A business loan can serve many purposes, from covering startup costs to keeping cash flowing or allowing for expansion into new products or markets. Before you get one, it’s important to decide how you plan to spend it. After all, if you don’t have a solid plan for using the loan proceeds (and paying it back), a small business loan is just debt — not a strategic use of credit.
How to spend your business loan wisely
If you’re seeking a small business loan in 2020, you’re in good company. According to a recent analysis of U.S. Census Bureau data, business loan applications are up an average of 47% across the 50 states and the District of Columbia, particularly in areas that have been hit hard and have then recovered from the coronavirus pandemic.
Here are a few ways to make the most of your loan.
- Buy new equipment
Most businesses use some sort of equipment in their daily operations — from computers and cell phones to specialized manufacturing, construction or medical equipment. All of that equipment can be expensive, so a small business loan can help businesses access the equipment they need without depleting their cash reserves.
Before using a loan to buy new equipment, consider whether the equipment will help your business grow — either by increasing efficiency or allowing you to create more products or serve more customers. It’s also a smart move to consider whether you can find the equipment you need used rather than buying new. Gently used furniture and equipment can usually be purchased at a fraction of the cost of new equipment.
- Increase inventory
For product-based business, keeping items in stock is crucial for keeping customers happy. If the company doesn’t have enough cash on hand to purchase the things customers want to buy, the business may lose customers and profits.
Using a loan to purchase inventory can help the business buy the items it needs without tying up all of its cash in stock that may sit around for some time before being sold to customers.
- Expand marketing efforts
In order to grow, a business needs to attract new customers while keeping existing customers happy. Advertising and marketing are some of the best ways to attract new customers. Different types of marketing and advertising campaigns make sense for different types of businesses.
You might consider social media campaigns, online pay-per-click (PPC) ads, print campaigns, commercials on television, radio or podcasts, billboards, direct mail or sponsoring events. You may also want to invest in building or revamping your website or customer relationship management (CRM) software to track leads.
Using a business loan for marketing purposes makes sense because it has the potential to generate more revenue in the future.
- Office space
What do Apple, Amazon and Google have in common? Besides being globally recognized brands, all three companies started out in their founder’s garage. In fact, according to the U.S. Small Business Administration, roughly 50% of all businesses are home-based businesses.
While many businesses remain at home, others eventually outgrow their humble beginnings and need office space — either to accommodate more staff or provide space for meeting with clients.
The problem is, buying or renting and furnishing commercial space can be an expensive endeavor. If you’re quickly outgrowing your current space, it may not be feasible to save up the money to pay in cash. Using a business loan to cover those costs can speed up the timeline.
Before you make an offer or sign a lease agreement, make sure your expansion will bring a return on investment that exceeds what you’ll spend on the loan.
- Operational expenses
The everyday costs of running a business can really add up: rent or mortgage payments, utilities, payroll costs, taxes, subscriptions and more. Before you know it, operational expenses can use up all of your cash, making it difficult to save for a rainy day or reinvest in your business.
In some cases, it makes sense to use a business loan to cover those expenses. These types of loans are called working capital loans. They’re a good fit for seasonal businesses that need an influx of cash during the off-season.
Working capital loans aren’t a good fit for covering long-term cash flow problems. If your business regularly has trouble covering operational costs, you’re better off increasing prices, looking for ways to cut expenses, or tightening up your collection procedures rather than taking on more debt.
Remember, you have other financing options
Business loans can be a convenient and low-cost way to access financing, but they’re not the only way to grow your business. Alternatives come in all shapes and sizes, so consider whether these other financing options are a better fit for your current business needs.
- Business line of credit. A business line of credit is similar to a loan, but rather than getting the funds in a lump sum, you can draw on the line up to a fixed amount. You only pay interest on the amount you’re currently accessing.
- Merchant cash advance. If your business accepts credit cards, you may be able to get a merchant cash advance. This financing option gives you cash upfront in exchange for a percentage of your future credit card sales. However, merchant cash advances can be an expensive option. Depending on how quickly you can repay the advance, it can wind up costing more than 80% of the amount borrowed.
- Invoice factoring. Invoice factoring allows a business to sell its outstanding accounts receivable to a third party at a discount in exchange for immediate cash. The third party then collects payments from customers. This can be a good option for businesses that have a lot of revenue tied up in receivables.
- Equipment leasing. If you need expensive equipment for a short time, leasing instead of buying can get you the equipment at a lower cost than financing the purchase with a loan.
- Business credit card. For smaller purchases, using a business credit card may make more sense. Getting approved for a business loan can take weeks or even months, so using a credit card for small purchases can save time.
- Cash. Debt-averse business owners may prefer to pay cash for business expenses and save up for larger purchases.