Expanding your property with a new garage or detached structure, such as a shed or greenhouse, can be a big undertaking — both financially and when it comes to labor. But with the right financing strategy, you may be able to create more space for your home without worrying about how you’re immediately going to pay for it.
This comprehensive guide will walk you through the various financing options available for detached structure additions to your home so that you can make informed decisions that align with your financial goals.
Opening a shop can be an exciting venture, but it also requires significant upfront costs. From securing a retail space to buying inventory and equipment, the expenses quickly add up. While some entrepreneurs fund new shops with their own savings or investments from friends and family many will need a business loan to get their dream off the ground.
I’ve opened a couple shops over the years so I want to share what I’ve learned about financing this kind of small business. In this article we’ll cover
- The main types of loans for shops and how they work
- What lenders look for when reviewing applications
- Tips for getting approved and finding the best loan terms
- Alternative funding options beyond traditional loans
Let’s dig in!
Types of Loans for Shops and How They Work
There are a few main loan options that are commonly used to fund new retail businesses
SBA 7(a) Loans
Small Business Administration (SBA) 7(a) loans are government-guaranteed loans offered through approved lenders like banks and credit unions. The SBA guarantees a portion of the loan, which makes lenders more willing to approve financing for riskier small businesses.
- Loan amounts up to $5 million
- Interest rates from 6-13%
- Terms up to 25 years for real estate, 10 years for other purposes
- Can be used for working capital, equipment, inventory, etc.
SBA 7(a) loans are a great option because they come with low rates, long terms, and flexible usage. The catch is that the application process is extensive.
Business Lines of Credit
Business lines of credit provide access to a set borrowing limit that you can draw from as needed. The interest rate is usually variable.
- Credit limits from $10,000 up to $500k+
- Interest rates from 5-36%
- Flexible draw periods, renews annually
The flexibility makes lines of credit helpful for managing cash flow. But the rates are higher than SBA loans, and the credit limits usually aren’t enough to fully fund a new business.
Equipment Financing
Equipment financing lenders provide loans specifically for purchasing equipment like registers, display cases, computers, etc. The equipment serves as collateral for the loan.
- Loan amounts $5,000-$500,000
- Rates 8-30%
- Terms based on useful life of equipment
This is an easy way to finance essential equipment, though the higher rates mean you’ll pay more over the full repayment term.
Alternative Business Loans
Online alternative lenders provide fast business loan options that are easier to qualify for than bank loans. However, they come with high rates and aggressive repayment terms.
- Loan amounts $5,000-$500,000
- Rates 10-99%
- Terms 3 months to 4 years
I only recommend these as a last resort because the high cost of capital can seriously cut into your profits. But they can help if you have an immediate need and poor credit.
What Lenders Look For When Reviewing Applications
When you apply for financing, lenders will review your business plan and personal financial profile. Here are some key criteria they consider:
- Personal credit scores – Most want to see scores of 680+
- Cash invested – At least 20-30% of total startup costs
- Business plan – Well-researched with realistic projections
- Industry experience – Prefer at least 2 years of retail management
- Collateral – May be required to secure the loan
Having good personal credit helps ensure you’ll qualify for the lowest rates. Your amount of cash invested also shows the lender you’re sharing the risk.
I recommend working with a loan broker or advisor to put together the strongest application possible. They can help you anticipate what the lender will be looking for.
Tips for Getting Approved and Finding the Best Terms
Based on my experience securing financing for shops, here are my top tips for getting approved and finding the best loan terms:
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Get your personal finances in order – Pay down debts, resolve issues on your credit reports, maintain low credit card balances. This gives you the best shot at qualifying.
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Have a solid business plan – Thoroughly research your concept, location, competition, financial projections, etc. The better prepared you look on paper, the more confident lenders will be.
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Raise as much capital as possible – Come up with at least 20-30% of startup costs out of pocket, through investors, or other sources. This will expand your lending options.
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Consider an SBA loan first – The low rates and long terms make SBA 7(a) loans the most affordable financing if you can get approved.
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Talk to multiple lenders – Compare options from several banks, credit unions, and online lenders. Shopping around leads to better offers.
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Bring in collateral – Have assets like equipment, securities, or real estate to pledge. This can get you better rates/terms.
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Improve your credit – If your credit score is below 680, delay your application and work on improving it. Those extra points could save thousands on interest.
Following this advice can help maximize your changes of getting approved so your shop dreams can become reality!
Alternative Funding Options Beyond Traditional Loans
While loans are the primary path for financing a new shop, there are a few other options to consider:
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Crowdfunding – Platforms like Kickstarter and Indiegogo let you raise smaller amounts from customers.
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Business credit cards – You can charge up to tens of thousands for startup costs, as long as you qualify.
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Friends and family – Ask close connections to invest; set clear terms.
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Retailer financing – Some equipment companies offer direct financing programs.
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Grants and incentives – Check state/local programs for retail businesses.
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Personal assets – Tap into savings/retirement funds or home equity.
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Business partners – Bring on a partner to invest equity/capital.
Each of these alternatives has its own pros and cons. A blended approach might give you the total funding needed with more favorable terms than 100% borrowed capital.
Final Tips for Securing Shop Financing
Launching a retail shop requires a significant infusion of startup capital. While loans are typically the primary source, securing financing still takes careful planning and preparation. By understanding the different loan options, building a strong application, and exploring alternative sources, you can get your shop properly funded.
I know the financing process can seem daunting. But take it step by step, lean on knowledgeable advisors, and don’t get discouraged by a few bumps along the way. If you have the passion, experience, and commitment needed to build a successful business, there are lenders willing to invest in your vision.
Research Lenders and Programs
Don’t rush into the first financing offer you come across. Take the time to research different lenders and programs to ensure you’re making the best choice for your situation. Compare interest rates, loan terms, fees and eligibility requirements when making this decision.
Search for lenders who specialize in home improvement or construction loans, as they may offer more tailored solutions. Additionally, you may want to look beyond traditional banks and explore credit unions, online lenders and specialized lenders who may offer unique financing options tailored to your project.
Once you’ve chosen a financing option, it’s time to apply. This involves submitting the required documentation like financial statements, proof of income and project details.
The lender will evaluate your application and determine your eligibility based on their criteria. Keep in mind that the approval process can vary in length so be patient as your application is reviewed.
Financing Options for Detached Structures
There are several different financing options available for homeowners looking to add a detached structure. But each comes with its own set of advantages and disadvantages, so it’s a good idea to do your research and choose the one that aligns best with your needs.
If you have the means to finance a detached structure using your personal savings, this will likely be your most straightforward option. Using your personal savings allows you to avoid incurring debt and interest payments, and you’ll likely end up saving money in the long run.
However, even if you have the money available, examine the opportunity cost of using your savings. For instance, depleting your savings could leave you financially vulnerable in case of emergencies.
Another option is to leverage the equity in your home through either a home equity loan or a home equity line of credit (HELOC). Both of these financing options allow you to use the equity you’ve built in your home and borrow against it.
Home equity is the difference between the value of your home and the amount you owe on your mortgage, shown below.
For example, if your home is worth $300,000, and you owe $200,000 on your mortgage, you have $100,000 in home equity.
You can tap into your home equity by applying for a home equity loan, which provides a lump sum amount; or opt for a HELOC, which functions like a credit card with a credit limit based on your home’s equity. If you use a home equity loan for home improvement projects, the interest you pay on these loans may be tax-deductible.
However, when using your home as collateral, it’s important to remember you also risk losing your property if you can’t repay the loan. Interest on these loans can also add to the overall cost of your project.
Personal loans may be an attractive option for financing your detached structure, especially if you have a good credit score. Unlike home equity loans, most personal loans are unsecured, meaning they don’t require any collateral such as a home.
Interest rates on personal loans largely depend on your creditworthiness, though they tend to be higher than those on home equity financing options. If you have an excellent credit score, you may qualify for lower interest rates, making this a cost-effective option. However, individuals with lower credit scores may face higher interest rates, which could significantly increase the cost of borrowing.
If you’re starting from scratch and building a brand-new detached structure, a construction loan may work well for you. These short-term loans are specifically designed for financing construction projects and provide funding in stages.
Construction loans typically have a shorter term and require you to make interest-only payments during the construction phase. Once your project is complete, you can either pay off the loan or refinance it into a more traditional mortgage.
Construction loans can, however, be more complex to navigate than other financing options. You’ll likely need to provide detailed plans and cost estimates for your project to lenders. Lenders will also generally require a clear repayment plan so be sure to think through your finances ahead of applying.
Pawn Shop Loan Facts
FAQ
What type of loan is best for building a garage?
How do people afford to build a garage?
How much can you borrow to buy a small business?
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Lender
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Average small business loan amount
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Online loans
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$5,000 to $500,000
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Short-term loans
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$5,000 to $750,000
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Business line of credit
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Up to $1 million
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Equipment financing
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Up to 80% to 100% of the value of purchased equipment
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How do I choose the best retail business loan?
Picking the best retail business loan for your specific needs means knowing where to look. We suggest you start with the top six business loans for retail: SBA 7 (a) loans. Best for general expenses. SBA 504/CDC loans. Best for commercial real estate. Business lines of credit. Best for sustained cash flow gaps. Short-term loans.
Can a coffee shop loan be a business loan?
A coffee shop loan is a business loan, which means that if your business already has its own established credit score, you may be able to take the loan out entirely in your business’s name. If the business is new, you may need to sign a personal guarantee or take the loan out in your name.
Can you get a loan to buy a business?
In many ways, getting a loan to buy an established business is easier than getting a business startup loan. As long as it’s turning a profit, the business’ success is already proven, after all. The only new thing coming into the equation is you. Lenders will want to see that you have good credit.
What is a business loan for Cafe supplies?
With this type of business loan for cafe supplies, you’ll get a quote from your vendor and present it to the potential lender, who’ll then give you the capital to make your purchase once you’re approved. There are many nice things about equipment loans, especially that they’re slightly easier to obtain than term loans.