What is the Purpose of a Small Business Loan?


It can require a considerable amount of capital to start and maintain a company. Most business owners don’t have that kind of money lying around. They obtain small business loans with the ultimate goal of boosting profits and then plan on paying back the loan once revenue starts rolling in.

Small business loans are offered through credit unions, alternative and online lenders, public funds, or private investors and often use accounts receivable or inventory as collateral. Historically, small business loans were only offered through established banks, which necessitate high qualifications and lengthy approval processes—barriers to funding for many applicants.

In October 2020, the Federal Reserve modified its Main Street Lending Program, reducing fees and lowering the amount small businesses could borrow from $250,000 to $100,000. To incentivize banks into lending, the Feds allowed for banks to collect higher fees on these loans.

Because of this change, a loan (if you can get one) can wind up being rather pricey due to the associated fees and interest. Despite this, there are reasons many firm owners attempt the application process. Continue reading to discover more about the purpose of a small business loan and the ways it can be used.

Ways to Use a Small Business Loan

The purpose of a small business loan can vary for each applicant, depending on their needs. Examples include:

  • Purchasing inventory
  • Buying equipment
  • Being prepared for new business opportunities
  • Expanding operations
  • Obtaining working capital

Purchasing Inventory

One of the most significant expenses for most small businesses is inventory. Keeping up with demand necessitates replenishing your stock with a substantial number of high-quality options. This can be challenging when inventory purchases need to be made prior to seeing sales revenue.

Small business loans are often received from banks with whom the company already has a trustworthy relationship. Having a positive checking or savings account balance and making payments on time are good ways to engender trust with the bank.

Because of their seasonal nature, loans to purchase inventory are typically short-term. Seasonal businesses (including agricultural, hospitality, and retail) earn most of their sales throughout the holiday season and use the money to purchase inventory in advance and then pay off the loan with sales proceeds when the season ends.

Buying Equipment

Buying equipment that can boost your company’s offerings is usually considered an easy choice for financing. You require IT equipment, tools, and specific machinery to help perform your service or create your product.

Small business owners can either lease or buy their equipment. If you obtain a loan to buy your equipment, you can write off up to $25,000 the initial year and then depreciate the rest of it over its financial life. Additionally, the equipment itself can sometimes serve as loan collateral.

When financial institutions extend equipment loans, they are generally intermediate-term loans paid back in monthly installments. They run for less than three years.

A Sudden Business Opportunity

There are times when a business opportunity arises that is too good to miss — for example, a good deal on more retail space or purchasing inventory in bulk at a discount. For these purposes, a small business loan may be risky, though if you do your homework you’ll know if the potential investment return outweighs the debt.

You’ll need to be careful when calculating the loan’s total cost versus the income you think you can earn through the opportunity. When deciding on the advantages and disadvantages, it can help to forecast revenue and growth to ensure you rely on concrete numbers rather than “guesstimating.”

Expanding Operations

It’s great news when you outgrow your office location or have too many customers for your tiny retail space; it means business is booming. Yet, just because things are going well doesn’t mean you have the working capital to expand your operations.

However, banks are more likely to lend funds to established companies with climbing cash flow and a positive revenue forecast. These business bank loans are typically in the form of a 3 to 25-year mortgage. These types of long-term bank loans require a quarterly or monthly payment from your firm’s cash flow or profits, and the bank will utilize your company assets for collateral.

Working Capital

Business owners use working capital to sustain day-to-day business operations. You might consider taking out a small business loan to fulfill operational costs until your earnings reach a particular amount.

A working capital loan will depend on you having a solid business plan and good credit. However, this form of short-term funding may have a higher interest rate than real estate or other kinds of loans because financial institutions regard them as riskier.

Take the Revenued PPP Survey

Small business loans serve a real purpose for solvent company owners with decent credit; however, if your finances were adversely affected by the pandemic, you will likely be pressed to seek other funding opportunities.

In December 2020, Congress passed the $2.3 trillion Consolidated Appropriations Act, allowing for PPP-funded expenses to be tax-deductible and expanding the ways business owners can use the money.

We at Revenued ask you to please take a few minutes to fill out our online PPP Survey. Information gathered from this survey will allow us to:

  • Gain better insight into how the pandemic shutdown may have affected your business
  • Refine our online PPP loan application process during the next funding round
  • Discern how effective the PPP was at helping your business and how it could be improved

Armed with this information, our team of customer service representatives will be better able to serve you to ensure your company is funded as rapidly as possible.

Join our email list for the latest information regarding the newest round of PPP funding and any additional COVID-19 funding programs.

Apply for the PPP through Revenued here
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