As a business owner, taking out a loan may be a necessary step to ensure your company's growth and success. However, it is critical to use the loan wisely and avoid common pitfalls that could lead to financial difficulties in the future.
In this article, we'll look at the best ways to spend your business loans, such as how to prioritize your expenses, make strategic investments, and track your spending to stay on budget.
Types of Business Loans
But first, let’s list down the types of loans businesses can avail of.
- SBA loans. The Small Business Administration guarantees SBA loans. They have lower interest rates and longer repayment terms.
- Term loans. This entails receiving a lump sum of money that you will repay with interest over a set period of time.
- Equipment loans. This type of loan, as the name implies, is designed to assist you in purchasing the equipment you require for your business. The equipment serves as loan collateral.
- A business line of credit. This gives you access to money up to a certain amount. You only pay interest on money that you have withdrawn.
- Business credit cards. These are revolving credit lines. You can borrow and repay them as often as you like. They work best when used to fund ongoing expenses such as travel or utilities.
What to do
Make timely payments
Falling behind on loan payments will negatively impact your credit rating and future borrowing ability. Set up an autopay to ensure that payments do not fall through the cracks. Most lenders make it simple to set up automatic monthly payments for your loans, saving you the time required to sign checks or fill out payment slips. This not only removes something from your and your employees' monthly to-do lists, but it also gives you peace of mind because you never have to wonder if your loan is in good standing.
Manage your spending
In the past, you may have taken a more casual approach to tracking and approving purchases – perhaps your small business loan is your first chance to make large purchases. In any case, now is an excellent time to establish clear internal spending controls and procedures. For example, you can establish guidelines for any employees or business partners who have the authority to make business purchases. These rules may limit the types of supplies that employees can purchase on their own or set a dollar limit on any employee purchases.
Spend it on growth
You might need to finance new equipment or a real estate purchase. Or you need funds to hire more employees or to hire professional consultants to assist you in developing your business strategy. Or you plan to take your marketing efforts to the next level and use your business loan to revamp your paid media strategy. The ways you spend your money will vary depending on your industry and stage of business development. It is critical that you spend your money only on things that will help your business grow. Your lender and other investors will want to see that you're growing sustainably and making sound business decisions as you continue to pay off your loan. It will also help you make your case when it’s time to apply for another loan or line of credit.
What NOT to do
Mixing personal and business funds
Having a business protects you as an individual from any negative financial consequences of the business, and vice versa. One of the most basic ways to ensure this is to never mix business and personal funds. When you receive your loan, deposit it immediately into a business-specific bank account. If you have yet to open a business account, talk to your bank and they’d gladly assist you. A separate bank account is the best way to keep business and personal funds separate.
Losing track of your expenses
With a new infusion of capital, it may be tempting not to keep your balance sheet as closely as you did previously. After all, you have enough money to pay your bills. However, now is the time to pay close attention to your balance sheet in order to forecast your future. Once you've received your business loan, keep an eye on your balance sheet. It lists all of your current assets and liabilities and is one of the best ways to see your company's overall financial situation at a glance.
Taking out a business loan can be a great way to fund your company's growth, but it's important to use the funds wisely to avoid financial troubles down the road. Keep personal and business funds separate, make timely payments, and keep a close eye on your balance sheet. Your business can thrive and reach its full potential if you spend your funds wisely and manage your loan carefully.
This article was written by our guest blogger, Bash Sarmiento.