Unless you've aggressively saved money to bootstrap your business, you'll likely need to borrow money at some point to make ends meet, whether it's a formal loan through a bank or online lender or an informal one from family and friends.
Regardless of the amount or source of your loan, it can be tempting to make those big "nice to have" purchases when the money hits your bank account. However, it's important to plan your spending carefully and allocate borrowed funds toward expenses that will ultimately accelerate your business's growth.
We spoke with small business lending experts about smart ways to put business capital to work. [Once you've secured your loan, spend smart and manage your finances with these tips.]
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1. Equipment and operational costs
When you're just starting out, you may not necessarily have the funds for all the basic elements your business needs to function. Jay DesMarteau, head of commercial bank specialty segments at TD Bank, said early-stage businesses will often use their funds for operational necessities such as buying inventory and building products.
"We are also seeing higher demand for lines of credit, which typically are used to finance short-term needs, such as buying or leasing equipment, purchasing a company vehicle or injecting cash into the business during a lean period, especially seasonal businesses," DesMarteau added.
2. Payroll and hiring
A company is only as strong as the people behind it, and investing your new loan funds in hiring can be a great way to help your business grow.
"True growth means spending funds to add employees who can take over some tasks such as bookkeeping or ordering supplies and help support the daily functions," said DesMarteau. "This will allow the business owner to better focus on long-term strategy and driving profitable revenue growth."
Isaac Rodriguez, CEO of Provident Loan Society, notes that as a not-for-profit collateral lender, most of his organization's loans are made for short-term expenses such as meeting payroll.
3. Soft costs
"Soft" costs, as opposed to "hard" physical assets or products, are those expenses that don't directly help create a product or provide a service but are necessary to keep your business functioning. This includes things like licenses, marketing campaigns and professional fees, said Rodriguez. This could also cover fees for advisors like CPAs, attorneys and bankers.
"Maximize the use of capital," Rodriguez told Business News Daily. "For example, don’t just pay legal fees and get tax returns done – explore how those professionals can help grow your business through referrals, recommendations, introductions, etc."
From mom and pop shops to software startups, technology plays an integral role for most modern businesses. Even businesses that aren't focused on a tech product may still need to invest in hardware and software to make their daily operations more efficient.
David Reiling, CEO of Minnesota-based Sunrise Banks, confirmed this trend, noting that many of the bank's small business customers now use their borrowed capital for technology purchases.
"Traditionally, businesses come to us when they need to expand, whether they have outgrown their space, are increasing their production capabilities, or [are] adding staff," Reiling told Business News Daily. "Recently, there has been a change, with a large number of businesses investing in their technology infrastructure to keep pace with growing digitalization."
Choosing a lender
If you're still deciding where to apply for a business loan, you've got your work cut out for you: There are a lot of options, and it's important to find a lender that works for your unique business needs.
A good place to start is the traditional bank. DesMarteau noted that banks are a great source of free advice for small business owners.
"A knowledgeable small business banker can give input on the business plan and provide a clear outline of the products and services available," he said. "Banks also can help businesses better understand what is needed to obtain financing. For example, according to a recent survey from TD Bank, 69 percent of small business owners either believe they do not have a business credit score or believe that business credit scores do not exist. Working directly with a local bank can help small business owners understand the process and requirements for obtaining a line of credit."
Bigger national banks aren't your only option, either: Reiling noted that small-scale, local banks are more aware of the needs of their community and, in turn, the small businesses that operate there. Therefore, they're able to strategically invest in these businesses to fill the needs of the community and amplify the impact each small business can have.
"Our lenders are able to build a closer relationship with each client and get to know their unique needs and goals," he said. "This close relationship allows us to advise and support each business to fit their unique needs, rather than give blanket advice. Our lenders are not only working to provide funding, they act as guides to a small business as businesses navigate their growth."
Of course, an alternative lender may be a better option if you want an even smaller loan or if you don't qualify for a traditional bank loan. For help choosing the right business loan for you, visit our guide.