Small business owners using a loan to grow their business

Common Uses for Small Business Funding

10+ min read • Jan 11, 2020 • Andrew Mosteller

So it’s time to start investing in the growth of your business, but you’re unsure exactly how to start using that fancy new loan. To be frank, the possibilities are limitless, and they’re not all created equal. Where you choose to invest your money should be a function of a few key factors.

These factors include:

  • Your industry
  • The current state of your business
  • An understanding of urgent vs. important needs
  • The type of financing you have or are seeking 

Over the course of this guide, we’ll discuss each of these factors in detail, paying special attention to how different kinds of financing can have different applications in your investment practices. 

But first, It’s important to look at the financing landscape for small businesses, which goes hand-in-hand with understanding the current state of your business in the market.

Small Businesses Are Ready for Expansion

Small business owners of 2019 are hungry for expansion, and it shows in the numbers.

A recent study polled thousands of small business owners who overwhelmingly reported a strong financial finish to 2018. A majority of small businesses (57%) reported that their firms had experienced revenue growth in 2018, and more than 1/3 added employees to their payrolls.

The majority of small business owners predict fruitful growth in 2019, but fewer anticipate adding employees to their payroll, down to 38% from 43% in the prior year’s survey.

Demand for financing products held strong in 2018, with 43% of firms seeking loans and credit for their businesses. Unfortunately, 53% of firms that sought new funding obtained less money than they applied for. About half of all businesses (48%) had their financing needs satisfied, 23% had some shortfalls, and around 29% found themselves critically below the amount of financing their business needed to keep up with growth.

From the looks of things, small business owners are going strong but are unable to secure capital. In order to start investing business financing, it’s crucial to first get funded. This seems simple, but it’s a complicated reality for many business owners today.

Luckily, you’ve found us. Lendio specializes in connecting small businesses to the lending products they need to start investing in themselves. In the coming sections, we’ll discuss the most common investments that entrepreneurs make in their businesses and the way in which certain lending products can help you make those investments.

Investing in Yourself? Start Here

According to a recent survey, the biggest financial challenges facing small business owners today are:

  • Paying operating expenses (40%)
  • Making payments on debt (27%)
  • Purchasing inventory and supplies to fill contracts (17%)
  • Other financial challenges (9%)

The items mentioned above represent the bread and butter of small businesses. Covering operating expenses is a quintessential need for every business—got to keep the lights on, right? If your business is struggling in any way to stay financially operational, this should be your highest investment priority. 

This brings us to the idea of urgent vs. important. This idea is often expressed in a matrix, like the one below:

This matrix is incredibly useful in planning out your financial decisions. The logic of the matrix is simple—figure out the investments that are both important and urgent and do those first. Then, take the opportunities that are less urgent but still important and plan when to do them. 

Investments that are urgent but not important are kind of weird because they come in many shapes and sizes. Maybe you offer your employees a gym membership and you have to renew that service soon. For the employees who use the membership regularly, there’s an urgency to getting it renewed. But renewing such a membership is not particularly business-critical. 

If you are low on funds, you’d probably choose to eliminate the gym membership. On the other hand, if you know you have enough dough to keep providing the service, it’s worth renewing, but probably not worth your time as a business owner to go through the renewal process. In that case, it’s wise to delegate renewing memberships to a trusted associate or employee. 

Investments that are neither urgent nor important should be eliminated. However, the biggest financial challenges facing small business owners are an absolutely critical investment. Operating expenses, paying off old debt, and purchasing inventory for your contracts are no-brainers.  

There is, however, a nuance to making financial decisions once you’ve secured certain types of financing. Purchasing inventory is a broad idea that can be drilled down into something more specific, like using an equipment loan to buy a new milkshake maker.

Discovering the specific investments your company needs requires you to bring your expertise to bear on making financial decisions.

The State of Your Business and Industry

The nuance required to make the right investment decision is largely tied to how well you know your industry and your business’s position in that industry. If, for example, you are a bargain sneaker company that specializes in selling name-brand quality sneakers at a low price, it’s probably not a good idea to roll out a premium sneaker line at the price point of other premium name-brand sneakers. 

But maybe you’ve noticed a large portion of your customers has expressed an interest in a more premium sneaker—a shoe that sets them apart as truly brand loyal to your small business. In that case, a premium line might be a good idea. 

It all depends on your expert knowledge of your industry, customers, and marketing position. As you plan your investments, it’s worthwhile to do a detailed analysis of these factors. This analysis will help you focus your investments into the urgent and important category. 

If you’re a little overwhelmed by the idea of diving into market research, there’s no need to worry. Plenty of digital tools are at your disposal to make market research affordable. 

Investment Depends on Loan Types

Now that you’re ready to conquer your industry, it’s time to examine how different financing options can help you accomplish your investment goals.

In the digital age, there are many options available to you. The default small business bank loan is a dated staple of small business financing, but its popularity is waning as new financial technologies enter the market.

Using a Traditional Loan

If you are thinking of applying for a bank loan, bear in mind that traditional lenders commonly have strict credit requirements. Small business loans and term loans from traditional lenders usually require a business to have a fairly high credit score even to consider the application. That’s important to know because most applications for traditional loans take around 29 hours to complete.

On top of that, there’s an 80% denial rate on applications. This means that 80% who think they have a chance to qualify for a traditional loan don’t ever see the money in their bank account. It’s a little depressing, but mostly it’s a function of increased regulation on banks after the 2008 financial crisis. 

The regulations made it harder for banks to justify lending to entrepreneurs because small business loans are usually riskier and for lower amounts. But that doesn’t mean you can’t get one. 

If you do get a small business loan from a bank, it may come with some restrictions on how the loan can be used. The key thing is to check your loan agreement. If the agreement specifies a particular kind of use for the loan money, then stick to that use. Any deviation from the agreed use of the loan may cause the lender to end the agreement and demand that you return the money immediately. 

Once you are aware of the terms of loan usage, it’s time to decide how exactly to use the money. If you’ve followed the steps for determining which investments are best for your business, the important and urgent investments are where you should start.

Now let’s get to the good stuff.

Using a Lending Marketplace

We’re obviously a bit biased towards lending marketplaces, but that’s only because they’re awesome (and because we are one). That said, the lending marketplace will easily enable you to start investing in your business. At the very least, it has these 3 things going for it:

  • The application process is shorter than an episode of Seinfeld (or SpongeBob for 90’s kids)
  • The loans are designed around the needs of small businesses—including those with poor credit
  • The number of options available to your business is staggering

Why waste your time with hours of mindless paperwork when a single online application can match your business with financing options from a variety of lenders?

At Lendio, our application takes only 15 minutes to complete, and applicants tend to see between 60 and 70% approval rates. You’ll be wasting less time for a much better chance of getting financed.

Also, it’s common to start receiving approvals for loans within the first 24 hours of applying, getting you the cash you need when you’re in a bind.

Almost 80% of small business owners who secured funding through online lending reported satisfaction with both the simpler application process and the shorter wait for a credit decision. Compare that to just half of traditional bank borrowers who report satisfaction. 

Here’s the best part: the loan products are better tailored to help you reach your financing goals. Let’s break it down.

Merchant Cash Advance

Amazon may boast 2-day shipping, but a merchant cash advance (MCA) puts money in your account in as little as 24 hours. The requirements for this type of financing are relatively lenient due to the nature and terms of the loan.

In most cases, there won’t be a credit pull. Your lender will simply want to review your past 4–6 months of bank statements or receivables.

A merchant cash advance enables you to leverage your future earnings for convenient access to money. Once the funds are advanced to you, you’ll repay the loan by having a percentage of your daily credit card deposits withheld for the lender.

A merchant cash advance is the preferred option for many businesses that need fast access to capital. Most businesses aren’t ready for the unexpected, which is where a merchant cash advance comes in handy. It’s financing that comes in clutch right when you need it.

Because of the nature of the loan, merchant cash advance funds should be focused on expansion. You will only be able to fulfill the agreement if you’re increasing an already-existing stream of revenue. Most MCAs are used as an influx to fund new hires, branch expansion, or other ambitious projects.

Many businesses choose to boost employee training or to put some extra shine on a previously successful marketing campaign. 

Equipment Loan

Equipment has inherent value that makes it a worthwhile investment for lenders. This financing will help you get that shiny new toy you’ve had your eye on for months.

Common equipment purchases include:

  • Business telephone system
  • Computers
  • Computer network and internet connection
  • Multifunction printer
  • Smartphone
  • Shredder
  • Mailing equipment
  • Servers
  • Office security systems
  • Forklifts and warehouse equipment
  • Projectors and audiovisual equipment

While these types of purchases are fairly commonplace for many offices, there are likely certain kinds of equipment made especially for your business. For an indie record label, this could include a large mixer board, synthesizers, or drum machines. For a smoothie shack, maybe a high-powered blender would streamline your workflow. 

The bottom line is this: when you choose an equipment loan, you’re also choosing to invest in some workflow-improving thingamajig. Regardless, always run your purchase decisions through the urgent-important matrix to make sure you’re not spending a lot of money on less-useful equipment. 

Business Line of Credit

If you’re looking for a highly flexible financing option, a line of credit is right up your alley.

A line of credit acts as a financial safety net for your business. You have it available for when the need arises, but you’re not obliged to use it—there’s no penalty for not using it. And when you do tap into the money, it can be used for almost any business need you can dream up. Plus, you only ever pay interest on the money you use, so there’s absolutely no penalty for letting the money sit around for a bit. 

So how exactly can you use a line of credit?

Lines of credit are very flexible and can be used for most business investments and expenditures. Popular uses include buying equipment, hiring staff, increasing inventory, adding a second location, paying invoices, installing a new employee refrigerator, and more.

And because lines of credit are revolving, you can use them as many times as you want. When you repay the funds, they’re immediately available again. Thus, a line of credit is like a loan that keeps on giving.

Lines of credit range from $1,000 to $500,000 of approved funds for your use and can be approved in as little as a week with interest rates starting at 8%.

Using Other Loan Types

The options described in detail above are but a handful of offerings available from a lending marketplace. Some honorable mentions include:

1. Business Term Loan

The business term loan is a classic among entrepreneurs. Loan amounts vary from $5,000 up to $2,000,000, and you’ll often get the cash within a few days of approval. The term of the loan is from 1 to 5 years, and the interest rates usually start around 6%.

2. Short Term Loan

Short term loans are lightning-fast, getting you money in as little as 24 hours. The amounts range between $2,500 and $500,000 and have interest rates that start at 8%. Because these loans can be approved so quickly, they’re perfect for when your business needs fast cash. The term of the loan is between 1 and 3 years.

3. Miscellaneous Financing

You can also look into crowdfunding and venture capital financing, but those avenues come with their own unique restrictions on what you can and can’t invest your funds in. Crowdfunding, for example, should mostly be used for production costs as consumers expect a product.

In the end, how you choose to spend your money is mostly dependant on your expert analysis of your business needs. The best investments are urgent and impactful. Always avoid investments that have little-to-no immediate or long-term impact on profit growth. Investments that center on the growth and development of your profits and operations are generally a safe bet. 

But it’s all up to you now. Get started today.

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Andrew Mosteller

Andrew Mosteller is a freelance writer and regular contributor to Lendio News. His upbringing in an entrepreneurial family nurtured a passion for small business at a young age. Andrew's father, an equity fund manager, taught him the ins and outs of investment financing. Now, Andrew spends his time writing copy for business owners, helping them expand and advertise their unique brands. He's also studying Strategic Communications at the University of Utah. When Andrew's fingers aren't glued to the keyboard, he spends his time reading, podcasting, composing music, and bombing down the ski slopes.