What Can Business Loans Be Used For? 23 Strategic Ways To Invest a Commercial Loan
Knowing what business loans can be used for is essential if you want to grow. As a business owner, you always want to be prepared for anything.
That’s why having a reliable source of funding is so important. No matter what stage your business is in, it’s always a good idea to have access to capital.
Funds can help you expand, hire new employees, or make other necessary investments in your company.
This article is about 23 strategic ways to put a business loan to use, restricted uses, some reasons to get a business loan, how to qualify, and all you need to know to get funding.
|Table of Contents|
|1. 23 ways to use effectively a business loan|
|2. What not to use business loans for|
|3. Reasons to get a business loan|
|4. Types of business loans to consider|
|5. How to qualify for a small business loan|
22 Ways to Use Effectively a Business Loan
Now that you’re ready to get a business loan, you need to consider the best way to invest it. Of course, it all depends on several factors, like your needs, how much money you get, and your goal.
We recommend you calculate how much profits it will bring using the ROI formula before you invest your loan. That way, you’ll ensure that only success lies ahead.
Buy new equipment
This is one of the best uses for a small business loan. You must upgrade the machinery and equipment you use to grow your business.
If you use old and worn gadgets and tools, your productivity will likely fall. Additionally, it will create a poor impression of customer-facing businesses.
Consider a business loan from Camino Financial as your best option for financing machinery.
A loan can provide the perfect solution when it comes to buying equipment.
The new equipment will help boost your revenues and profits, and you can use the extra cash you generate to repay the loan.
That was the case of Rafael Reynoso, who used a business loan to buy a new smog check machine for his garage business.
This new machine produced $300-400 dollars a day. That was more than enough to repay the loan and generate a wide profit.
Pay your suppliers early to earn discounts
Are you familiar with the term 2/10 net 30? This is a facility offered by many suppliers.
What it means is that if you pay within ten days of making a purchase, you can earn a discount of 2%. The other option is to pay the full amount in 30 days.
Do the math for yourself. It may make sense to take a loan to pay a vendor early.
Step up your marketing efforts
Business owners know that a focused marketing campaign can boost sales.
But traditional marketing methods and even digital marketing require an investment.
A loan taken for this purpose can pay for itself many times over by generating additional sales volumes.
Apply for a business loan today
Hire additional workers
Depending on your type of business, you may manage with just a few employees or even just by yourself.
But some businesses receive more customers at certain times of the day (like restaurants or coffee shops) or during certain periods of the year (like a tax preparation business).
Hiring more workers can make a difference, especially if your business is customer-oriented. You don’t want to offer your customers a poor business image.
Also, if you overload your current employees with work because there’s no one else to do it, they will grow disgruntled, and your turnover rate will eventually grow.
A business loan can help you get the money you need to hire and train your new employees properly.
With prepared staff, you’ll experience an immediate difference and grow your business fast.
Follow the example of Leticia Michel, who runs a tax preparation services practice.
Hers is a very seasonal business, and during the “busy season,” Leticia realized she wasn’t offering her clients the best customer service, and also, her small team was getting overworked.
Leticia got a loan and used it to hire 3 new employees and train them to offer best-in-class customer service.
Since then, she has experienced a 49% increase in business operating income.
Invest in technology
A relatively small outlay on business technology systems can provide tremendous benefits to grow your business.
Consider buying a good point of sale system (POS) and a customer relationship management system (CRM) if you don’t already have them.
The insights and advantages you gain from using these tools could surprise you.
Expand into a new territory
A loan to expand businesses makes it possible to grow by increasing your geographical coverage.
This doesn’t necessarily mean setting up a new office or renting an additional warehouse.
You could target customers in a neighboring city or town by placing advertisements in the appropriate media. It is also possible to launch a targeted online advertising campaign.
Add new lines to your product range
Say you have a pool of loyal customers who regularly buy from you. Is there a new product or service that you could introduce to them?
The advantage that you have is that your clients know you and trust you. However, that doesn’t mean you will get away with offering an inferior product or one that doesn’t meet their requirements.
It would probably be a good idea to conduct some research before making the investment that introducing a new product will require.
Does it fill a market need? Is it as good as the competition’s product? Have you priced it appropriately? The success of your investment will depend on correctly answering these questions before you commit yourself.
Buy inventory in bulk
Sometimes you can get an opportunity to buy inventory at a substantial discount. If you make the purchase, you assure a considerable profit in the months ahead.
But the seller may stipulate that you need to place a large order and pay for it immediately.
In this situation, how will you arrange the money?
A line of credit or a short-term loan could provide the answer. You will benefit even if you have to pay a high-interest rate.
Remember that the amount you pay as interest should be less than your anticipated profit on the transaction.
That was the case of Baldemar Ramírez, the owner of Mireyes Instalaciones (a small business installing and servicing mechanic repair equipment). Before getting a loan, Baldemar felt frustrated trying to finish jobs with no parts or driving a long time to pick them up.
So he used a Camino Financial loan to purchase the parts in bulk and get bulk pricing.
Now he doesn’t turn away business because he doesn’t have the parts on-site and has saved 10 hours a week commuting to get the parts.
Buy out a competitor’s business
You can use a loan to buy out a competitor’s company. Buying an existing business is a great way to start your own business.
Of course, it is vital to carry out careful due diligence before purchasing.
It can be less risky than starting a business from scratch, and you’ll have the advantage of an already-established customer base, products or services, and employees.
If you’re considering buying an existing business, here are a few things to keep in mind:
- Do your research. Buying a business is a big decision, so do your homework before making any offers. Make sure you understand the financials of the business, as well as the potential risks and rewards.
- Have a realistic idea of what you can afford. When buying a business, you’ll need enough cash to cover the purchase price and any necessary repairs or renovations.
- Have a plan for the business. Once you own the business, it’s up to you to make it succeed. Be sure you know your goals and how you plan to achieve them.
It may seem counterintuitive to borrow to pay off an existing loan. But it could be a step that could save you a great deal of money.
It will be a good idea if the refinanced debt has a higher interest rate than the business loan.
However, if the refinanced debt has a lower interest rate than the business loan, then it would not be a good idea.
Consider the example of Diego, who runs a small construction business. One of his clients delayed payments for several months.
Consequently, Diego couldn’t pay his workers their wages. In desperation, Diego asked his wife, an office assistant in a small firm, to borrow from a payday lender.
Diego used this money to pay a part of the wages that were due to his employees.
But Diego soon realized that the payday loan carried an interest cost of over 100%! He quickly applied for a loan and used the funds to repay his wife’s loan.
Set up/improve your company’s website
If your company does not have a website, it’s high time you get one.
Small businesses with an online presence are more credible than firms that don’t appear in a Google search.
Money spent on digital marketing and on sprucing up your website usually yields disproportionately high returns. If you don’t have the cash, making this investment with borrowed funds can help you grow your business.
Use a loan to get through slow temporary periods
There are times when a business may go through a slow period. Sales may taper off in certain months.
- Do you operate in a seasonal industry?
- Or is your business dependent on a few large customers?
- Some of your big clients often delay their payments.
But you will still have to meet your fixed costs. You must pay administrative expenses such as wages, utility bills, and rent.
A loan can help you to keep your financial commitments. You can repay the borrowed amount when the business picks up.
Boost your revenues by selling on credit
If you operate in the business-to-business segment, you could be selling on credit to your customers. This would be the case of a wholesaler of products that sells to restaurants.
Sometimes, a new client considers switching over from the competition, provided you offer attractive credit terms.
Your existing customers may increase purchase volumes if you agree to a longer credit period.
While this could mean higher sales and profits, it could also strain your cash flow. A working capital loan could provide a solution.
However, you should adopt this strategy with caution. In your eagerness to boost sales volumes, don’t push too hard.
You could spend a great deal of time following up on your payments.
Increase business volumes
In any business, the most significant constraint is finding new customers. If you can do this and manage the other activities of your company reasonably well, you ensure success.
But how can you identify new clients and convince them to buy from you?
The answer to this question could depend on the type of business that you operate in. You may need to call hundreds or thousands of prospective clients on the phone.
Offering free samples of your product may be necessary. At times, you could benefit from hiring a business consultant.
All these activities have a cost, but you may not have enough money to pay for them. A loan could provide the funds that you need.
Utilizing the borrowed money in this manner may not yield immediate results, but if your strategy is sound, you could gain in the long term.
Buy new furniture
If you own a customer-facing business, like a restaurant or retail store, your success is greatly influenced by the impression you create in the client’s mind.
Shabby interiors and old furniture will reflect poorly on your business. Spending money on improvements can provide lasting benefits.
That’s exactly what Óscar López did. He purchased an existing sandwich shop, Deli 23, in Los Angeles, CA.
The business was operating but needed some serious renovations. Óscar used a business loan to buy new equipment for the deli and new tables and chairs for the dining area.
He also invested in the storefront to bring in more foot traffic. These changes have brought more clients and better reviews and have generated way more profit.
Build your credit
Taking a business loan and repaying it on time can be an excellent way to build your credit history. If you do this, you will create a successful record of repayments with the lender. It will also help to improve personal credit scores.
If you need to borrow funds to grow your business later, a higher credit score could be instrumental in getting you quick approval and a lower interest rate.
It’s important to note that not all lenders report payments to credit bureaus.
You may be interested in: Does a business loan affect personal credit?
Certain types of retail businesses need to stock up on inventory in preparation for the busy season.
You don’t want a customer to walk into your store and leave because of the non-availability of the correct type or color of the merchandise.
An inventory loan can help you maximize sales by ensuring that your store is well stocked.
A loan to expand a business: Open in a new location
It’s possible to grow your business exponentially by opening up new markets. Consider a storefront business that operates successfully in a specific area.
The business owner could double sales by opening a similar store at a new location. Of course, this would involve a significant investment. If you are confident that this strategy would work for you, it is one of the fastest ways to grow your business.
Remember Óscar López? The loan he initially got helped boost his business and profits: now, he has plans to expand Deli 23 throughout San Francisco, California.
Train your employees
Your workers should have the skills and knowledge needed to carry out their roles effectively.
One way to ensure this is to hire individuals with relevant experience. But it is also crucial to provide your employees with training. The money you spend on this should be an investment in human resources.
If you don’t have the cash to pay for training programs, consider taking a loan. Providing your workers with training programs will build loyalty and help motivate and encourage your employees.
Most importantly, it will enable your employees to discharge their duties in a better manner.
Loan for starting a new business
If you’re considering getting a loan to start a business, this will give you access to a larger amount of capital, which you can use to cover costs like inventory, equipment, and marketing.
Improve your product or service
A superior product or one that delivers higher value will attract more customers.
Your investment to improve your product or service can help you gain market share and grow your business.
Remember that it may not be necessary to make drastic changes.
Often, a minor tweak, like a change in packaging or a focus on a different attribute of your product, can improve sales.
Working Capital for small businesses
This is one of the most common ways that business owners use loans.
Working capital is the money you have available to run your day-to-day operations. This includes inventory, payroll, rent, utilities, and other expenses.
For many businesses, having enough working capital on hand can be the difference between success and failure.
What Not to Use Business Loans For
There are a lot of things that business loans can be used for. But there are also many things that they should not use for. Here are some examples of what not to use business loans for:
- Personal expenses – You should never use business loans to cover personal expenses. This is a huge mistake that can lead to financial ruin.
- Risky investments – Never use them to finance risky investments. This includes things like penny stocks or cryptocurrency.
- Luxury items – While it’s tempting to use a business loan to buy luxury items, it’s not a good idea. These are often not essential to the business and can be a huge waste of money.
- Gambling – Gambling is another poor use of business loans. Not only is it risky, but it’s also illegal in many states.
- Speculative ventures – You should not use it to finance speculative ventures. This includes things like flipping houses or investing in a new business.
Reasons to Get a Business Loan
There are many reasons to get a business loan, ranging from needing additional capital to expand your business to want to take advantage of what comes your way.
Here are some of the most common reasons why businesses take out loans:
- To expand your business
- To take advantage of opportunities:
- To cover unexpected expenses
- To weather a downturn
- To improve your cash flow
How to know what the best business loan purpose is
The best purpose of business loans is one that will help you achieve your business goals.
There are many different loan programs available, so choosing the one that best suits your needs is important.
Here are some things to consider when choosing a loan purpose:
- What is your business goal? Make sure the loan purpose aligns with your goal. For example, a loan for equipment or expansion would be a good choice if you want to grow your business.
- How much money do you need? Make sure to get a loan amount that meets your needs. Getting a larger loan than you need can be costly, and getting a smaller loan may not give you the funds you need to reach your goal.
Types of Business Loans to Consider
There are many different types of business loans available, and the one that is right for your business will depend on various factors.
To decide which loan is best for your business, you should consider the following:
- The amount of money you need to borrow
- The purpose of the loan (e.g., working capital, equipment purchase, real estate purchase)
- The repayment loan terms (e.g., interest rate, repayment period)
- Your personal credit history
Some common types of business loans include:
- SBA Loans
- Bank Loan
- Equipment Financing
- Invoice Financing
- Business Line of Credit
- Term Loans
- Merchant Cash Advance
- Working capital loans
Once you’ve considered all of these factors, you’ll be better positioned to choose the right loan for your business.
Business Loan Requirements
Business owners should keep a few things in mind when considering taking out a loan.
Here are some requirements that businesses typically need to meet to qualify:
- Business plan: this is one of the most important requirements for securing a business loan. Your business plan should outline your business goals and objectives and your strategies for achieving them.
- Financial statements: Lenders will want to see your business’s financial statements to assess your financial health and determine whether or not you’re a good candidate for a loan.
- Collateral: Many lenders will require collateral to secure a loan. This could be in the form of property, equipment, or even receivables.
- Business credit history: Your personal and business credit history will be considered when applying for a loan. Lenders will want to see that you have a history of making on-time payments and managing your debts responsibly.
- Tax returns: Lenders may request to see your business’s tax returns to better understand your financial situation.
- Personal guarantee: Some lenders may require a personal guarantee from the borrower to secure a loan. This means the borrower is personally responsible for repaying the loan if the business cannot do so.
How to Qualify For a Small Business Loan
One of the most common questions small business owners have is how to qualify for a small business loan.
There are a number of factors that lenders will take into consideration when determining whether or not to approve a loan, and each one will play a role in the final decision.
The first factor that lenders will consider is your credit score.
This is a number that lenders use to determine your creditworthiness, and it will have a major impact on whether or not you qualify for a loan. If your credit score is low, getting approved for a loan may be difficult.
Another factor that lenders will take into consideration is your revenue.
This is the amount of money that your business brings in every month, and it will be used to determine how much money you can borrow. If your revenue is low, getting approved for a loan may be difficult.
The last factor that lenders will consider is your collateral.
This is the property or assets that you put up as security for the loan, and it
Other requirements, depending on the lender, could be:
- operational for at least six months
- have a good credit history
- have a concrete business plan
Qualifying with a lender that wants to help you grow
Camino Financial small business loans could be your best option. The advantages of dealing with us include:
- You can apply even if you have no previous credit history.
- You don’t need to put up any collateral.
- An application will not affect your credit score.
Business loan requirements vary through online lenders, banks, credit unions, etc. You can apply in a few steps, as our process is easy to fulfill.
All that you have to do is to submit an online application. It will take just a few minutes, and you will be immediately informed if you are pre-qualified.
A business loan specialist will get in touch and guide you through our loan process.
- To qualify, you must have a business that has been active and registered for nine months and generates a minimum monthly revenue of $2,500.
- You will also need to provide basic information about your business, including your tax ID number and contact information. If needed, we’ll ask for more documents.
- Once you have provided this information, our team will review your application and decide based on your qualifications.
We will closely work with small business owners to determine the best loan option for their needs. Contact us today to learn more about how we can help you grow your business!
Apply for a business loan today
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What is a business loan?
A financial institution such as a bank offers these types of loans.
You can use the loan for various purposes, including start-up costs, working capital, equipment purchases, and expansion.
These typically have higher interest rates than personal loans and often require collateral.
What type of fund is used for small business expenses?
Most likely, the business will use a checking account to cover its day-to-day expenses.
Some businesses may also opt for a money market or a savings account if they’re looking for a higher yield on their deposits.
What is a small business loan used for?
Some people use loans to consolidate debt, others for home improvement projects, and others use them for large purchases like automobiles or boats.
How do business loans work?
It depends on the type of loan. The business borrows money from a bank to finance its operations or expansion for a commercial loan.
The business then pays back the principal amount plus interest over a set period of time.
How do you get a loan for a business?
Research the different types of loans available and decide which is right for your business.
Then, you’ll need to gather the required documentation, including financial statements and tax returns. Finally, you’ll need to submit your loan application and await approval.
Can you use a business loan for personal use?
The simple answer is yes; you can do it. However, there may be some restrictions and/or requirements from the lender that you will need to adhere to.
For example, some lenders may require you to use the funds from the loan strictly for business purposes and not for personal expenses. Others may restrict how much you can use the loan funds for personal expenses.
So it’s always best to check with your lender beforehand to see if they have any specific requirements or restrictions when using business loan funds for personal use.
How to grow your business fast?
One way to grow your business fast is to focus on increasing your sales revenues, or another way is by improving your efficiency and productivity levels.
How to use a business loan?
You should use a business loan to finance the growth of your business.
A business loan can help you purchase new equipment, hire more employees, and expand your operations.
What are the most common types of lenders for a small business loan?
Commercial banks, credit unions, and online and alternative lenders are the most common.
Commercial banks are the traditional lending institutions that offer loans to businesses.
Credit unions are member-owned organizations that offer loans to their members.
Online lenders offer loans through the internet and usually have faster approval times than traditional lenders.
What is the SBA 504 Loan fund used for?
SBA 504 Loan Program provides financing for purchasing fixed assets, including real estate, machinery, and equipment.
You can use the 504 loans for growing your business and job creation by buying or enhancing:
What are the restrictions of the SBA 7(a) Loan?
The SBA restricts the use of proceeds from this loan to the following:
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