Congratulations! You’ve gone through the loan process and now have the funds you wanted. Now what?
What you do with the money may be entirely up to you. For example, when applying for a loan from Kabbage, an online lender, you aren’t asked what you need the money for; you have the freedom to spend the funds as you see fit. Here are some guidelines for using your funds wisely.
Receiving the proceeds of your small business loan isn’t like winning the lottery. If you foolishly spend your winnings or gamble them away, there are no consequences. However, if you blow your loan proceeds you can wind up in a worse position than you’d be if you never took the loan in the first place. You have to repay the money but you haven’t advanced your business.
Use the money to make money
Determine what investments you can make with your loan proceeds that will generate revenue for your business. Consider:
- Inventory. Stock up on items you can sell to customers. You don’t have to buy all of the new inventory all at once. Use the funds to buy advantageously. For example, being able to buy more than you usually may entitle you to better prices.
- New equipment. A new machine may help you work more efficiently. What’s more, you may be eligible for tax breaks for the purchase, such as the 179 deduction. In 2016 this means taking an immediate write-off for the cost up to $500,000 rather than having to expense the cost over a number of years.
Invest in your future
You may apply the funds toward activities that won’t necessarily show immediate results but could pay off big in the future. Consider:
- Marketing. It’s not always easy to correlate your marketing efforts with your sales results. However, spending money on marketing can pay off. Determine the best ways to do this, such as developing or improving a website, advertising, or outsourcing social media management.
- IP. Intellectual property (IP), such as trademarks and patents, can be costly to obtain government protection. The process entails government fees and payments to attorneys. However, this intangible property is a valuable asset for your business. Find out more from the U.S. Patent and Trademark Office.
Expand your activities
Your business may be stuck at a certain level but funding can help you advance. Consider:
- Hiring. A person can only do so much. Adding to your staff enables your company to do more. Whether it’s hiring another sales person or someone with a special talent, be sure to budget for the full cost of employment: wages plus employment taxes and employee benefits (e.g., health coverage, retirement plan contributions). According to a rule of thumb from an MIT professor, figure 1.25 to 1.4 times the base salary. Thus, a new employee who’ll be paid $40,000 a year will likely cost you $50,000 to $56,000.
- Taking on new products and services. Expanding into new areas is a big undertaking. You have development costs to determine whether the new direction makes sense. Once you’ve decided to go ahead, then you have marketing costs to promote your new lines.
- Relocating. If you’ve outgrown your current space, you may need to relocate to larger quarters. Or you may want to relocate for other reasons, such as moving to another state because of more favorable tax and employment laws. Consider all the costs involved: moving inventory and equipment, reconnecting phones and Internet service, and informing customers/clients and suppliers about the new location.
Knowing what to do with the money is a big step toward wise spending. But here are some other considerations:
- Go slow. When you receive loan proceeds, typically they are deposited in an account that you can draw upon as needed; you don’t have to spend the money all at once.
- Build in a fudge factor. Whatever you decide to spend the proceeds on, be sure to budget carefully. Whatever you think something will cost, likely there are unforeseen expenses that will raise the total price. For example, if you buy a new machine, you may require additional electrical work to accommodate an added load.
Having your loan approved is a great feeling. Using the proceeds smartly to grow your business will make that great feeling last a very long time.
This post was created in partnership with Kabbage. All opinions expressed in the post are my own and not those of Kabbage.