Can My Plans For Using Loan Funds Impact Whether My Loan Will Be Approved?

by Debi Enders

When you are seeking a business loan, how you intend to use the funds does, indeed, matter. A business loan must be used for a business purpose.

If you are thinking of taking out a business loan to refinance personal debt, think again. The same is true if you want to finance a truck or other major purchase for a family member’s private use. A lender will not look favorably on either loan application.

If you are tempted to claim you will use a loan for one reason and then use it for another — don’t. Your lender is required to confirm that loan proceeds are used as promised. If you purchase a vehicle, for example, your lender will require its vehicle identification number (VIN) so it can be used as collateral.
Different business uses call for different kinds of loans. How you use loan funds can also impact the kind of financing you apply for. If you want to purchase equipment, acquire a competitor or renovate your office, for example, you should apply for a term loan. That’s a loan that provides you with a lump sum of money, which you pay back by making set monthly payments of principal and interest. Term loans work best for long-term investments.

If your business has a short-term, temporary need for cash to cover inventory purchases or other operating expenses, you are better off applying for a line of credit. That gives you access to a specific amount of financing — say, $20,000 — which you can tap again and again without reapplying. You make payments and incur interest only when you use the funds.

Remember: Paying off a loan eats into a business’s cash flow. A purchase that doesn’t contribute to your bottom line is going to be a drag on your business.

Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.