Getting approved for the business loan you applied for could be the breakthrough opportunity for you to take your business to the next level.
But you have to spend your business loan wisely or you’ll find yourself scampering for ways to pay off your loan when it becomes due, and yet wondering how and where you spent the loan proceeds.
There are different kinds of business loans and they also have varying payment terms and interest rates. Business loan rates are pegged on bank interest rates. The explanation in this article on how bank interest rates affect business loans best describes it.
If you’re looking for ways to spend your business loan, here are some tips which you might find helpful.
1. Plan How To Spend And Pay For The Loan
You have to remember that the lump sum cash you received from your business loan is borrowed money, which would cost your business something in the way of interest rate.
At some point in time, several months or maybe years down the road, you’ll have to pay for the loan when it becomes due. Depending on your loan terms, you might have to pay for the interest every month and perhaps a portion of the principal amount too.
If you can keep this in mind, then you’d certainly know that you should spend your business loan on things that can help you eventually pay out the principal debt plus the interest you’d be incurring, when the loan ultimately becomes due.
Even before you touch the money from your business loan, you should have a clear, concrete, and detailed plan of how you’re going to spend the amount you borrowed, including the items that should make up your priorities.
2. Use A Separate Account For The Loan
Once you’ve figured and planned out how you’re going to spend the business loan you received, you should also set up something that would help you implement your plan.
For example, separate bank accounts for your business loan. That way, you won’t mix and commingle the business loan proceeds with your regular budget for business operations. This will help you track your cash flow and how you’re spending your business loan.
Another purpose of keeping a separate account for your business loan proceeds is that you can also use this separate account to deposit and save the monthly amortizations for the interest rate, as well as the principal amortizations.
Once you’re able to generate enough revenue and income from your additional investments, you should set aside the monthly payments for your business loan. This will help you maintain financial discipline in paying off the loan.
3. Buy More Inventory
Knowing that you’ll have to pay off the business loan someday, and with interest at that, you should make it your priority to spend your business loan primarily on potential investments that would eventually generate revenue and cash for your business.
Since the business loan is borrowed money, it would certainly be wise to spend it on something that can generate enough cash for you to pay off the whole principal loan plus the interest, and hopefully, some extra cash that you can reinvest in your business and even cover for operational expenses.
Whether you’re a brick-and-mortar or an online e-commerce business, the typical way to do this is to buy more stocks for your inventory. If you’re a restaurant owner, you can spend your restaurant business loan on delivery vehicles since a lot of diners have shifted to online orders these days.
If you’re a self-employed individual offering cleaning services, you can spend it on additional equipment and supplies such as cleaning machines and detergents. Or you can spend it on power tools and equipment if you’re a self-employed home builder.
4. Acquire Revenue-Generating Assets
The basic idea is that you should spend your business loan on assets that can immediately generate revenues for your business in the short term. Since most of these small business loans are short- to medium-term loans with maturities from three to five years at most, then you shouldn’t spend it on long-term investments. Don’t use it to buy land, for instance, unless you’re in the real estate buy-and-sell business, because land properties are a long-term investment.
The key principle here is that you should spend it on assets that can generate revenues for your business in the short- to medium-term. As much as possible, spend it on assets that have a direct and immediate impact on the capacity of your business to generate more revenue sources and earn higher profits. In any business, only assets can generate revenues, so it’s only wise to spend on revenue-generating assets instead.
Buy More Cows
Think of this analogy before spending your business loan: in farming, you buy more cows and not more grazing land. The new cows can yield more milk which you can bottle and sell in the market. But new grazing land will have to wait for new or more cows before they can generate any cash for you.