One of the keys to running a successful business is having access to capital. Whether you need to purchase equipment or restock inventory, having the funds available to complete your projects is critical. 

And one of the best ways to secure funding is through a business loan. So, what can business loans be used for? 

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Key takeaways
  • If repaid responsibly, business loans can be a great way to grow and run a successful business.
  • Business loans can be used for many kinds of business expenses but cannot be used for any personal expenses.

7 ways to use a business loan

No matter your business need, there’s likely a business loan that suits it. Some loans, such as term loans and lines of credit, can be used for nearly any business-related purpose. But others, like equipment loans and commercial mortgages, are designated for specific purposes. Do your research before applying.

1. Purchase equipment

Depending on your business, you may need specialized or pricy equipment. And it’s important to replace outdated equipment on a timely basis.

With the equipment serving as collateral, you may be able to get a business loan at a competitive interest rate and finance the entire cost of the equipment. Many lenders offer equipment loans as a specific type of business loan with special rates.

2. Buy inventory

If you sell products, running out of stock means interrupting your revenue. Consumer interest in your product may vary depending on the time of year. For example, most companies increase their inventory in preparation for the holiday season.

If you’re short on both cash and inventory, you may want to take out a business loan. However, when the business loan purpose is for inventory, lenders will often offer a shorter term, such as one year or less. 

3. Buy real estate

Whether you’re increasing your existing footprint or adding another location, you may need to secure a business loan to buy commercial real estate. Like conventional mortgages, this business loan uses the purchased real estate as collateral. A commercial real estate loan typically has lower interest rates and longer repayment terms than, say, a term loan for general business purposes.

4. Buy an existing business

One way to eliminate the competition is to buy their business. This is also a good option for entrepreneurs who want to skip the start-up phase. You can take out a business acquisition loan to fund this purchase.

5. Refinance an existing loan

If you took out a business loan during a period of high interest rates, consider refinancing it if the current rates are lower. Refinancing uses a new loan to pay off your existing loan; the new loan’s terms and rate replace the old.

However, before refinancing an existing loan, you’ll want to consider all the costs, including the origination fees for the new loan. Calculate the savings lower interest could offer you to determine if they offset the cost of getting a new loan.

6. Build business credit

It takes time to establish your business’s credit history. This can make it challenging to take out a large business loan.

To build up a strong credit record, you may want to take out small business loans and pay them back on time. Building your credit history may help you qualify for larger loans when the need arises. 

Even if you don’t expect to need a large loan soon, building business credit can help you separate your business and personal finances.

7. Provide working capital

Some companies use business loans to fund their day-to-day operations. Working capital can fund payroll, rent, utilities, inventory, vendor payments and other expenses. 

Using a loan for working capital can ensure you always have the resources for ongoing expenses — so long as you can repay the loan when it’s due. Note that many loans designed to provide working capital have short terms; they may also have higher interest rates.

What you can’t use a business loan for

While business loans are a great tool for growing your business, there are some things you can’t do with a business loan.

 

Essentially, you can’t use a business loan to finance any personal expenses. This includes personal property, homes, cars, boats or other goods. You also cannot use a business loan to pay off student loans, personal debt or delinquent taxes. 

 

Some lenders place additional restrictions on how you can use their loan products. For example, some don’t allow their loans to be used to pay rent or to refinance business debt. Many restrict the kinds of businesses that can use their funds, commonly excluding businesses in or related to the following industries:

  • Gambling
  • Multi-level marketing
  • Marijuana and other federally restricted substances
  • Hemp
  • Day trading 
  • Adult entertainment
  • Financial services

If you’re confident your need is one a business loan can meet, check out Bankrate’s advice on how to get a business loan.

 

FAQs about how you can use business loans 

  • Short answer: no. Business loans can only be used to provide funding for your business. This means you cannot use the capital generated from a business loan to pay off personal debt or make personal purchases.

  • The U.S. Small Business Administration offers a variety of loan products, but the most popular is the SBA 7(a) loan. This business loan can be used to purchase real estate; provide the business with short- and long-term capital; buy furniture, fixtures and other supplies; and refinance existing business debt.

  • You can secure a business loan through traditional financial institutions (like national and regional banks and credit unions), online lenders or the SBA. SBA loans typically have lower interest rates and longer repayment terms. They may suit start-ups that haven’t operated long enough to develop a business credit history. Conventional business loans are best for companies that have been in business for a while and have a strong financial track record.