increases in the federal funds interest rate. This policy is consistent with sustained expansion of economic activity, strong labor market conditions, and an inflation rate near the central bank’s 2 percent target.
While higher interest rates mean that the cost of capital goes up for borrowers, it has also become easier to get banks to say yes when they can charge higher rates. Small banks continue to approve SBA loan applications, which enable younger, growing companies to secure financing because government backing helps reduce lenders’ exposure to risk. Banks that issue SBA loans are a good source of capital for startups and companies with substandard credit ratings. Often these firms do not qualify for traditional small business term loans.
Banks reportedly eased important lending terms, including maximum loan size for commercial real estate (CRE) loans, according to the Fed’s Senior Loan Officer Opinion Survey. Almost all of the banks that reported changes in CRE credit policies pointed to aggressive competition from nonbank lenders as a major reason for this development.
Meanwhile, non-bank lenders, including institutional lenders (pension funds, insurance companies, and others) are approving nearly two-thirds (64.8 percent) of loan requests and are offering offer competitive interest rates with long repayment terms. Loan approval rates remained stable among alternative lenders (factors and cash advance firms) at 56.5 percent and credit unions, which approved 40.3 percent of loan applications in July.
Many of the funding requests – especially in the flourishing economy – are for expansion. Firms may be adding staff, expanding a current facility or opening up a new location.
So how do small business owners know if the time is right for expansion? Here are four considerations: market demand, industry growth, profitability, and staffing.
Market Demand: If you notice that your customers are coming from greater distances or if they keep asking if you plan to open another location, it is a good time to consider expanding. Turning business away that you cannot handle with your current resources means you must invest in your firm’s growth. A major consideration will be whether or not growth will impact the quality of the delivery of goods and services to your existing customer base.
Industry growth: At one time, Blockbuster was the top name in video rentals. While it held the No. 1 position, the industry was dying as cheaply priced DVDs hit the market and, later, Netflix entered the game. Now videos can easily be watched on mobile devices and VCRs are gathering dust in basements across America.
Meanwhile, the Baby Boomer population is aging, and services catering to retirees and others age 55+ are on the rise. Additionally, services such as Twitch, the live streaming video platform, are making a fortune from Millennials who want to watch the world’s top video gamers in action.
Current Profitability: Lenders will look at three years’ worth of financial information, including tax returns, when considering funding requests. If your profits are continually rising, your chances of securing funding greatly improve. One year’s worth of increases can be a fluke; three years will show a trend of growth.
Staffing: The economy is at full employment, and according to a recent New York Times report, even workers with less than a high school degree are finding jobs. Just because your first location has a solid team does not mean the same will be the case in another location. Do your research on the local labor market if you are expanding into another town.
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