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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
- 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
If your business has cash flow problems, maintaining day-to-day operations and scaling up may be difficult. A business loan can provide an influx of necessary funding. Business loans can be used for anything from equipment purchases to real estate expansions or buying inventory.
And one of the best ways to secure funding is through a business loan. So, what can business loans be used for? Before you apply for a business loan, consider how you’ll use it. Identifying the purpose of your loan helps you determine which type of loan is most appropriate for your needs, and a loan plan may also strengthen your loan application.
7 things business loans can be used for
No matter your business needs, 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 And it’s important to replace outdated equipment on a timely basis.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 financing 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.
You can start with a smaller business loan, but you likely see a higher interest rate without a strong business credit score, and loans often come with additional fees.
An alternative for building credit is business credit cards and lines of credit. If you pay off your business credit card monthly, you will build credit without paying interest or additional fees.
Once you create a positive payment and increase your credit score, you’ll be more likely to get approved for a larger loan with better terms and conditions, which will continue to improve your credit score.
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 and may 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.
- Personal expenses: You can’t use a business loan to finance any personal expenses. This includes personal property, homes, cars, or travel. You may not use a business loan to pay off your personal debt either, which includes delinquent personal taxes.
- Restricted industries: Some lenders restrict the kinds of businesses that can use their funds. If your business is in one of the following industries, you may have fewer loan options: gambling, multi-level marketing, cannabis, hemp, adult entertainment and 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.
What type of small business loan to get
Not all loans are appropriate for every type of business. For instance, a company with ongoing cash flow needs may need a different type of loan than a business that needs money for a one-time project. Planned expenses may also warrant a different loan than emergency needs.
- Small business loans: Also called term loans, these loans distribute money in a single lump sum. Term loan repayment periods can be between about two and 10 years.
- Business line of credit: Lines of credit are revolving, similar to a credit card. They may be right for a business looking for flexibility in funds.
- Business credit cards: A business credit card may have a lower limit than other financial products, but you can avoid interest by paying it monthly. You can often earn travel points or other perks as well.
- SBA loans: These small business loans are backed by the U.S. Small Business Administration. They are good for businesses that have exhausted other loan options.
- Merchant cash advance: Provides upfront cash in exchange for a portion of credit card transactions. This option works best for businesses in need of short-term financing.
- Invoice financing/factoring: Businesses can get access to quick cash by selling their unpaid invoices or using them as collateral. Invoice financing/factoring is ideal for businesses with bad credit that need to manage cash flow and operational needs.
- Microloan: The SBA offers low-interest loans of up to $50,000. This financing is available to startups and established businesses, but it caters to businesses in underserved communities, including minorities, women and veterans.
- Commercial real estate loan: These loans work for various business needs, including purchasing, renovating or expanding commercial properties. They offer longer terms than what you’ll see with other types of business loans.
How to qualify for a small business loan
Each lender has its own approval terms and conditions. Commonly, your business will be asked to meet certain credit score requirements, revenue minimums and time in business. The type of loan you need will also inform the types of requirements; for instance, working capital loans often have shorter repayment periods than SBA term loans.
Community, online and alternative lenders may have more generous approval guidelines than traditional banks. Online lenders also have a much faster approval and funding timeline.
The bottom line
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 way to access capital is through business loans.
With several types of loans, you can likely find a loan that fits your needs. But, before committing to a business loan, be sure to review all your options to determine which small business loan is best and will ensure your success.
Frequently asked questions 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.