Small Business Lending: Why Using a Loan for Its Intended Purpose Matters

by Claire Parker, Staples® Contributing Writer

In life, death and taxes are certainties. In business, it’s finding a loan.

Whether funding equipment upgrades, supplementing employee salaries, or making real estate investments, getting a loan is a rite of passage business owners will likely do not once, but many times.

It might seem to you that all money spends the same. But the bank wants to know exactly how you plan to use the funds so they can recommend the right kind of financing.

“You have to understand, a lender is trying to determine how big of a risk it would be to lend you money,” says Erik Larson, an SEO specialist for South Jordan, UT–based Lendio, which recently launched a financing program with Staples to help small business owners find alternative loan options. Which is why an important aspect of the lending process is explaining what the borrowed money is going toward, and then actually using the money for that specific purpose.

So before you talk to a lender, use the advice of these small business coaches, owners and bankers to get the loan you need, and for the reasons you need it.

Have a Plan for Your Business

Dr. Angela Lindenmuth, owner and chiropractor at White Rose Family Chiropractic, LLC, in York, PA, recently secured a mortgage loan from her local bank in order to buy a permanent location for her practice. A few years prior she used a line of credit to purchase office equipment. She says these two sources of funding were available only when she set clear goals and completed them, and made sure her lender understood her ultimate business plan.

“Banks need to feel confident that you will pay back any money they lend you,” Lindenmuth says. “So have a clear understanding of what you are trying to do with your business and how it will generate income.”

"Before you go to a lender, you need to be prepared. Find out what documents they’re going to need, and know the answers to the questions they’re going to have," advises Larson.

Have a Plan for Your Loan

Along with your business plan, bring a detailed document that includes how you determined the amount you need, how the money will be used, and how that activity makes your business more sustainable. This gives the bank confidence you can repay the loan. Depending on the lender, you may also need to bring additional financial records.

Many alternative lenders don’t require all of this documentation, but most responsible lenders at least walk you through the cost of the loan to help you compare that cost to the benefits your business will receive from the loan, according to Craig Coleman, CEO and founder of ForwardLine, a Woodland Hills, CA–based merchant lender.

“Borrowing for the sake of borrowing doesn’t help your business,” Coleman warns. He says having the important analysis of comparing the cost of the loan to the benefits that the loan will provide your business is a necessary step. “It’s not responsible borrowing to take on debt if you’re not sure how you’re going to use it.”

Read the Fine Print

There are serious consequences if you don’t use the loan for its original purpose.

Loan terms vary from lender to lender, but in many cases you could face a penalty if the loan is used for a reason other than its original intention. So don’t think you can skim off the top of a real estate loan to pay for extra inventory you need this month.

“Most, if not all, lending contracts contain a clause that basically says if you don't use the capital for its intended purpose, your loan could be due in full within 48 hours,” Larson cautions. So read the fine print carefully before signing, and make sure anyone using these funds in your company understands the requirements fully.

These steps will help you get the small business loan you need, and not extra headaches you don’t.

blog comments powered by Disqus
We welcome your comments about the articles on the Staples Business Hub. Please follow these simple rules when submitting your comments: Do not mention our competitors, the price you paid for products, URLs, or your personally identifiable information (such as your full name or address). Be considerate and courteous. Do not attack or insult other users, use violent language, or engage in name-calling. These types of comments will be removed. Our moderation team may read comments before they are displayed.