Commercial Lending Can Help You During an Economic Expansion

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Savvy business owners are constantly on the watch for the next “growth industry” — a sector of the economy experiencing higher-than-average growth. They understand that with the right strategy and adequate capital, they may be able to leverage the growth for their own economic expansion. Even if their business isn’t directly associated with a growth industry, a business owner can still benefit from opportunities that span multiple business sectors.

A growth industry is often associated with new or pioneer products and services, but it can also be driven by a renewed interest in an existing product or service.

Pool Surfing

An example of a growth industry that was sparked by interest in an existing product can be found in the mid-1970s when California teenagers started riding waves not found on the Pacific Ocean. At the time, southern California was experiencing a severe drought — gardens wilted, lawns turned brown, and many homeowners left their pools empty of water. It’s not clear how it started, but a few local surfers started “surfing” the empty pools. The result was a Renaissance in the skateboarding industry with a high demand for innovative board designs, improved knee pads, and polyurethane skateboard wheels. Skateboarding contests and the construction of skate parks soon followed. Some business owners were in a position to capitalize on the opportunity and quickly expanded their operations to meet the demand for these products and services.

Growth in the skateboarding industry has ebbed and flowed since then, but recent statistics show a remarkable 6.44 million U.S. participants. In fact, a number of companies are still finding ways to profit on the industry, including Nike with a line of shoes designed exclusively for skateboarding.

DNA Fingerprinting

DNA fingerprinting is an example of a pioneering product that has generated a number of growth cycles in different industries. When a British geneticist, Professor Alec Jeffreys, accidently discovered the human DNA profile in 1984, the medical industry was forever changed. DNA testing, a.k.a. genetic testing, was used to match organ donors and transplant recipients, identify diseases that are passed down through families, and help find cures for these hereditary conditions. It also revolutionized crime scene investigations and proved useful in resolving paternity issues.

To this day, businesses are still finding ways to capitalize on the technology. The newest growth industry appears to be in genealogy testing. According to industry estimates, over 12 million people had their DNA analyzed with direct-to-consumer genetic tests in 2017. In addition to mapping your family tree, businesses have expanded to help you to determine your dog’s breed or customize a weight loss program for your genetic make-up.

people on assembly line

Commercial Financing Options

Is your business in a position to leverage the next growth industry? After you’ve identified an industry that can be leveraged and developed a strategy, you still need adequate capital to implement your expansion. The need for capital is a challenge faced by many business owners.

Not every company has a ready supply of cash to purchase supplies and equipment, update technology, and pay additional workers.

A frequent solution to the problem is found through a commercial bank. In addition to checking and savings accounts, a bank can offer a diverse range of commercial financing programs designed specifically to meet the capital needs of small businesses.

Some common financing programs available to business owners include:

  • Commercial Lines of Credit
  • Commercial Term Loans
  • Equipment Financing
  • Commercial Real Estate Loans
  • Commercial Real Estate Cash-Out Refinance Loans

Commercial Lines of Credit

Best for short-term needs, a business line of credit is one of the fastest ways a business owner can access capital. Similar to a credit card, a business owner can withdraw money, up to a set limit, from the account to use for a variety of business needs. A business line of credit is often referred to as a revolving line of credit because once the balance is paid down, money can be withdrawn again up to the credit limit.

Time in operation, collateral, company profits, and financial ratios are some of the factors used by a bank to determine if a business qualifies for this type of financing. It’s common for a lender to prefer that a business be in operation for a minimum of two years and have accounts receivable, inventory, machinery, or real estate to serve as collateral to back the line of credit.

Commercial Term Loans

Offering a single lump sum of money with set terms for repayment, commercial term loans can also be a good option to expand an operation. A more long-term solution for capital needs, a term loan is frequently used for a specific purpose. Unlike a line of credit, once all the loan funds are used, the business owner would need to reapply for a new loan in order to obtain additional funds.

As with a line of credit, the lender will look at time in business, profits, ratios, and collateral among other factors to underwrite the loan. Lenders prefer this type of financing be secured by collateral, but will also consider unsecured loans under certain conditions.

Equipment Financing

Equipment financing can allow a business owner to secure the assets needed to expand an operation. Frequently favored by small businesses with limited capital, this type of financing is not limited to actual equipment and can be used to obtain software and services. Equipment financing can serve a diverse range of businesses, including agriculture, aviation, construction, healthcare, manufacturing, mining, technology, food and beverage distribution, insurance, and private equity.

The two most common ways to finance equipment are through a loan or lease. In general, leasing is a good match for equipment that needs regular upgrading, and a loan works well for equipment that is durable and retains its usefulness. The decision to buy or lease the equipment can also be influenced by tax considerations.

As with all financing, the lender will be interested in seeing the business plan, credit history, revenue, balance sheet, and cash flow.

Commercial Real Estate Loans

If the expansion of your business involves the purchase and/or renovation of an owner-occupied commercial property, a commercial real estate loan is a viable financing option. A property where the business occupies at least 51% of the building is generally considered an owner-occupied property. These types of loans can be used to finance mixed-use buildings, retail centers, and office buildings.

The lender will evaluate the financial strength of your business along with the property itself and your plans for using it. Having a clear and detailed business plan is crucial to qualifying. It’s likely you will be asked to provide 3 to 5 years of financial documents, including your asset statements, tax returns, and corporate accounting reports. In addition, your personal financial information and personal credit history may also be reviewed.

Commercial Real Estate Cash-Out Refinance

Although often used to secure a lower interest rate, the refinance of an existing commercial mortgage can be used to secure cash for needed renovation or improvements to the property. In addition to adding value to your property, the improvements to your property can give you the space needed to expand operations and attract more customers. To allow enough equity for the cash-out refinance loan, the commercial property’s value must be significantly more than the current mortgage balance.

Similar to the traditional commercial real estate loan, the lender will look at your business, the property, and your personal finances in qualifying you for the loan.

The Next Wave of Expansion

Commercial financing programs offered by banks can provide the capital a business needs to purchase supplies and equipment, update technology, and hire additional staff. Look for a lender who offers a diverse range of products and has industry experts with the experience and knowledge to match your business with the right financing option.

Many business owners have an eye trained on the horizon, ever watchful for the next growth industry. Having the right strategy, a solid business plan, and adequate capital can allow your business to ride the wave of growth and profit from the economic expansion that is sure to follow.

You can learn more about Axos Bank and the options available to meet your capital needs by exploring our Commercial Lending programs.

Commercial Lending Can Help You Ride the Wave of Economic Expansion

This blog post was published by Axos Editorial Team on January 10, 2019 and last updated on January 11, 2019.

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