Before searching for lenders for your business loan, you need to first understand what you will use this money on. While a large cash lump sum may seem like just what your business needs, you need to approach your loan with caution. Without a proper plan on how you will use these funds you could suffer from irresponsible or even accidental overspending.
Business loans can help in every facet of your business from inventory to payroll and even helping your business with its prior debt. When thinking about how much capital you will need from your business loan take into consideration these seven ways you could put it to great use.
1. Purchasing Inventory
Inventory is one of the biggest expenses for any business. If you want your business to succeed you need to keep up with the demand by restock your inventory with high-quality options. This can prove difficult at times when you need to purchase large amounts of inventory before seeing a return on the investment.
Especially if you have a seasonal business, there are times when you may need to purchase a large amount of inventory without the cash on hand to do so. If you are in a business that runs off the ebb and flow of slow seasons followed by thriving holiday or tourist seasons using your business loan for inventory can be extremely beneficial.
Be sure to verify that this is a wise financial move for your business. When working on your plans for your loan create a sales projection based on past years’ sales around that same time. Calculate the cost of the debt and compare that number to your total projected sales to determine whether taking an inventory loan is a wise financial move. It is essential to understand that the market can change from year to year so digging back a few years and checking those sales as well can help you more accurately calculate.
2. Purchasing Equipment
For start up businesses, it is hard to have the funds for all the basic elements your business needs to function. This one of the best ways to use your business loans as they are an investment into the future of your business. Your building, tools and machinery may not be affordable for you, but are necessary to get your business off the ground and start gaining capital. For veteran businesses, your business loan is a great opportunity to update your current items or replacing damaged ones.
To determine how much of your business loan you would need for this it is best to estimate a little high. Not only will this cover your sales tax but you have the opportunity to find a sale or lower priced item. You would then have money available to put back into paying off your loan. Bankers are used to higher demand for lines of credit used to finance buying or leasing equipment so do not be fearful of putting these expenses in your loan plan to present them.
3. Business Expansion
As your business grows you will more than likely have to move to a larger location or even open a second or third location. Seeing your business grow is exciting but now it is time to make moves to support your larger staff, have room for more customers or whatever your needs may be.
Just because your business is ready for expansion, doesn’t mean you have the cash on hand to make it happen. In these cases, you may need to use a business loan to finance your big move. Whether it’s adding an additional location or picking up and moving, the up-front cost and change in overhead will be significant.
Before you commit, take steps to measure the potential change in revenue that could come from expanding your space. Could you cover your loan costs and still make a profit? Use a revenue forecast along with your existing balance sheet to see how the move would impact your bottom line. And if you’re talking about a second retail location, research the area you want to set up shop to make sure it’s a good fit for your target market.
4. Consolidating Debts
Consolidating debt can be a smart way to use small business financing. Many business owners use their advance to help refinance or pay down other debts. Paying off your other debts can help you short term. However, you should be cautious of replacing debt with more debt.
To decide if this is a good decision for your debts you will need to gather the details on each of your companies outstanding debts. If the interest from your debts is higher than what the interest of your business loan would be, consolidating to the loan may be a good option for you.
5. Marketing
Whether it’s through social media, email, events, or more traditional paid media, marketing is one of the best ways to grow business. Marketing is an important part of business that can lead to the rise or demise of your company. You want to remain relevant to the public and put yourself in their mind whenever possible.
Start up companies should especially focus business loan funds into marketing to build their customer base. If you do not have customers, you will not have the money to pay back your loan. Marketing is imperative to get new customers in the door and keep loyal customers, well, loyal. Costs for marketing will vary by your type of business so shop around to find a good deal before blindly pulling out money from a business loan.
6. Paying Employees
A company is only as strong as the people behind it, and investing your new loan funds into hiring can be a great way to help your business grow. You can easily use your business loan to add employees who can take over some tasks such as bookkeeping or ordering supplies and help support the daily functions. This will allow the business owner to better focus on long-term strategy and driving profitable revenue growth.
For new businesses, you are most likely going to need your employees before your company will make enough revenue to pay them a decent wage. This practice is a tricky one. You should try not to hire a new employee with the thought of using your loan to cover their paycheck for too long. Your business loan is a short term solution of borrowed money that you will have to pay back- don’t just pass it out.
Conclusion
Having a game plan for how you’re going to spend your small business loan is crucial. Go through your finances and calculate how a new business loan could help your business. Perhaps opening that second yoga studio, buying that new model oven or adding new team members. Whatever it is, before you apply for (or accept) small business financing, make sure you’ve thought through the most strategic way to use it.To better understand how to use your loan visit Get Out of Debt for helpful blogs and finance information.
If you have any experience with taking a business loan, share your experience and leave any helpful advice you may have in the section below.
