10 Things Business Loans Can Be Used For

What small business loans can be used for includes a variety of business expenses. But it’s not just up to the business owner. Depending on the lender and type of loan, some business loans may place restrictions on what you can and can’t use the loan proceeds for.

Let’s look at both what business loans can be used for and what’s off limits.

1. Daily Operations

There are costs to running a business, and it’s not always the large one-time expenses like new computers that can break the bank. Paying rent or a mortgage, utilities, and payroll each month can eat up a large portion of your revenues.

Luckily, what you can use a small business loan for includes the daily operations involved in running a business, including inventory, marketing and advertising, maintenance and repairs, payroll, legal fees, office supplies, and more.

2. Equipment

Equipment might be something as large and complex as a crane or as simple as computers for your staff. If you have a company vehicle, that’s also considered equipment, and you can use a loan to pay for it.

Equipment Financing vs. Leasing

There are small business equipment loans specifically designed to help with these expenses. With these equipment financing loans, you can use the equipment you’re purchasing as collateral for the loan itself, which can help you secure lower interest rates.

You can also lease many types of equipment. In the case of leased equipment, the lessor still owns the equipment, but you may have an option to purchase it or return it at the end of the lease.

Recommended: Leasing vs. Purchasing Equipment

3. Business Improvements/Enhancements

A business loan can provide the capital you need to improve or enhance your business. These may include additions to your store space or remodeling your existing location, for example. As long as the enhancement or improvement is to your business, it qualifies as a business expense – you can’t use it to put a new roof on your home.

4. Production

Another expense you can use a business loan for: If you sell products, you may need to purchase supplies to create your finished wares.

For instance, maybe you sell customized clothing. Production expenses could include things such as fabric, thread, packaging, and labels. You could even include the cost of shipping your products in the production category. A short-term business loan can be a great way to cover these expenses until you recoup your investment.

5. Debt Refinancing

If your business has taken out high-interest loans in the past, you might be paying more than you should in interest and business loan fees. Some business loans allow you to use the funds for debt refinancing, which is taking out one loan to pay off another that has a higher interest rate.

Consolidating Higher-Interest Business Debt

You can also use one lower-interest loan to consolidate multiple loans. This leaves you with one low interest rate for your entire debt and can simplify as well as lower your payments.

6. Inventory

An inventory loan is a small business loan that’s designed for purchasing inventory. This kind of business funding is flexible, since you can use it to pay for different kinds of supplies needed to run your business.

7. Marketing

If you can’t attract customers, you will probably have trouble establishing your business. Marketing can help you get the word out about your company and gain customers.

Branding, sales, and engagement can all be enhanced through marketing. Funding a well-planned campaign with the use of a small business loan can make a big difference to your company’s visibility and success.

8. Business Expansion

Many loans are intended to help a business grow. This could mean hiring more staff, building more inventory, or offering more products. A small business expansion loan can be used to help you purchase a new location or expand your existing one. The building is typically used as collateral to secure your loan, which could get you a better interest rate.

Opening New Locations

Expansion can also include starting up new branches of your business in different locations. Again, the property may serve as collateral for your loan.

9. Acquisition

If the opportunity arose today to buy a competing company and capture more of the market, could you afford it? Many businesses don’t have the capital on hand to make an acquisition and therefore have to miss out on what might have been a significant opportunity to grow. A business acquisition loan can help you purchase another business, buy out a partner, or become a franchise owner, depending on your lender.

Buying an Existing Business

As the name suggests, a business acquisition loan gives you the ability to jump on opportunities to grow through acquiring another company. And since adding another business should expand your profits, you may be able to pay back the loan more easily than you’d imagine.

10. Startup Costs

You’ll probably incur some of your largest expenses when your business is launching. From renovating commercial space to stocking up on supplies and products and hiring staff, these expenses can be in the tens of thousands, if not hundreds of thousands. Many new entrepreneurs don’t have that kind of cash lying around, which is where financing is helpful.

Remember, most investments you make in your business will be recouped if and when you reach profitability. Consider which expenses are necessary to start your business off on the right foot and which are just nice-to-haves. (For example, maybe you don’t need that $5,000 espresso machine in the break room just yet.)

Recommended: Equipment Financing for Bad Credit

How Business Loans Work and Common Funding Types

There are a variety of different business loans and other forms of funding companies can apply for to obtain funds when they need them. Each comes with its own rules and requirements. Some possibilities include:

•   Term loans

•   Small Business Administration (SBA) loans

•   Business lines of credit

•   Equipment financing

•   Merchant cash advances

•   Invoice financing

•   Invoice factoring

•   Microloans

•   Commercial real estate loans

•   Working capital loans

•   Restaurant loans

•   Franchise financing

•   Startup business loans

•   Personal loans for business

•   Alternative funding options (crowdfunding, peer-to-peer lending, etc.)

Term Loans vs. Business Lines of Credit

Small business term loans are likely the form of loan you’re most familiar with. When you apply to a lender for a term loan, you need to prove your company’s creditworthiness and ability to pay back the loan. If you’re approved, you receive an upfront lump sum which you typically repay with interest in monthly payments over a set period of time that can range from months to years. This kind of loan can be helpful in a variety of situations.

A business line of credit, however, works differently. If you’re approved, you have access to a preset amount of money and can draw on it if and when you need to. You typically pay interest only on the money you actually use. If you do take money out, as you repay it, you replenish the amount available to you. This kind of funding can be helpful if you don’t know exactly how much money you’ll need or when, if your business is seasonal, or if you want to have emergency funding available.

Recommended: Business Loan vs. Business Line of Credit

SBA Loans and Other Popular Options

Small Business Administration (SBA) loans are typically issued by private lenders but are partly backed by the SBA. This lowers the perceived risk for the lenders, meaning that the loans can often be accessed by small business owners who might not qualify for traditional funding. Interest rates and loan terms tend to be favorable. SBA loans tend to involve a lot of paperwork and take relatively long to be approved, but come in a variety of forms, some of which can move faster.

Alternative funding also offers some popular options. Crowdfunding, for example, can be useful if you’re seeking funds to start up or to develop a specific product. Using a crowdfunding platform, you can explain your need and ask for funds. Depending on your model, you may need to repay the funds or offer “rewards” for what you receive. Borrowing funds from family and/or friends is another way businesses often get funding in the early stages. Generally it’s a good idea to have a lawyer draw up a repayment contract, to avoid misunderstandings.

What Not to Use Business Loans For

Now you have a grasp on what business loans can be used for, but what about what they can’t be used for? The biggest prohibition is typically personal expenses.

What Counts as a Personal Expense?

Below are three scenarios in which a business loan can’t be used.

Using a Business Loan to Purchase a Personal Home

If you need property for your business, that’s allowed. A home for your personal use, however, is not.

Using a Business Loan to Purchase a Personal Vehicle

This is also against the rules. You can form a business entity to purchase a car if it’s strictly for your business, but that’s a whole procedure in its own right.

Using a Business Loan to Pay Off Personal Debt

Business loans can’t be used to pay off personal debt, such as personal credit cards, mortgages, student loans, and more.

SBA 504 Restrictions

SBA loans are helpful to many entrepreneurs, but they have many rules. If you take out the 504 loan from the SBA, there are restrictions on what you can and can’t use the proceeds for that are stricter than the rules for many other loans.

You can’t use these loans to pay for:

•   Startup costs

•   Office supplies

•   Business acquisition

•   Working capital

•   Inventory

Recommended: Guide to Business Financing

SBA 7(a) Restrictions

You can, however, use an SBA 7(a) loan for some of the expenses excluded by the 504.

With 7(a) loans, like 504 loans, you still can’t use the loan proceeds for an illegal business or to pay delinquent taxes.

Bottom line: Read the fine print before taking out a loan so you can be sure that what you want to use it for is approved.

Misuse of Funds and Potential Legal Consequences

Misusing your business loan can lead to serious negative consequences.

First of all, it puts you in breach of contract. Typically this means that your lender could demand that you immediately repay the loan in full, which could potentially put you in a difficult financial position. If you can’t do it, this might impact your credit score and your changes of being approved for loans in the future.

Your taxes may also be affected. Typically, you may be able to deduct the interest you pay for a business loan. But if you use that loan for personal expenses, you could lose that deduction – or face penalties and audits if you attempt to use it anyway.

Legally, you could be charged with fraud, especially if you have partners or shareholders, and face fines or other penalties. And if your business structure gives you limited liability, that may be compromised.

Recommended: Business Loan Calculator

Reasons to Get a Business Loan

Taking out a small business loan may provide your business with more opportunities. If there’s a way to accelerate your business’s growth, such as purchasing faster computers or acquiring another business, having access to that capital can make it happen.

Financing can also help with maintaining your operations, especially if you’re a seasonal business. Revenues can be like hills and valleys, and if you hit a dip, you want to ensure you have the cash you need to compensate your staff and pay your bills.

Fortunately, there are many types of business loans, so even if your business is new and not yet established or you don’t have great credit, there’s likely a financing option for you, whether it’s invoice financing, a short-term loan, or a merchant cash advance.

Whether you think you’d be best served by a small microloan or by a million-dollar business loan, it’s generally a best practice to research the possibilities to see what will make the most sense for you.

The Takeaway

A small business loan can be used for almost anything that makes your company stronger. But different loans come with different rules as well as different rates, so you’ll need to shop around to find one that will work well for you and your business’s needs.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

Can you use a business loan to pay off personal debt?

No, for numerous reasons. Paying off personal debt with a business loan is against the rules if you’re getting a loan through the SBA. Other lenders strongly disapprove, too, to the point that if a lender finds out about a business owner using a business line of credit for personal use, it may call in the balance of the note.

Can you use a small business loan to purchase a house?

If the real estate is needed for your business, then it could fall within the rules of what business loans can be used for. You can’t buy a house for personal use or as an investment with a small business loan.

What can SBA loans actually be used for?

SBA loans, depending on the type, can be used for many things, such as startup costs, business expansion, equipment purchases, working capital, inventory, or commercial real estate purchases.

Are there restrictions on how you use a small business loan?

You cannot use a business loan for personal use. For instance, you can’t use a business loan to pay off personal debt, buy a home, or purchase a family car. Specific types of business loans may also carry other restrictions, so it’s important to read and understand the fine print.

Can lenders check how you use your business loan funds?

Depending on your lender and kind of loan, your lender may be able to monitor your bank statements and/or other financial records. SBA loans in particular may require lenders to do so. Be sure to read your loan contract carefully to see what it says about financial reporting and/or ongoing monitoring.

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Photo credit: iStock/panida wijitpanya

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