There comes a time in nearly every business owner’s life when a loan seems necessary to expand or simply sustain operations. To that end, business financing is used for a number of reasons.
Find out how to use a business loan effectively, including several top expenses business loans are used for.
What Are the Most Common Small Business Loan Uses?
According to the Federal Reserve Bank’s 2021 Small Business Credit Survey, 45% of firms surveyed applied for business loans, making it the top choice of financing.
Others types of loans and financing applied for included:
- SBA loan: 42%
- Business line of credit: 35%
- Auto and equipment loans: 12%
- Personal loans: 11%
Here are 10 ways to use a business loan effectively:
Ready to buy new inventory to stock your virtual or brick-and-mortar store? Whether inventory items are used for production or finished products, a business loan can provide the funds you need to manufacture items, stay on trend with your customer base or make a bulk purchase to refill empty shelves.
Types of inventory could include:
- Raw materials
- Packaged goods
- Packing materials
- Parts, supplies and assemblies
- Extra stock or anticipation inventory
Some pieces of equipment are vital to certain business operations, whether you own a restaurant, run a retail store, operate a trucking business, work in manufacturing or are in another industry.
When your company vehicles, machinery or equipment needs updating, or you need to add to your existing pieces, consider equipment financing for a purchase or lease.
Here are examples of equipment you could acquire with a business loan:
- Office equipment
- Warehouse equipment
- Commercial or industrial machinery
- Company transportation
- Communication systems
- Security systems
- Point-of-sale systems and forecasting tools
- Electronics and technology equipment
Jim Rohn, an author and motivational speaker, said: “Time is more valuable than money. You can get more money, but you cannot get more time.”
This is the essence of capitalizing on an investment, which could be anything from buying out a competitor to buying into a franchise. When opportunity knocks, you’ll want to be ready to quickly open the door.
It may be time to update your existing location. Alternatively, you might want to add on to your store or build a new one altogether.
If you’re looking to finance leasehold improvements or construct a new facility from the ground up, business financing can provide the funds you need to start your project.
If business has been good to you and you’re looking to grow, a loan could help. That’s true whether you’re interested in scaling operations or opening a new location, whether a lease or purchase, or buying land or a building.
Marketing budgets vary by company and industry, but many businesses budget 7%-8% of revenue. There are times, though, you may want to ramp up advertising to attract new customers or beef up business during a slow season.
Alternatively, perhaps you’d like to invest in enhancing your website, search engine optimization tactics or social media campaign. These are just a few reasons you might turn to funds from a business loan.
Do you need an office manager or want to hire several seasonal workers? Sometimes, you need additional hands to keep business running smoothly. Expanding your team to invest in experienced, dedicated staff could offer a great return on investment.
Additionally, you might use a business loan to pay for professional development for your existing team. Consider bringing in a trainer, purchasing a subscription to online learning platforms or partially funding field-relevant college degrees for your employees.
8. Operating Expenses
Firms are more likely to apply for a business loan because they need financing to meet operating expenses, according to the Federal Reserve. When business owners need help covering operating expenses, which can run the gamut from rent and utilities to payroll, many use a working capital loan.
Consider this example: Dr. Eileen Conti, founder of Conti Eye Care, worked with Fast Capital 360 to obtain financing for just this reason. Conti said she used financing to get through months when her patients’ health-care reimbursements weren’t immediate.
9. Debt Refinancing
According to the Federal Reserve’s report, 56% of firms surveyed have $100,000 or less in debt, while 44% have more than $100,000. If you have high-interest debt, unmanageable payments or financing you’d like to consolidate, find out if a business loan can help.
Keep in mind debt refinancing with lower payments could free up your day-to-day cash flow, which you could then invest in other areas of your business. A more favorable interest rate and terms also could potentially save you money in the long-term.
10. Product Development
Is your business doing well? If you’ve noticed your customers are constantly asking for something that you just don’t have or you’re looking to one-up your competition with a better product line, maybe it’s time to launch a fresh piece of merchandise or offer a new, innovative service.
How Much of a Loan Do Business Owners Need?
Loan purposes and reasons to obtain financing can vary.
Here’s a bit more insight to consider when you’re seeking business financing. Take a look at average business loan amounts by lender, including conventional vs. alternative lenders:
|Lender||Average Loan Amounts|
|Large National Banks||$593,000*|
|Small Domestic Banks||$146,000*|
|Fast Capital 360 Lenders||$31,000|
*According to Federal Reserve data
What Does a Business Loan Cover and Is One Right for You?
Unless there are restrictions on the use of your loan proceeds, such as is typically the case with equipment financing and certain SBA loans, you may be able to use loan funds for nearly any business need.
When you’re looking to apply for a business loan, consider the following:
- How much capital do you need?
- What will you need the funds for?
- How soon will you need the funds?
- Are your needs short-term or long-term?
- How much of a payment can you afford? (Use a business loan calculator to estimate payments.)
Additionally, while you may be thinking a business term loan is the only option for financing your company’s needs, there are actually many different financing products for business owners. Other options include business lines of credit, merchant cash advances and accounts receivable financing.