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A rising force among today’s small business owners and entrepreneurs, crowdfunding can enable access to funds that may have been previously out of reach. Instead of relying on investors or financial institutions, it allows you to tap into a grassroots support system.

With rewards-based crowdfunding (also known as seed-based crowdfunding), entrepreneurs solicit financial donations from individuals in return for a product or service. It’s one of the most popular types of crowdfunding. Here’s why: It doesn’t require giving up any equity in your company or paying back any of the funds you raise.

While crowdfunding for a small business can be a game changer, a successful rewards-based campaign can take a fair amount of time, hustle, and salesmanship. You typically need to develop a convincing pitch that appeals to as many people as possible and offer attractive rewards at all donation levels.

Could rewards crowdfunding be a good fit for your business? Read on to find out.

What Is Rewards-Based Crowdfunding?

With rewards crowdfunding, a company asks for money from the general public in exchange for a gift. Generally, companies provide tiers: The more money you give, the greater your reward.

To launch a rewards-based crowdfunding campaign, you generally need to describe your project or idea on a crowdfunding platform. You’ll also likely need to set a specific fundraising goal, choose an end date, and ask the crowd to contribute to your campaign for the promise of a reward.

Crowdfunding rewards can be as basic as a personalized thank-you letter or branded T-shirt. The most popular crowdfunding gifts, however, often revolve around donors gaining early access to the product because they actually receive what excited them enough to fund your project in the first place.

Rewards crowdfunding differs from other types of crowdfunding. With equity crowdfunding, for example, companies give up a percentage of their company in exchange for funds. With loan crowdfunding, any money received is paid back with interest.

What Type of Business Is It Useful For?

Rewards-based crowdfunding can be great for startups that don’t qualify for traditional small-business loans.

It can also be a good choice for any small business that wants to test the waters on a new product or idea. Should a service or an aspect of your product need to be tweaked, user feedback from the crowdfunding process will likely quickly let you know.

Rewards crowdfunding might not be ideal, however, if your business has a complex product or service. It may be hard to explain the value of your company in layperson’s terms to a crowdfunding audience.

Recommended: Crowdfunding Loans Explained

Who Can Donate to Your Crowdfunding Campaign?

Anyone can donate to a rewards-based crowdfunding campaign — family, friends, business associates, customers, or people entirely outside your network. Crowdfunding doesn’t require donors to have any special training, experience, or, in many instances, large amounts of money to donate.

Often, business owners will share their campaign on social media, with the hope that their followers will share the campaign with their networks.

What Platforms Can I Use for Crowdfunding?

There are many reward-based crowdfunding platforms small businesses and entrepreneurs can explore. These include:

•  Kickstarter

•  Indiegogo

•  IFundWomen

•  Fundable

•  Patreon

•  Artistshare

Each platform has its own rules, procedures, and fees. Platforms typically charge a percentage (which can be around 5% or even 10%) of total funds raised, plus a credit card processing fee that can run around 3% to 5% of each transaction.

In many cases, companies won’t receive their money (and donors won’t get their rewards) unless funding targets are hit before the project’s deadline.

Researching Reward Ideas for Crowdfunding

Generally, the best rewards will excite your target audience no matter what tier they fall into, so it can be a good idea to provide multiple reward options.

You may want to start by researching successful crowdfunding campaigns that offer products similar to yours. What sort of crowdfunding gifts did they offer? How many tiers did they provide?

Ideally, you’ll want to find something that is both affordable for you and interesting to them.

For example, if you have an app you want to promote, you might consider providing the following rewards:

•  $1 Thank you email with a special sneak peek video of the progress your team has been making.

•  $5 Thank you postcard and weekly emails providing updates

•  $10 T-shirt and weekly emails providing updates

•  $15 Early access to the app

•  $20 T-shirt and early access to the app

•  $50 Honorary mention within app and early access

•  $75 T-shirt, early access, and honorary mention

What Are the Pros and Cons of Rewards Crowdfunding?

All fundraising strategies come with a unique set of benefits and drawbacks. Here are some of the pros and cons of rewards-based crowdfunding.

Pros

One of the biggest advantages of rewards-based crowdfunding is that you are not giving up a portion of your company, nor are you taking on any debt. All you’re doing is offering perks to donors for giving you donations.

Unlike applying for many small business loans, a crowdfunding campaign does not require you to pass a credit check or meet eligibility requirements.

Rewards-based crowdfunding can be a good funding option for a startup because of the exposure you can gain on the platform.

This can help establish your customer base and build brand awareness. If donors get really excited about your product, they may do a lot of your marketing for you by talking about it on social media. When this happens, not only are you generating money, but you’re also getting free advertising.

Rewards crowdfunding can also enable you to get consumer feedback during the early stages of product development to help you make it as good as it can be.

Cons

One major drawback to running a rewards-based crowdfunding campaign is the amount of time and effort you may have to put into it.

Entrepreneurs typically need to create a persuasive campaign, which may include producing promotional videos, in order to help get backers interested in the project. They will likely also need to continuously promote their product.

If you don’t reach your fundraising goal, all of the money you raised may be given back to the donors, leaving you with no return on your efforts.

Another potential drawback to rewards crowdfunding is that it can allow competitors to see and steal your idea. Patents can protect you, but they, too, can take time and money. Unfortunately, successful crowdfunds can sometimes lead to cheap knockoffs.

Recommended: How to Finance Equipment With Bad Credit

The Takeaway

Rewards-based crowdfunding is a form of crowdfunding where the creators of a new product, service, or business solicit capital from a large number of people (the “crowd”) in exchange for the promise of a reward. In many cases, these rewards are the product or service that the campaign was created to fund.

Rewards crowdfunding can help you raise money — as well as generate excitement — for your product or service. However, it can take a fair amount of effort to execute a successful campaign, and you may not be able to raise as much money as you might need to launch or grow your business.

Whether you decide to try your hand at rewards-based crowdfunding or not, you may want to check out other financing options as well.

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.

Photo credit: iStock/luplupme

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The 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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB-Q224-1874360-V1

When a borrower is especially risky, a lender may ask them to agree to a blanket lien, also known as a general lien or a UCC-1 blanket lien. A blanket lien gives the lender the legal right to seize multiple (possibly even all) assets owned by the borrower should they stop making payments on the loan.

Blanket liens aren’t unusual in the small business lending world, and can give a business with thin or poor credit access to affordable financing. But because these agreements put most, if not all, of your business assets at risk, a blanket lien isn’t something you want to enter into lightly.

Should you agree to a UCC blanket lien to get a business loan? Does having a lien on your business assets affect your credit? If you already have a lien placed on your business, can you get it removed? Here’s everything you need to know about blanket liens as a small business owner.

What Is a Blanket Lien?

Collateral is one way lenders reduce their risk when they loan you money. If your business takes out a loan and fails to repay it according to the terms of the loan agreement, your collateral can potentially be seized and sold to help the lender recover some of its losses.

For some loans, a lien against a single piece of collateral may not be enough to make a lender feel comfortable. Instead, the lender may prefer a type of lien that secures multiple assets your business owns at the same time. This is commonly known as a blanket lien, or UCC-1 blanket lien, after the section of the Uniform Commercial Code that regulates these types of liens.

Under a UCC blanket lien, a lender might ask you to pledge any of the following as collateral when you’re borrowing funds:

•  Accounts receivable

•  All equipment

•  All vehicles

•  Real estate

•  Inventory (current and future)

•  Other business assets

Blanket liens are involved in many types of small business loans, including short-term loans from alternative lenders, loans backed by the U.S. Small Business Administration (SBA), and secured business lines of credit. If you have a loan and aren’t sure if there is a lien against your business, you can do a lien search at your secretary of state’s office. In some states, you can do a lien search online for free.

How Do Blanket Liens Work?

If you agree to pledge multiple assets as collateral for business funding, the lender will typically file a UCC-1 with your secretary of state to stake claim to those assets. The lender must also include a copy of the blanket lien in the loan agreement.

The lien is a public filing that any creditor can look up. Lien records show a prospective lender that another blender has already made a loan to the business and has a security interest in the business’s assets. Because UCC filings are public records, they’re frequently picked up by the commercial credit bureaus. This means UCC liens may appear on your business credit reports.

A blanket lien typically expires in five years. If the loan has a longer term, the lender has to file a renewal to maintain the lien on your assets.

Blanket Lien Regulations

The Uniform Commercial Code, or UCC, is a set of laws that were created to standardize the conduct of lenders and borrowers during commercial transactions. UCC Article 9 specifically lists what assets can and cannot be collateralized for a blanket lien.

A blanket lien cannot, for example, secure any property that would require government consent, such as:

•  Business licenses, such as those issued to independent contractors

•  Patents, such as utility or design patents

•  Trademarks, such as a service mark or certification mark

•  Other government issued permits

UCC Article 9 serves as a guide for the drafting of lien language, but to avoid confusion between parties and to provide clear details, creditors also file a UCC-1 statement. The UCC-1 statement publicly declares a creditor’s right to seize a borrower’s assets if the borrower defaults. A UCC-1 is required for all business loans.

The UCC-1 statement will specifically list what assets are allowed to be seized and in what order. It can also prioritize which lenders are allowed to seize assets first in case there are multiple lenders on the loan. The UCC-1 statement must be filed with local agencies in the state where the business of the borrower is located.

While a blanket lien sounds ominous, most lenders will only enforce them as a last resort. To actually lay claim to any of your assets, the lender has to take you to court and win a judgment against you. If you miss a payment or two, it’s unlikely your lender will go to court to lay claim to your assets. Instead, the lender would likely want to work out a payment plan. The plan might involve extending the term of your loan or lowering your monthly payment. Generally, only if these measures don’t work, would a lender consider enforcing a blanket lien.

Removing a UCC Lien

A UCC lien stays on file for five years. If your loan doesn’t mature until after that point in time, your lender will likely renew it. You can only have a blanket lien removed after you repay your loan in full. Sometimes the lender will remove the lien themselves once your loan is repaid, but if they do not, and you’re still seeing an active lien on your credit profile, there are certain steps you can take to get the lien removed.

Option 1: Call your lender
It’s possible that you haven’t fully repaid your loan. There may be one or two payments to go, or perhaps there are still some outstanding fees on your account. To resolve the issue, call your lender to find out why the lien is still on file and what you need to do to get it removed.

Option 2: Wait
Even if you do nothing, a UCC-1 lien will automatically be removed after the lien’s five-year term expires.

Option 3: Request a UCC-3
If you have fully repaid your loan (including fees), and your lender acknowledges that you have done so, ask them to file a UCC-3. A filed UCC-3 removes the blanket lien on file with your state. You can also request a UCC-3 when you send in your final payment.

Option 4: Dispute the lien
If you can’t resolve the issue with your lender, you can visit your secretary of state’s office to dispute the lien. You’ll have to provide all the paperwork showing you have repaid the loan and swear an oath that all the information is truthful. If a credit bureau is still inaccurately showing the lien, you can dispute the lien with the credit bureau.

Pros and Cons of Blanket Liens

Blanket liens give small businesses that haven’t yet built up credit, have poor credit, and/or lack any single high-value asset access to use as collateral the ability to access financing they would not otherwise be able to get.

Even if you have collateral, agreeing to a blanket lien on a business loan might allow you to get a lower interest rate or a larger loan than you would otherwise qualify for. While it’s often possible to get a loan without collateral or a blanket lien, the drawback is that these types of loans often come with higher costs.

Also keep in mind that, as scary as a blanket lien sounds, a lender would only enforce it as a last resort. If you make all — or most — of your payments on time, you should never lose any of your assets. And, if you did not have the blanket lien, your lender might ask you to sign a personal guarantee. With a personal guarantee, a lender can seize and sell your personal assets (such as your house, car, retirement fund) should you default on the loan, which is similar to a blanket lien.

However, blanket liens also have some definite downsides. The biggest is that they give the lender the legal right to seize many, if not all, of your business assets should you become unable to repay the loan.

On top of that, having a lien on file can make it more difficult for your business to secure additional financing. And, even after you fully pay off the loan, the lien may not immediately come off your credit report. This can make it harder for you to apply for a small business loan in the future.

Comparing Small Business Loan Rates

Before you commit to any small business loan, you’ll want to shop around and compare business loan rates, as well as the terms and requirements of any loan you are considering. If a business loan requires collateral, it means the lender can only seize that particular asset should you become unable to repay the loan. If a loan requires a blanket lien, it means the lender has the right to seize and sell most or all of your assets in the event of a default.

If you’re interested in exploring different types of financing — both with and without blanket liens — SoFi’s marketplace can help.

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.

FAQ

What does blanket inventory lien mean?

A blanket inventory lien on a business loan means the lender can seize and sell all the business’s inventory in the event of nonpayment.

What is a blanket filing?

A blanket filing is when a lender files a UCC-1 with your secretary of state to stake claim to all, or most, of your business assets in the event of default, rather than a single piece of collateral.

What does UCC stand for in regards to blanket liens?

UCC stands for Uniform Commercial Code and is a standardized set of laws and regulations for transacting business. UCC regulates blanket liens on businesses.

Photo credit: iStock/Nuthawut Somsuk

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The 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.

This article is not intended to be legal advice. Please consult an attorney for advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOSB-Q224-1871621-V1

If your small business hits a slump, due to a crisis, pandemic, or other unfortunate circumstance, any employees you let go will be able to file for unemployment benefits.

You may wonder, however, if the same applies to you: Can small business owners file for unemployment? Is your only option small business bankruptcy?

In some cases, small business owners may be able to file for unemployment. It just depends on how you’ve been paying yourself and whether you’ve paid into unemployment insurance.

How Do Unemployment Benefits Work?

When employees are laid off or let go from a company, they are typically entitled to temporarily receive a portion of their previous salary in the form of unemployment benefits. People who quit their jobs or were fired because of poor performance are generally not eligible.

Unemployment benefits vary from one state to another, but generally can last up to 26 weeks. To qualify, individuals must be ready and willing to work and unable to find comparable employment. There may be additional requirements depending on which state you live in.

Unemployment insurance is financed by taxes paid by employers.

Types of Business Owners Who Are Eligible for Unemployment

Whether or not a small business owner can file for unemployment will depend on what state they live in, how their business is set up, and how they pay themselves. Here are some general guidelines that can help you decide if you should apply for benefits.

1. Sole Proprietorships

If you are the sole proprietor of a business, you likely do not pay yourself wages and unemployment taxes. If that’s the case, you probably do not qualify for unemployment for small business owners.

2. S Corporations

If you operate as an S corporation, you may be required to pay yourself wages, as well as state unemployment insurance tax on those wages, just as you do any other employee. If so, you can likely qualify for unemployment benefits.

You may want to keep in mind, however, that generally a business owner has to cease business operations entirely in order to be eligible. This shows that you are, indeed, separated from the company. “Firing yourself” due to a slowdown in business is not likely to make you eligible for unemployment.

3. Business Owners Not Earning Wages

If you operate your business as a partnership (such as an LLC or LLP) or a corporation, but haven’t been drawing a regular paycheck or contributing to your state’s unemployment insurance fund, you are likely not eligible for unemployment benefits.

If you only take money from your company as you need it, or only take money through distributions or dividends, you’re generally not considered an employee unless you are also drawing regular employee wages.

Changing your status and making yourself a W-2 employee of your company shortly before shutting it down isn’t likely going to help your case either. Many states have rules about required minimum lengths of employment to qualify for benefits.

Recommended: Business Loan Defaults Explained

Requirements for Small Business Owners Applying for Unemployment

Requirements for small business owners to qualify for unemployment are dictated by the state. Typically, however, a business owner will only be eligible for unemployment benefits if they are an employee within their own business.

This means that if you meet these requirements:

•  You worked as a wage-earning employee of the company on a W-2 (not 1099)

•  You had a title and a role with defined responsibilities (such as CEO or president)

•  You paid federal and state unemployment taxes

•  You lost your status as an employee

•  You can prove that you’re seeking alternative employment

If you’ve been compensating yourself through dividends or distributions, rather than wages, or you’re a sole proprietor, you likely will not be eligible to file for unemployment as a business owner.

How Small Business Owners Can File for Unemployment

If you believe you qualify for unemployment benefits, you may want to start by visiting your state’s Employment Development Department (EDD) website to review requirements and to start the application process.

You’ll likely need to have certain documents on hand, such as your driver’s license, Social Security card, and/or passport, and need to submit certain information, such as details on your last employer (that’s your company), the last week you worked, and your total gross earnings for the last week you worked.

You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. Some states may require you to have an interview with a representative from the EDD.

Once approved, you may need to verify whether you have looked for work or worked at all during a given pay period so your unemployment benefits can be accurately calculated.

What Kinds of Unemployment Benefits Can Business Owners Expect?

If you’re eligible for unemployment benefits as a business owner and your claim is approved, you’ll receive the benefits available in your state. Benefits can typically last anywhere from three to six months.

The actual amount of weekly unemployment benefits you’ll receive as a business owner will depend on where you live and your prior earnings. The maximum weekly benefit amount can range from $215 to $900-plus depending on the state where you file.

Once your benefits run out, you generally cannot file another claim until a year after your original claim.

Other Small Business Financial Relief Options

If you don’t qualify for unemployment benefits, but still need a solution to cover a gap in income until business picks up, there are a number of small business funding options to consider.

SBA Disaster Loans

The COVID Economic Injury Disaster Loan (EIDL) offered by the U.S. Small Business Administration (SBA) is no longer available. However, the SBA continues to offer traditional EIDL loans for business owners that have been affected by a natural disaster, such as a flood, drought, or hurricane. You can learn more on the SBA’s website.

Other SBA Loans and Grants

In addition to the EIDL program, the SBA offers many other loans to small businesses, such as the 7(a) loan program. SBA loans tend to offer the largest loan amounts and have the lowest interest of all your options.

In addition, the SBA offers a small number of grants to small businesses that do not have to be repaid.

Small Business Loans

You may qualify for a traditional small business loan from a bank, credit union, or online lender. Some require higher credit scores, while others have less stringent requirements, though may offer less favorable terms. You may also be able to get a personal loan while unemployed.

Recommended: What to Know About Short-Term Business Loans

Emergency Funding Options

If your revenues and credit scores are down, you may be limited to applying for higher-interest options, like a merchant cash advance.

Even if you have to pay higher interest, an emergency business loan could ensure you have the money you need to pay yourself and your business expenses until you once again have a successful small business, especially if you don’t qualify for unemployment.

Business Insurance Policies

Business insurance helps protect your business’ financial assets should you face an unfortunate (and costly) event, such as a lawsuit, property damage, theft, loss of income, and employee injuries or illnesses. A general business owners policy (BOP) typically includes:

•  General liability insurance

•  Commercial property insurance

•  Business interruption insurance (which helps you recover lost business income if your business is unable to open because of a problem such as a fire)

Crowdfunding

Crowdfunding is the use of small amounts of capital from a large number of individuals (a.k.a., the “crowd”) to finance your business. If you opt for reward-based crowdfunding, investors receive a reward for investing and you get to keep ownership of your business. To go this route, you typically have to create a campaign on a crowdfunding site that gets people excited about your business.

The Takeaway

Whether or not you can file for unemployment as a business owner generally depends on whether you get a regular paycheck from your company and pay unemployment taxes. It can be a good idea to check in with your state, since these benefits are administered at the state level. If you don’t qualify, there are other ways to help keep your business afloat during a slump.

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.

FAQ

Can small business owners file for unemployment?

It depends. Generally, a business owner will only qualify for unemployment benefits if they have been paying themselves as a W-2 employee.

How can small business owners apply for unemployment?

If you think you may qualify for unemployment benefits as a small business owner, you can start by going to your state’s Employment Development Department (EDD) website to review requirements and to start the application process.

To apply, you will generally need your driver’s license, Social Security card or passport, details on your last employer (your company), the last week you worked, and total gross earnings for that week.

You may also need to provide information on any other employers you have had over the past 18 months, as well as your net income. In some states, you may need to have an interview with a representative from the EDD.

Are unemployment benefits for business owners different from employees?

No. If you qualify for unemployment benefits as a business owner, you will have access to the same unemployment benefits as any other eligible applicant in your state.

Photo credit: iStock/andresr

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The 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.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSB-Q224-1883354-V1

Small business loans can be used for 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-loan lenders may place restrictions on what you can and can’t use the loan proceeds for.

Let’s look at both what a business loan can be used for and what it can’t.

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.

Luckily, a small business loan can be used for any of the daily operations of 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 is also considered equipment, and you can use a loan to pay for it.

There are small business 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

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 space, for example. 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.

Debt refinancing is 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.

Recommended: Types of Business Loan Fees

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

You will have trouble establishing your business if you can’t attract customers. Marketing will help you get the word out about your business and gain customers.

Branding, sales, and engagement are all enhanced through marketing. Funding a well-planned campaign with the use of a small business loan can make a big difference.

8. Business Expansion

Many loans are intended for helping a business grow. It could be more staff, more inventory, or more products offered. Some small business loans can even be used to help you purchase a second 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.

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 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. 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 of thousands. Most new entrepreneurs don’t have that kind of cash lying around, which is 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 (for example, maybe you don’t need that $5,000 espresso machine in the break room just yet).

Recommended: Equipment Financing for Bad Credit

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 no-no is typically personal expenses.

What Counts as a Personal Expense?

Below are three scenarios in which a business loan can not be used for.

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 is a whole procedure of its own.

Using a Business Loan to Pay Off Personal Debt

Business loans cannot be used to pay off personal debt, including credit cards, mortgages, student loans, and more.

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.

Recommended: Business Loan Down Payment

Reasons to Get a Business Loan

First, taking out a small business loan may provide your business with more opportunities. 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.

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 need to shop around to find one that will work 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.

FAQ

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

No, for tax reasons and other reasons. Paying off personal debt with a business loan is against the rules if you’re getting a loan through the Small Business Administration, and other lenders frown on this to the extent that if a lender finds out about a business owner using a business line of credit for personal use, they will 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 is allowable. You cannot 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: start-up, expansion, equipment purchases, working capital, inventory, or commercial real estate purchases.

Photo credit: iStock/panida wijitpanya

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The 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.


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.

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If you’re a small business owner, you’ve likely put time and effort into building your business credit. Unfortunately, negative information can land on your business credit report through absolutely no fault of your own. This could be due to honest mistakes (even typos) or, worst-case scenario, fraud or identity theft.

To make sure your business credit reports accurately reflect your company’s financial activity, it can be a good idea to regularly check your reports from the three commercial reporting agencies (Experian®, Equifax®, and Dun & Bradstreet®) and, should you find any inaccuracies, dispute them as soon as possible.

Read on to learn how to get copies of your business credit reports, what to look for when you do, and how to dispute any misinformation you find.

Do Credit Reporting Agencies Make Mistakes?

Like consumer credit reporting agencies, business credit reporting agencies do sometimes make mistakes. In some cases, it’s a mistake they’ve made (such as misspelling your name or address); in others, the incorrect information comes from a creditor, vendor, or supplier reporting activity for you.

You might see an account you’ve closed still appears, or an outdated balance.

Or you might see an account that doesn’t belong to you. This can happen if a credit bureau mixes up your business name with a similar one and adds data for that business to your report.

An unfamiliar account can also be a sign of identity theft, which, unfortunately, is not uncommon for businesses.

One reason is that the business credit bureaus are allowed to sell business credit reports to anyone willing to pay for them. Information about your business may also be publicly available via your Secretary of State’s website. Thus, it’s not hard for a fraudster to get hold of your company’s information (such as EIN, business name, and address), and then use it to open accounts in the name of your business.

How to Check Your Business Credit Report

To check your business credit, follow these three simple steps.

1. Get Copies of Your Business Reports

To do this, you’ll need to create accounts with each of the business credit bureaus: Experian, Equifax, and Dun & Bradstreet. Unlike consumers, businesses are not entitled to a free credit report once every 12 months. As a result, each bureau will likely charge a fee for getting a copy of your business credit report. You may also have the option of signing up for business credit monitoring that includes unlimited access to your scores.

(One caveat: If you were turned down for a loan, you may be eligible for a free credit report.)

2. Review Each Report Carefully

Make sure your business and personal details are correct; even a misspelled last name can cause issues when applying for credit.

Also, review any debts listed. Make sure only active accounts appear, and that balances are accurate (or close to it; they may take a month or so to update).

3. Dispute Incorrect Information

If you see any errors or indications of fraud on your business credit reports when you review them, you’ll need to notify each commercial credit bureau that is reporting the incorrect data about your company. Below, we detail how to dispute errors with each of the three commercial credit bureaus.

Recommended: Personal Business Loans: Risks, Appeals, and Alternatives

How To Dispute a Credit Score

Correcting business credit report mistakes isn’t complicated, but each credit bureau has a slightly different process.

Experian

Here’s the process to file an Experian business credit report dispute.

If you’re logged into your Experian business credit report, there’s a “Submit Data Dispute” button at the bottom of the report. Use it to report the discrepancy.

Alternatively, you can send an email to BusinessDisputes@Experian.com. Include a note mentioning what the discrepancy is and how it should be updated. It may take 30 days or less, unless the investigation is complex. You’ll be notified once the report is updated via email, and you will get a free business report so that you can confirm the updates.

If you don’t need to report an error but want to update business details like business name, address, number of employees, or executives, you can visit BusinessCreditFacts.com and click “Update my Report” on the right. Search for your business and select it, then update the information in the following form.

Equifax

To file an Equifax business credit report dispute, you can use the data dispute request form at the bottom of your report, or you can email ExperianHelpdesk@SmartBusinessReports.com.

Dun & Bradstreet

If you need to make updates on your Dun & Bradstreet report information, such as business name, address, or leadership, you can file it here.

If you want to dispute something on the report, call customer service at 800-463-6362 to report the error.

Recommended: Business vs. Personal Loans

Why Disputing Business Credit Reports Can Be Worthwhile

Why does it matter if there are discrepancies on your business credit reports? If you plan on applying for business loans, either soon or down the road, these errors may prevent you from qualifying for many business loan types.

If there’s an error on your report where the credit bureau confused your business with one of a similar name, and that business has a lot of debt. Your credit report indicates that you have a high level of debt, which may cause lenders to not want to lend to you. That, or they may charge higher interest than they would otherwise.

If your report is missing details on a trade account you opened with the goal of building your credit, you’ll lose the opportunity for your positive payment history to impact your credit.

Even if a mistake appears minor, like the wrong number of years in business or an incorrect industry code, it’s worth getting it corrected. If your company is classified as belonging to a riskier industry type or younger than it really is, it could negatively impact your business credit scores.

Low business credit can not only negatively affect financing opportunities but also lead to higher insurance premiums and difficulty securing leases for equipment, office space, or retail space.

Recommended: How Blanket Liens Work

Should You Ever Not Dispute a Credit Score Error?

There’s really no reason not to dispute a credit report or credit score error, even if it may be a hassle to do so. Something as simple as your name being misspelled can mean that any accounts you open under your actual name aren’t reflected on the correct report.

When comparing business credit vs personal credit, it is equally important to monitor your business credit as it is to monitor your personal credit, since it impacts your ability to get financing for your business.

Take the time to review your credit reports and report any errors so that your financial opportunities don’t suffer.

The Takeaway

Your business credit report can play a large role in small business loan applications and other types of financing, which is why it’s important to pay attention and actively manage your scores. Any mistakes can damage your credit and make you look less reliable in the eyes of a lender or creditor.

However, your credit scores are just one part of your business’s financial profile. Lenders will typically look at multiple factors — from your annual revenues to your business plan — when you apply for a loan. Plus, there are many different types of small business loans available, so even if your credit scores aren’t excellent, you will likely still have options.

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.

FAQ

Is it worth disputing a business credit report?

Yes. Disputing errors on your business credit report can ensure it accurately reflects your financial activity and may, in turn, help you qualify for better financing offers.

Can you remove negative items from your business credit report?

You can dispute errors and inaccurate information on your business credit report and get them removed. However, you can’t remove negative items that belong there, like liens or bankruptcies.

Photo credit: iStock/Andrii Zastrozhnov

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The 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.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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