Business owner scouting possible second business locations

How to Pick the Perfect Second Business Location

10+ min read • Jan 15, 2020 • Grant Olsen

When your business is bustling, it may feel like a second location would be the best way to capitalize on that momentum. Perhaps your restaurant often has lines snaking out the door. Or your tax business has identified a prime market in another city. Or your medical practice has more patients than the available space can accommodate.

Scenarios like these certainly indicate that another location might be a solution. Here is a handful of questions you can ask yourself to get a clearer picture of whether or not expansion would be wise:

  • Is your business space limiting your ability to serve customers?
  • Is there a new market you can leverage?
  • Do you have the capital necessary to expand?
  • If not, do you have access to additional capital?
  • Would a new location boost your revenue?
  • Can the factors that have made your first location successful be duplicated?

If you answered yes to 3 or more of these questions, consider your business a prime candidate for expansion. This is a major decision, so due diligence is crucial. Take the time to consider growth alternatives that don’t require you to open another brick-and-mortar.

“For example, you may be able to grow your business by building a website, eliminating the need for considerable funding and the risk associated with opening a physical store,” according to business expansion strategies from Entrepreneur. “For many businesses, the internet offers low-cost access to a national market, with large numbers of potential customers. The viability of the internet marketing medium for your business is a function of your business’s ability to successfully and profitably deliver your products and services outside your existing local market.”

Once you’ve taken the time to survey the situation, you can make your decision. If a new business location is your preferred route, you’ll need to maintain your deliberate approach. This care can be difficult, especially when you feel compelled to leap for a rare opportunity in a new market. But always strive to balance your enthusiasm with caution.

Here are 10 considerations that will aid you in choosing the right location and setting yourself up for success once you move in:

 

  1. How much the venture will cost: You can’t make solid business decisions until you know the price tag. Don’t simply focus on the cost of the physical property—you’ll also need to take into account the utilities and other expenses. Depending on your industry and business model, these costs can add up quickly.You can get started by evaluating the average utility costs where you’re thinking about opening another location. This information will help you contrast your current utilities with the projected expenses associated with the new one.
  2. How you’ll continue what has made you successful: Many entrepreneurs capture something special with their first business location. Whether it’s the location, ambiance, staff, or a combination of many factors, customers are consistently drawn to that store.Your challenge is to transfer what’s working so well to your next location. This can be difficult, as the details associated with the store or office will undoubtedly differ from your first. For this reason, it’s more of a translation than a straight transfer. You’ll need to find a way to effectively incorporate the best parts of your business into a new place.
  3. How you’ll improve upon what has made you successful: Don’t stop at simply replicating your first location. This is your chance to transcend the status quo. Look for at least 5 ways you can elevate your operations, with particular focus on the customer experience. After all, opening a new location can be extremely stressful for entrepreneurs. And that’s when you run the risk of losing sight of your customers.Perhaps you’ll add new inventory in this new store or offer exclusive promotions. Whatever you decide, the point is that a rising tide lifts all boats. By improving things at your new location, you’ll benefit your operations across the board.
  4. The foot traffic in the area: Even if your business is primarily driven by advertising or referrals, don’t underestimate the importance of foot traffic. The more people passing by your business, the better. So when choosing a location, look somewhere that people care about and visit often.You can get a general idea of foot traffic by simply spending time in a potential area. Beyond that, don’t be afraid to visit with other business owners in the neighborhood and ask them about the foot traffic they experience on a monthly basis.
  5. Car traffic in the area: Another important aspect of your business will be vehicle traffic. For example, will a lot of potential customers be driving in the area of your new business? Taking that a step further—will there be too many cars in the area? If so, parking and accessibility could become a problem for you, your staff, and your customers.This is another opportunity to speak with local businesses and get their insights on the traffic situation. If there are too few people driving in the area, that dearth of customers could impact your success. And if there are congestion problems, be wary of setting up shop in the midst of them.
  6. Get to know the competition: On the topic of neighboring businesses, it’s important for you to find out what competitors are already established there. This isn’t just to avoid setting up your business next door to someone who already does what you do. It’s to see how other local businesses promote their products or services. You can never stand out if you don’t know what you’re standing around.It’s important to find an area where customer needs aren’t being met. Perhaps there’s a business on the same block that is similar to yours, but if you can articulate why yours will be more effective at serving customers, you have a strong chance of succeeding.
  7. Establish a network: Opening a second business location is nearly always a tricky endeavor. Rather than go it alone, leverage other businesses and contacts in the local area. Not only will this help you gain insider knowledge of your new market, but you’ll make contacts that can boost your business. Even the briefest of conversations with other small business owners can yield strong results, as they may then go on to consciously or subconsciously promote your business.A good way to get your foot in the door is to join any business organizations in your new neighborhood. Each event you attend is another way to rally support for your business and make a few friends along the way.
  8. Keep your eye on the horizon: Your network will be an excellent source of information regarding the future of your second business location. What’s in store for the region? For example, housing and transportation projects can be gold mines, as they bring more potential customers into your radius.On the flip side, be aware that the current condition of a potential location is never set in stone. Many small businesses have struggled when undesirable businesses or projects emerged in their vicinity. The more you know in advance, the less you’ll need to worry about this happening to you.
  9. Account for logistics: A new location means you’ll need to figure out how to handle shipping and receiving, parking, and a host of other nuances. You can take best practices from your current business location, but plan that many may need to be retrofitted.The more time you devote to evaluating the day-to-day logistics of your new location, the fewer surprises will pop up once you begin your operations. It can be helpful to talk to your employees about their unique roles and how they would recommend tackling the new logistical approaches your second location will demand.
  10. Rent first and buy later: There are times when you may feel confident buying the property for a second location. Perhaps you are already familiar with the area or have found an opportunity so lucrative that buying isn’t a substantial gamble.Most of the time, however, it’s recommended that you think about renting first. This gives you the chance to learn the area and find solutions to any complexities. If things go smoothly, you can always think about buying in the future. And, if long-term problems arise, you’ll be thankful for the flexibility your rental agreement allows.

Funding Your New Location

If you dream about expanding your business, you’d better be spending your waking hours figuring out how to fund it. One popular route for entrepreneurs who want to open a second location is a loan from the Small Business Administration (SBA). These financing products come with interest rates and repayment terms similar to those you’d get from the best traditional bank loans.

The SBA is dedicated to helping underserved entrepreneurs, including women and minorities. If you’ve been rejected in the past and feel that you haven’t been given a fair shake, it’s definitely worth checking out the options this agency offers.

Other loans may also help provide funding for expenses related to your expansion. Possible options include term loans, short term loans, equipment financing, business line of credit, or a merchant cash advance.

There’s also a type of loan specifically designed for small business owners looking to expand their operations. Known as a commercial real estate loan (aka a commercial mortgage), it can be used for all manner of projects that might be tied to your business growth. Possible uses include:

  • Renovating an existing business location
  • Constructing a brand new building
  • Opening new retail space
  • Buying an existing warehouse
  • Getting out of a lease in order to become a property owner
  • Refinancing for an extension on your current payment term

Commercial real estate loans usually offer favorable rates and terms. For example, the rates start around 4.25%, and the repayment terms are about 20–25 years. The dollar amounts on these loans start around $250,000 and go all the way up to $5,000,000.

The reason these loans provide such borrower-friendly details largely comes down to collateral. The real estate involved with the loan will be used as collateral, which works wonders on lenders. Knowing their investment in your business is secured by such a tangible and valuable asset, they’ll be more generous and willing to work with you.

“When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit,” explains BizFilings. “In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made.”

Be aware that in situations where the value of the asset isn’t clear to a lender, they may ask you to provide an alternate form of collateral. This way, they’ll still feel secure in the loan and will be able to proceed with confidence.

In addition to reviewing your collateral, the lender will look at other factors to determine the interest rate and repayment term you might qualify for. Here are some of the most important things they’ll consider:

  • Your credit score: Lenders will look at your financial track record to get an idea of how likely you are to make regular payments on the money you borrow. Your credit score is one of the most important aspects of your financial history, as it reveals crucial payment history details. Commercial real estate loans often involve large sums of money, so you can plan on lenders giving these details a close inspection.
  • Risks involved: Because real estate projects are notoriously unpredictable, lenders will do everything in their power to understand the nuances of your project before loaning you the money you’ve requested. If you are purchasing an existing structure or doing a new build in a safe area, there probably won’t be major issues. But if you decide, for example, to renovate a dilapidated pickle factory for your second business location, lenders will be understandably apprehensive when it comes to providing the funds.
  • Size and term of the loan: Larger loans typically have higher interest rates to compensate for the higher risk posed to the lender. If you have a shorter repayment term, lenders will also consider a high interest rate. This is because shorter terms include fewer payments, which is where a lender makes their money.
  • The economy: If the economy is humming, you may find that interest rates are higher. On the flip side, rates often go much lower during economic downturns. While you can’t control the national and global financial systems, you can control when you borrow money. For this reason, many small business owners try to take out loans more often when interest rates are pulled down by economic factors.
  • Variety of interest rate: Since real commercial estate projects vary in so many ways, lenders use a handful of different types of interest rates depending on what the project entails. A loan-to-value ratio compares your loan amount with the property value. An after-repair value ratio is used for renovations or repairs and accounts for the rise in value at the completion of the work. Fixed rates are locked for the duration of the project, so you won’t need to worry about fluctuations in the economy or other external forces. Variable rates, on the other hand, are able to change based on market conditions. The rates may reset monthly or as sporadically as every 5 years.

Finding the Best Loan for Your Real Estate Needs

Don’t assume that a commercial real estate loan is the only way to fund your second business location. You have numerous financing options. The key is to review the relevant financing products and choose the one that gets you the money you need, the timeline you require, and the rate you prefer.

“While there are numerous options from which to choose, not all deliver the same benefits,” explains Tom Coletta, a senior vice president at Axiom Bank. “Make a short list of potential lenders by shopping around to compare offers.”

Many resources are available to help you evaluate loans and make an educated decision. One of the first places to start is a trustworthy loan calculator, which allows you to identify costs in a clear and efficient way.

You also might want to talk to a financial expert who can help you identify desirable loans and watch out for red flags. This can be critical because some lenders use inconsistent terminology or hide fees in their disclosures. These frustrating practices can muddy the water, making it even more beneficial to lean on an experienced guide who can point you in the right direction and prepare you to make a confident decision.

Regardless of whether your second business location is a restaurant, retail store, warehouse, office, or something else entirely, your preparation is key. By taking the time to choose the best location and secure the most favorable funding, you’ll be setting yourself up for a much brighter future.

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Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.