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.
SOSB-Q224-1871681-V1