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Key takeaways
- Business loans can support revenue generation, offering financing for various growth opportunities.
- Examples include purchasing equipment that increases capacity, expanding to new markets and funding advertising efforts.
- Calculate the potential return on investment before taking on business debt to use it strategically.
Business loans have various purposes, from bridging cash-flow gaps to buying real estate. Using a loan strategically can boost your business revenue directly and indirectly. It can help you finance revenue-generating purchases—such as more efficient production equipment—or build business credit to make you a better candidate for future funding. Do the math on the potential benefits before taking on debt.
How to use a small-business loan
A small-business loan is versatile. It can help you smooth cash flow, finance renovations or access capital for expansion.
“Like most financial tools, it can be wonderful if used appropriately,” says Brian Eder, CFP, managing partner and private wealth adviser at OnePoint BFG Wealth Partners.
There are many ways a business loan can grow your revenue. Eder explains that it’s about doing the math for your company.
“If you can borrow at one cost and grow at a clip that exceeds that cost, those are great opportunities to use debt to grow,” he says. “You can run a calculus on the required return on investment and use debt intelligently.”
1. Consolidate high-interest debt
High-interest debt can strain your business’s budget. Consolidating your existing debts into a lower-interest loan might not increase revenue directly, but it can free up funds for other expenses.
A debt consolidation loan streamlines multiple payments into one and might reduce your rate. Approach consolidation carefully and consider the borrowing cost. A new loan with a longer term could increase total interest.
2. Invest in better equipment
New equipment might be expensive, but a business loan can finance the purchase. Investing in more effective tools might increase production and revenue in tandem.
Prioritize equipment that increases your capacity instead of upgrading for modernization’s sake.
“New equipment might have a longer useful life and some efficiencies, but, ultimately, if it's a good use of debt, it should increase your capacity to some degree,” Eder says.
3. Buy inventory in bulk
Buying inventory in bulk is typically less expensive, but it requires more upfront capital. A business loan can provide the funds you need. Affordable inventory and reduced shipping rates can increase your profit margin directly. Remember to factor in interest and other borrowing costs to ensure a net gain.
4. Expand into new markets or locations
Expansion is an exciting prospect with revenue growth potential. Business loans can cover associated expenses, such as buying inventory or equipment, hiring staff or acquiring real estate.
Plan carefully to mitigate risk.
“The biggest thing when you're considering expansion is not just following your gut but also having the discipline to look at various outcomes,” Eder warns. “People get captivated by the positives in a transaction, but if you're taking on debt to grow in a new market, you need to understand what poor economic conditions or average or poor sales numbers do to that calculus.”
5. Acquire another business
Acquiring another business can have an immediate impact on your bottom line, offering access to established talent, procedures and customers. Small-business loans can provide funds for purchase and integration.
6. Build business credit
A good business credit score can unlock more financing options and better loan terms. However, building business credit requires time and a positive payment history. Taking out a small-business loan or line of credit and making on-time payments can increase your score and help you qualify for affordable funding.
7. Hire revenue-driving talent
Launching new initiatives, upgrading your services or expanding into new markets might require additional talent. You can use business loan funds for hiring, but plan how new employees will increase revenue to promote sustainable operations.
8. Complete upgrades or renovations
Businesses that want to attract new customers or improve customer experience to drive revenue might upgrade or renovate their spaces. A business loan can cover the cost of new furniture or construction.
9. Fund marketing or advertising efforts
According to Eder, evaluating the impact of marketing efforts on revenue can be tricky.
“Look for things that are more measurable, such as predictable partnerships or referral channels,” he says. “There's a difference between procuring sales or doing things that add revenue and building a brand.”
Brand building is important, he adds, but attributing growth to it can be hard, making it difficult to determine if a loan makes financial sense.
10. Cover temporary cash-flow gaps
Income doesn’t always keep up with expenses, which can put your business in a precarious position. A short-term business loan or business line of credit can help bridge cash-flow gaps and ensure operations run smoothly.
