Starting and growing a business often requires infusions of capital to turn goals into reality. You may need funds to open a new location, expand your product line, purchase essential equipment, or bridge cash flow gaps. But what financing option is best when you need a serious capital injection into your small business?
Business purpose loans allow entrepreneurs to access lump-sum financing to make major business investments. With flexible loan amounts and repayment terms tailored to your needs, business-purpose loans provide an affordable way to gain financial runway.
What is a Business Purpose Loan?
A business purpose loan is a type of financing used for business needs other than purchasing real estate. The funds can be used for various things like:
- Buying equipment
- Purchasing inventory
- Expanding facilities
- Marketing and advertising
- Hiring employees
- Managing cash flow
- Refinancing business debt
Essentially, if you need capital to grow your business, a business purpose loan allows you to borrow money and structure repayment terms suited to your needs.
What is an example of a business-purpose loan?
Here are some examples of how business purpose loans can be used:
- Buying new equipment – A loan to purchase machines, vehicles, hardware, etc. to upgrade operations.
- Opening a new location – A loan provides capital to open a new retail store, office, or facility.
- Expanding facilities – Loans finance physical expansions like adding warehouse space.
- Marketing campaigns – Borrowing to fund a major marketing push like TV/radio ads.
- Developing new products – Loans provide working capital for R&D and launching new products.
- Hiring staff – A loan can fund hiring additional employees to grow the team.
- Purchasing inventory – Getting capital to buy more raw materials or products to sell.
- Bridge cash flow gap – Loans maintain smooth business operations during financial slow periods.
- Consolidating debt – Combining multiple debts into one through a consolidation loan.
- Refinancing – Taking out new financing with better terms to replace existing loans.
- Acquiring new equipment – Loans to purchase vehicles, computers, machinery, tools.
- Renovations – Borrowing to fund office remodels, facility upgrades, and retail space improvements.
What is the purpose of a loan?
The main purpose of a loan is to provide financing for major expenses or purchases. Here are some of the key reasons businesses and individuals seek loans:
- To purchase large assets – Loans allow you to buy expensive assets like equipment, vehicles, and machinery that would otherwise require large upfront capital.
- Real estate financing – Loans are commonly used for purchasing commercial real estate or residential property.
- Business expansion – Loans provide funding for things like opening a new location, hiring more staff, and ramping up inventory/operations.
- Cash flow management – Loans give access to capital to smooth out financial gaps and keep businesses running.
- Large purchases – Loans finance major business purchases like materials, supplies, and inventory that would strain cash reserves.
- Debt consolidation – Borrowers can combine multiple debts into one through consolidation loans and get lower rates.
- Emergency expenses – Loans provide funds to handle unexpected business issues or repairs needing immediate financing.
- Special projects – Loans can fund one-off big projects like marketing campaigns, overhauls, and events requiring capital infusion.
- Taxes – Loans allow businesses to pay taxes, especially quarterly/annual taxes that require larger payments.
Benefits of Business Purpose Loans
Business purpose loans offer several advantages over other financing options:
- Flexibility – You have flexibility in how you use the loan funds, beyond just real estate. The loans are not tied to a specific purchase.
- Competitive rates – Business-purpose loans often have lower interest rates than credit cards or merchant cash advances. Rates are also often fixed so they don’t fluctuate.
- Long repayment terms – You can often get 1-25 year repayment terms, which lowers monthly payments.
- No collateral required – Secured loans require collateral, but many business-purpose loans are unsecured. This gives financing flexibility.
- Predictable payments – Fixed monthly payments help forecast cash flow and budgeting.
Where to Get a Business Purpose Loan
There are several options for obtaining a business purpose loan:
- Banks – Most major banks and community banks offer some form of business-purpose lending. Rates and terms vary.
- Online lenders – Online business loan providers like Fundbox, Credibly, and Kabbage offer quick approvals for small business loans.
- Credit unions – Many credit unions provide business-purpose loans with competitive rates to members.
- SBA loans – The SBA guarantees loans made by lenders for eligible small businesses. Great for those who qualify.
- Alternative lenders – Non-bank lenders provide financing options like merchant cash advances for businesses.
- Peer-to-peer lending – Borrow from individual investors via P2P lending platforms like LendingClub.
Shop around and compare options to find the best rates and repayment terms suited to your borrowing needs.
Qualifying for a Business Purpose Loan
Lenders look at several factors when evaluating a business purpose loan application:
- Time in business – Most require at least 1-2 years in business to qualify.
- Business revenue and cash flow – This helps assess the ability to repay the loan.
- Business and personal credit scores – Good credit means better chances of approval and lower rates.
- Collateral – For secured loans, collateral like equipment or accounts receivable may be required.
- Debt-to-income ratio – They analyze your existing debt obligations. Lower ratios are better.
Having organized financial records and a solid business plan will help demonstrate that you are prepared to take on financing.
How Much Can You Borrow with a Business Purpose Loan?
Loan amounts for business purpose financing can range quite a bit, often between $5,000 up to $5 million. The amount you can qualify to borrow will depend on factors like:
- Your time in business
- Credit score and history
- Revenue and cash flow
- The collateral you’re able to put up
For startups and newer businesses with less financial history, loan amounts may be smaller in the range of $20,000 to $50,000. More established businesses with strong revenues, profits, and credit can qualify for larger loans over $100,000 or more.
Talk with lenders to see what loan sizes you may be eligible for based on your specific business profile and financials.
Tips for Getting Approved
To boost your chances of getting approved, make sure to:
- Have 2+ years in business with steady revenue. This demonstrates stability.
- Maintain low debt-to-income ratios. Don’t take on too much-existing debt.
- Have good personal credit scores above 680.
- Put up collateral if possible. This lowers risk.
- Have organized tax returns, bank statements, and financial projections.
- Only apply for what you need and can comfortably repay.
With strong financials and preparation, you can present yourself as a low-risk investment worth approving.
Alternatives to Business Purpose Loans
If you need funds for your business but don’t qualify for a loan, some other options include:
- Credit cards – Good for small purchases but interest rates are high.
- Business lines of credit – Revolving credit lines to withdraw funds as needed.
- Merchant cash advances – Get an upfront lump sum in exchange for a percentage of sales.
- Equipment financing – Specific loans to finance large equipment purchases.
- Invoice factoring – Sell unpaid invoices to a lender at a discount to get capital.
- Angel investors – Get startup funding from high-net-worth individuals.
- Crowdfunding – Raise small amounts of capital from a large pool of contributors.
Depending on your specific needs, one of these alternative financing options may be a better fit. Evaluate all the options to determine the best way to secure funding.
Conclusion
With favorable rates, flexible terms, and relatively easy qualification, a business-purpose loan can provide an affordable way to access capital to take your business operations to the next level. Just make sure to find a lender that meets your needs and thoroughly understand the repayment terms before signing any loan agreements. With the right loan, you’ll gain the financial runway to help expand your small business.
