What Can a Business Loan Be Used For?

Susan Guillory

Updated November 5, 2021

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Let’s say you decided your business needed 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 a business loan 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.

Common Uses for Business Loans

What can a business loan be used for? It depends on the loan, but generally, a business loan can be used for any business-related expense. (There are some exceptions, as we’ll discuss but any restrictions should be noted in a loan’s fine print.)Let’s dive deeper, looking at common expenses for both existing and new businesses.

Existing Business

If you have an existing business, especially if you have good credit, you likely have many options in terms of types of loans and terms. You may even qualify for an SBA loan or a traditional bank loan, which typically require good credit and a business that’s been operating for two years. Here’s what you can use loans for.

1. 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.If you sell products, inventory also falls into this bucket. You may not see a return on investment for several months until you sell the inventory, and you might not have the capital to purchase your next round of products without a business loan.

2. 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. 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

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. 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.

Starting a Business

If you’re just starting a business, you likely could use an injection of cash to get it up and running.Unfortunately, you may not qualify for traditional loans, since many require you to have been in business for at least two years. There are other options, however, including merchant cash advances and payroll loans. Note that these may have shorter repayment periods and higher interest.

6. Expanding

If your business is booming, it may already be a great time to expand. That might mean hiring staff, getting larger office space, or stepping up your marketing budget. All of that can cost, and a business loan can open doors to help you grow faster.

7. 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.

8. Start-Up 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).

What Not to Use Business Loans For

Now that you know what a business loan can be used for, let’s address what you can’t use one for. Your contract will likely specify any particular restrictions.The biggest no-no here is typically personal expenses. Business loans cannot be used to cover personal expenses like home improvements, a car for personal use, or grocery shopping trips.

SBA 504 Restrictions

If you take out a loan from the Small Business Administration (SBA), specifically the 504 loan, 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, let's wrap up by talking about the benefits of taking out a business loan in general.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.Another reason to learn about how to take out a loan, even if you don’t feel like you need one now, is that 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, 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.

Photo credit: iStock/kate_sept2004The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1021201

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.

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