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Let’s say you’ve decided your business needs a business loan. You did your homework. You researched small business loans and common terms used in business loans, so you’d be well-informed. You even started looking at what you need to qualify for a loan.But do you know: What can business loans be used for?Depending on the lender and type of loan, some business loans place restrictions on what you can use the loan proceeds for. Let’s look at both what a business loan can be used for and what it can’t.
1. Using a Business Loan for Daily Operations
There’s a cost 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.
2. Using a Business Loan for Equipment
Your business probably uses some sort of equipment to operate. That might be something as large and complex as a crane, if you’re in the construction industry, or as simple as computers for your staff. If you have a company vehicle, that is also considered equipment, and you can use a loan to pay for it.There are even equipment loans specifically to help with these expenses! To put what equipment financing is in a nutshell, you use the equipment you’re purchasing as collateral for the loan, which can help you secure lower interest rates.
3. Using a Business Loan for Business Improvements/Enhancements
Are you constantly complaining about how cramped your business is in its small retail space? Wishing you could add a mural outside your restaurant? Have a long list of wishes for what you’d do if you had the money?A business loan can provide the capital you need to make those wishes come true. As long as the enhancement or improvement is to your business (you can’t use it to put a new roof on your home), it qualifies as a business expense.
4. Production
What can a small business loan be used for? If you sell products, you might need to purchase supplies to create your finished product. For instance, maybe you sell custom clothing. Production expenses would include things like fabric, thread, packaging, and labels. You could even include the cost of shipping your finished products in this category. A short-term business loan is a great way to cover these expenses until you recoup your investment.
5. Using a Business Loan for Debt Refinancing
If you’ve taken out high-interest loans in the past, you might be paying more than you should in interest and fees. Some business loans allow you to use the funds for debt refinancing.What is debt refinancing, you ask? It’s taking out one loan to pay off another that has higher interest. You can also use one loan to consolidate multiple loans so that you have one low interest rate for your entire debt.
6. Using a Business Loan to Purchase 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 goods and supplies.
7. Using a Business Loan for Marketing/Staying Competitive
You will have trouble establishing your business if you can’t attract customers. The challenge: How do you get the word out? How can they learn about you? The answer: marketing.Branding, sales, and engagement are all enhanced through marketing. Funding a well-planned campaign can make a big difference.
8. Using a Business Loan to Expand Your Business
Many loans are intended for helping a business grow. It could be more staff, more inventory, or more products offered. Many of these goals could use up-front cash.
9. Using a Small Business Loan for an 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 purchase and therefore have to miss out on what might have been a significant opportunity to grow.A business loan gives you the ability to jump on such good fortune. And since acquiring another business should expand profits, you may be able to pay back the loan easily.
10. Using a Business Loan to Cover Startup Costs
Some of your largest expenses will happen upon 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. Most new entrepreneurs don’t have that kind of cash lying around. That’s where financing comes in handy.Remember: Every investment you make in your business will be recouped if and when you hit profitability. Consider what expenses are necessary to start your business off on the right foot and which are just nice-to-haves (maybe you don’t need that $5,000 espresso machine in the break room just yet).Recommended: How to Run a Successful Small Business: 9 Useful Tips
What Not to Use Business Loans For
Now you have a grasp of what can business loans be used for. How about what they can’t be used for? The biggest no-no is typically personal expenses.
What Counts as a Personal Expense?
Although it’s usually pretty clear what personal use means, here it is spelled out.
Using a Business Loan to Purchase a Personal Home
Can you use a business loan to buy a house? If you need property for your business, that’s allowed. A home for your personal use 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 is a whole procedure of its own.
Using a Business Loan to Pay Off Personal Debt
You may wonder, Can I use a small business loan to pay personal debt? No. These loans cannot be used to pay down your mortgage or personal credit card bills.
SBA 504 Restrictions
Small Business Administration loans are extremely helpful to entrepreneurs, but SBA loans 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 cannot use the loan to pay for:
Start-up costs
Office supplies
Business acquisition
Working capital
Inventory
SBA 7(a) Restrictions
You can, however, use an SBA 7(a) loan for the expenses excluded by the 504. With 7(a) loans, you cannot 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 what you want to use it for is approved.
Reasons to Get a Business Loan
Now that we’ve looked at what a small business loan can be used for, what about the benefits of taking out a business loan in general? Should you meet business loan requirements, there are still considerations.First, it provides opportunity. If there’s something that could help your business grow faster — be it a speedier computer or buying another business — having access to working capital can make that happen.There are a variety of types of 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 that's invoice financing, short-term loans, or a merchant cash advance.Needs vary. Perhaps you are best served by a microloan — or by a million-dollar business loan.The point is it’s always a good idea to look to the future. Revenues can be like hills and valleys, and if you hit a dip in revenues, you want to ensure you have the cash you need to pay your staff and bills.
Looking for a Business Loan?
So, what can small business loans be used for? Potentially, almost anything that makes your company better and stronger. But different loans come with different rules as well as different rates, so it can be helpful to shop around to find one that will work for you and your business’s needs. Looking for a business loan with Lantern by SoFi makes it easy. Get quotes from multiple lenders in our network all in one place.
Frequently Asked Questions
Can you use a business loan to pay off personal debt?
Can you use a small business loan to purchase a house?
What can SBA loans actually be used for?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/kate_sept2004
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About the Author
Susan Guillory
Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
