Bootstrapping, or covering start-up costs for a business without outside assistance, is one possible avenue for getting a company up and running — but many entrepreneurs with great ideas don’t have large lump sums sitting around ready to go. This is exactly why loans for small businesses remain a popular strategy for getting the funding required to become operational. However, this business credit line can also be useful at different points in a company’s lifecycle beyond the early days. Want to know more about making the most of a small business loan? Here are four effective uses.
Paying for Start-Up Costs
As we touched on above, one common use for a loan is to pay for start-up expenses for a new business. The U.S. Small Business Administration provides some key examples of such start-up costs: research, employees, technology and marketing — although there are many more to consider.
For instance, entrepreneurs opening a local shop have to think about securing the right commercial space, while those entering the eCommerce space will likely face costs related to inventory and website design. An important part of successfully starting a business is creating a highly personalized budget that anticipates to the dollar those essential start-up costs.
Raising Working Capital
Businesses of all types and ages depend on access to working capital— otherwise known as the money needed to pay for day-to-day operations. Small business owners may seek out loans from a bank or credit union to afford these necessary expenses until they are able to stay afloat using revenue alone.
You can calculate how much working capital your business has on hand at any given time by subtracting its current liabilities from its current assets. A negative number, or even a low positive number, maybe an indicator a business does not have the money it needs to comfortably afford immediate expenses. This is what drives some companies to bolster their bank account with a small business loan.
Purchasing & Upgrading Equipment
Imagine running your business solely using the “cutting-edge” technology released a decade ago. Although some types of equipment can withstand the test of time — up to a certain point, that is — other apparatuses need routine upgrades and replacements.
Certain small business loans permit the purchase of machinery and technology as the need arises, oftentimes at the start of the business and then again months or years down the line. Loans for small businesses may also cover the cost of more routine purchases along the way — an example would be buying not only a colour printer for your office but paper and ink a few times per year.
Investing in Personnel
Some people choose to run their business as a sole proprietorship, but others need teamwork to make the dream work. Many loans will cover costs related to hiring and training employees, as well as paying their hourly or salary earnings. If your business isn’t yet at the point where it’s ready to invest in full-time employees, you may be working with freelancers. Consider using the funds from a small business loan to meet payroll needs as your company grows.
We’ve covered just four of the many ways businesses put funds from a loan to work. However, it’s very important to apply for loans that specifically meet your funding needs. Many loans have specific terms outlining what they will and will not cover — and it’s your job as the leader to make sure you’re staying within the lines on those requirements. Knowing what you need the funds for — start-up costs, employee expenses, working capital, equipment purchases, etc. — will help you apply for the most fitting loans from banks, credit unions or online lenders.