Before you begin looking into what small business loans entail, there are basic things you need to know. The first thing is figuring out exactly how you’ll use the money you get – and how you’ll pay it back. If you don’t plan these things out carefully, the loan might not even make a difference in the long run. In 2016, we extended over $795 million through more than 133,000* plans to growing small businesses through Square Capital. The average size plan was about $6,000. At the beginning of 2017, we asked 7,000 sellers who accepted loans to tell us how they used their funding. What we found was that 20% of those sellers were first-time borrowers, while 80% had used the Square Capital in the past. From those repeat borrowers, 66% used their plan to fund the same business purpose, while 34% used it for a new purpose.
Here’s what they invested in:
A lot of business – 31% – put their loan towards purchasing inventory. Among retailers, this number was even higher, with more than 60% using their funds this way. Using a loan to buy inventory is good way to keep seasonal dips under control, replenish stock, or try new products.
It’s relatively common for small businesses to need a loan to fund the heavier purchases. The second-most popular way this loan was used is to make capital investments in equipment. In fact, 30% of businesses use Square Capital funds this way.
Running a business and making sure it runs smoothly is a pricey task, not to mention time-consuming. 17% of Square Capital recipients use their loans to help cover the everyday expenses that come with running a business.
Refinancing or paying other debts
Consolidating different debts can be a smart way to use small business financing. As it turns out, 9% of Square Capital recipients use their advance to help pay down other debts.
In order to grow a business, it’s vital to get new customers in the door and keep them loyal to the company. Whether it’s through social media, email, events, or more traditional media, marketing is one of the best ways to grow a business. 6% of businesses used their advances in marketing.
It’s crucial to have a game plan for how you’re going to spend your small business loan and how you’re going to pay it back. Maybe one of the investments listed above make more sense for your business, maybe your business would do best with new products or a new marketing campaign. Whatever it is, before you apply or accept small business financing, be sure to think of the most strategic way to use it.
*Represents a mix of merchant cash advances and loans through Square Capital from January 2016 to December 2016.