One of the keys to a successful business is access to capital. Whether you need to purchase equipment or restock inventory, it’s important to have funds to complete your projects.
And one of the best ways to secure funding is to a business loan. So what can business loans be used for?
- If paid responsibly, business loans can be a great way to build and grow a successful business.
- Business loans can be used for many types of business expenses, but not for any personal expenses.
7 Ways to Use a Business Loan
Whatever your business needs, there’s likely a business loan that’s right for it. Some loans, for example, term loans and lines of credit, can be used for almost any business-related purpose. Others, such as equipment loans and commercial mortgages, are designed for specific purposes. Do your research before you apply.
1. Purchase of equipment
Depending on your business, you may need specialized or expensive equipment. Timely replacement of outdated equipment is important.
With equipment as collateral, you can get a business loan at a competitive interest rate and finance the entire cost of the equipment. Many lenders specifically offer equipment loans type of business loan with special rates.
2. Take inventory
If you sell products, running out of stock means cutting into your income. 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 don’t have both cash and inventory, you may want to take out a business loan. However, when the purpose of the business loan is for inventory, lenders often offer shorter terms, such as one year or less.
3. Buy real estate
Whether you’re expanding your existing footprint or adding another location, you may need to secure a business loan to purchase commercial real estate. Like a conventional mortgage, this business loan uses the purchased real estate as collateral. A commercial real estate loan typically have lower interest rates and longer repayment periods than a term loan for general business purposes.
4. Buy an existing business
One way to eliminate competition is to buy their business. It is also a good option for entrepreneurs who want to skip the start-up phase. you can remove a loan to acquire business to finance this purchase.
5. Refinance an existing loan
If you took out a business loan during a period of high interest rates, consider refinancing if current interest rates are low. A refinance uses a new loan to pay off your existing loan; the terms and rate of the new loan replace the old one.
However, before refinancing an existing loan, you’ll want to factor in all costs for the new loan, including down payments. Calculate the savings can offer a lower interest rate to determine if they offset the cost get a new loan.
6. Establish business credit
It takes time to build your business credit history. This can make it difficult to get a large business loan.
To build a strong credit record, you may want to take out small business loans and pay them off on time. Building your credit history can help you get bigger loans when the need arises.
Even if you don’t need a big loan anytime soon, build business credit can help you separate your work and personal finances.
7. To provide working capital
Some companies use business loans to finance their day-to-day operations. Working capital can finance wages, rent, utilities, inventory, vendor payments, and other expenses.
Using a working capital loan can ensure that you always have resources available for ongoing expenses, as long as you can repay the loan when it comes due. Note that many working capital loans have short terms; they may also have higher interest rates.
Why you can’t use a business loan
While business loans are a great tool for growing your business, there are some things you can’t do with a business loan.
In fact, you cannot use a business loan to finance any personal expenses. This includes personal property, houses, cars, boats or other goods. You also can’t use a business loan to pay off student loans, personal debt, or delinquent taxes.
Some lenders place additional restrictions on how you can use their loan products. For example, some don’t allow their loans to be used to pay rent or refinance business debt. Many limit the types of businesses that can use their funds, typically excluding businesses in or related to the following industries:
- Multi-level marketing
- Marijuana and other federally restricted substances
- Daily trading
- Fun for adults
- Financial services
If you’re sure you can afford a business loan, check out Bankrate’s tips how to get a business loan.
Frequently asked questions about how you can use business loans
Short answer: no. Business loans can only be used to finance your business. This means that you cannot use the capital from a business loan to pay off personal debt or make personal purchases.
The US 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; providing business with short and long-term capital; buy furniture, fixtures and other supplies; and refinance existing business debt.
You can secure a traditional business loan Financial institutions (such as national and regional banks and credit unions), online lenders, or the SBA. SBA loans are usually available low interest rates and longer maturity. They may be suitable for startups that have not been operating 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.