Consider this four-step process before making any final expansion decisions.

The private credit market has seen steady growth since 2005. In 2005, private lending made up just 5% of the total U.S. credit market. In third quarter 2021, it was 30%—and there doesn’t seem to be an end in sight for that steady growth, according to an April 2022 report entitled “Private Credit’s Rapid Growth: A Secular Trend” from Blackstone Securities Partners L.P.

There are many reasons for that growth, but they point to a healthy economy and strong asset classes across the board.

On a practical level, the growth of private lending means greater competition for private lenders in the market, but it also means increased opportunities for those lenders. One of the best ways to increase profits and revenues is to expand into new markets.

Let the following be your guide to successfully expanding your lending business.

When is the Right Time to Expand?

To make the most of your expansion efforts, the first question any lender should ask is, “Should I, or should I not, expand?” The standard answer is always, “It depends.”

Every lending business is different. Even private lenders within the same sector and geographic region may have completely different approaches to credit, different business philosophies, and different values. Whether it’s right for your business to expand into new markets, and when, depends on those differentiating factors.

First, what is the market outlook for your lending business? What’s the competition like in the market you have your eye on? What is the size of that lending market? What types of lenders service that market currently? You’ll need to do a complete market analysis to determine whether there is an expansion opportunity.

Next, what is the financial health of your business? Can you afford to expand? Will you have to borrow to expand? Is your team capable of handling an expansion? Will you have to hire new people? Could your current team handle an expansion without new hires?

Finally, what is your overall market position? If you’re at the top of the market in most of the areas you currently serve, you may benefit from an expansion into a new market. If you sit near the bottom of the market, would expanding into a new market benefit your business? You may be better off improving your operations so you can increase your market standing in the markets you’re already serving.

These are necessary questions to ask before you begin any new market expansion effort. Be sure to evaluate your company’s financial health thoroughly. Otherwise, you could find yourself in serious trouble.

The Benefits of Expanding into New Markets

Growth and risk are not necessarily related, but planning for each can help you better determine your expansion path and, most importantly, the timing of that expansion.

Sharestates based its decision to launch a national sales expansion on the company’s strong financial health and a critical analysis of market opportunities nationwide. Since 2013, the platform has grown quickly, but its loan origination footprint was entirely in the Northeast U.S. There was a lot of room for growth.

Following the pandemic, the lending market began to ramp up again. We asked ourselves, should we rebuild what we had before the pandemic, or should we attempt to broaden the reach and scale of the business? Sharestates chose the latter because it would have been riskier to maintain our current market position while the competition expanded into new markets. So, we leveraged the lessons of our past to expand into new growth opportunities.

The macroeconomic drivers of the private lending market overall supported that rationale. Market expansion is risky, but continuing to provide value to customers in new markets makes it a risk worth taking.

The decision to expand into new markets across the country was not predicated on growth alone. Post-COVID, building a company at scale requires a new way of thinking. Sharestates’ national expansion plans relied on the core internal capabilities of its team and a belief that the lender could improve value for shareholders.

On that note, there are five benefits to expanding into new markets:

1. Leads to long-term company growth
2. Provides access to new labor pools
3. Creates economies of scale that can increase loan originations more cost-efficiently
4. Diversifies holdings through disparate market conditions
5. Makes a company more competitive

Four Steps to Expanding into New Markets

Expanding into new markets is both an opportunity and a risk. To mitigate your risks, craft a viable plan for your business. To leverage the best opportunities, be sure to assess your company’s strengths and weaknesses and conduct a thorough market analysis.

After conducting a thorough market analysis, if you decide expansion would be beneficial to your business, there are four steps you should take to ensure your expansion is successful.

1. Conduct an accurate assessment of your business.

• Are you ready to expand based on the current health of your business? If not, then you may want to delay expansion until your business achieves a level of financial health to support it.
• Assess the strengths and weaknesses of your company and your team. Are you currently capable of expanding into new markets? You may need to hire some key team members before you expand—and that’s OK. If so, you need to know that before you start the expansion.
• Why are you expanding, and what do you hope to achieve? You should have a clear idea before you begin.
• Your expansion plan must leverage your company’s strengths (brand reputation, cost advantages, customer value proposition, etc.) and include contingencies around your weaknesses and biggest risks.
• Other considerations include licensing requirements in the markets you want to expand into, lending limits, distance lending requirements, capital considerations (what will it cost to expand into each market?), differences in lending products expected by customers in the markets you want to expand into, and the length of your internal decision-making process.

2. Do a returns analysis.

• Understand your potential return on investment and the cost to achieve your goals. Be specific about the costs involved and outline clearly what success will look like. Run the calculation of a return against alternatives.

3. Set goals.

Develop your expansion plan focused on achieving your goals. It’s important to narrow your focus toward just one or two goals. Don’t think too broadly. Set targets you can accurately measure.

4. Execute.

Finally, make sure you have the team to execute your expansion plan. Whether you plan to expand nationally or into single markets, you should have any new key hires on staff before you execute that expansion. That is critical to the success of your market expansion.

When it comes to determining capital requirements for expansion, break your analysis down by region. For example, if you’re planning to expand nationally and organize your sales team into five different regions, how much will it cost to expand into each region?

Align your expansion goals with the length of your decision-making process; otherwise, you may find you don’t have the time to ramp up your resources before your planned execution date. All expansion details must be laid out before you execute.