When Marketing and Advertising Loans Are a Good Idea

Using a small business loan to buy advertising doesn’t have to be high-risk when you know how to calculate the additional profit you’ll make to cover the interest payment and loan amount by using the return on ad spend (ROAS) formula.   

Advertising and marketing loans are not good for every situation, including industries where there is an extended time between conversions and becoming profitable. This includes subscription boxes, where you may not have the cash flow to fund operations and pay back the loan immediately.   

For other situations, like securing limited ad space before a busy season (giving a high probability of strong returns after the season starts), marketing and advertising loans do make sense. 

This guide walks you through each step of the process of determining profitability, so you can clearly see if it’s a good or bad idea to take out a loan for marketing and advertising. You’ll learn about situations where it makes sense and find a three-step process for calculating your ROAS. 

When Loans for Marketing and Advertising Are a Good Idea 

Marketing and advertising loans may not be a good idea for seasonal businesses when the peak season is over, or when existing cash flow will not cover the costs of the loan if the ads don’t work as expected. 

Loans for advertising can make sense when there’s enough cash to cover operating costs until invoices come due, and when the ads are projected to increase customer acquisition levels. Advertising financing can also make sense when you need to build brand awareness before a busy season begins. 

Situations where small business advertising loans may make sense: 

• A tourism board advertising before peak travel season or a hotel promoting new renovations or high-demand amenities competitors don’t have leading up to a big event in the city 

• Restaurants and retailers in seasonal towns that want to be top of mind as customers come back for vacations (They can use a loan to buy the limited billboard and TV ad space before competitors do.) 

• Companies looking to attract investors by bringing customers back for repeat purchases, or to build their business up before launching a new round of fundraising 

When a marketing and advertising loan may not be beneficial: 

• When customers don’t become profitable until well after the loan payback period ends and there are not enough cash reserves to cover operating costs like payroll, purchasing supplies, and working capital 

• If peak season is ending and seasonal sales are lower than expected (A marketing and advertising loan won’t be a good idea because demand will not be there; this could be pool toys in climates that get cold after September or Christmas tree ornaments after January.) 

If you’re in a situation where it does make sense to take out a loan for marketing and advertising, here is how to forecast the ROAS and the profitability needed to make the loan a good idea.   

3-Step ROAS to Loan Comparison Process 

The three-step process to calculate the ROAS you need to see if taking a loan for advertising makes sense is as follows: 

1. Use ROAS to calculate revenue and the potential profit the ads will generate. 
2. Determine the total loan costs. 
3. Compare the additional profit to the loan cost to see if you’ll make money. 

ROAS tells you how much revenue you get for each dollar spent on advertising and uses the following formula: 

• ROAS = Revenue / Ad Spend 

The ROAS formula does not include your expenses, including operations and interest payments on the marketing and advertising loan. That is why you’ll need a modification to the ROAS formula by using another three-step process below to determine if marketing and advertising financing is right for your business.  

Pro-tip: Use customer lifetime value (CLTV) when calculating revenue in the ROAS formula instead of single purchases. This tells you about the long-term return from the ads when they bring in loyal customers, which can come in handy for break-even situations or while you wait for customers to become profitable. 

Step 1 

Step 1 in the process is to use the below formula: 

• Profit = ROAS * $ spent on ads – Cost of Goods Sold (COGS) – other Operating Expenses (OpEx) 

COGS is what it costs you to make the product and OpEx includes additional costs you’ll face with the extra business generated by the ads. This can be added costs from more salespeople to handle higher foot traffic, higher payment processing fees from the additional sales, and lots of other items depending on your business. 

Pro-tip: The ROAS formula only includes spending to run the ads, so include ad production costs in other OpEx. This can be money for stock images, freelancers to write or manage the ads, and other costs you wouldn’t have if you didn’t run the ads. 

Step 2 

Now that you know how much profit the ads will give you, the next step is to calculate total loan costs from interest paid plus fees: 

• Origination fee 

• Late payment penalties 

• Prepayment penalty (if you pay off the loan before the due date) 

• Service fee 

You’ll find the fees and total interest amounts in your loan agreement. If you’re not yet working with a lender, online loan calculators will do the math for total interest on a loan. 

Step 3 

Now it is time to compare profit to loan costs for a break-even ROAS. You’re looking to make sure the profits after expenses are large enough to cover the cost of the loan including interest payments, and what you need to have sales-wise as a minimum to break even. 

Pro-tip: Use past ad campaigns during similar seasons and in the same channels to calculate your average ROAS. Knowing your average break-even ROAS helps to determine your potential risk for the new campaigns with the added debt of the marketing and advertising loan. 

Calculating your break-even ROAS is like doing the process above in reverse: 

1. Determine loan costs = $2,078. 
2. Forecast expenses including advertising = $22,000 (with no added OpEx) or $28,000 (with OpEx). 
3. Calculate break-even ROAS. 

The formula for break-even ROAS is: 

• Break-even ROAS = (Loan Costs + Total Expenses) / (Gross Margin * Ad Spend). 

This table shows example break-even ROAS calculations with and without operating expenses (OpEx).  

Comparing this analysis to previous campaigns shows you the likelihood of making a profit. A history of ROAS above 5.0 gives you plenty of buffer above a break-even point, so you can likely afford the marketing and advertising loan. Adding this information to your loan application may also build lender confidence to help you get approved. 

Don’t worry if you don’t know what your ROAS is already. Keep in mind that some industries like renewing software, consumer subscriptions, or hosting have higher competition, so profitability comes in during the second or third payment cycle (or a couple of years later, as the average customer may stay for five years or longer). A good ROAS could help you to break even or be at only a slight loss, as profitability isn’t expected in the first year in some cases. 

Taking a small business loan for advertising and marketing can be a good idea when you have calculated that the return from the advertising will be more than your operational costs, will make up for margins, and will cover the costs of the loan. This applies to seasonal businesses, subscription companies that have cash flow to fund operations, and service-based businesses. 

If you’re looking to take out a loan for advertising, apply online by clicking here. Applying only takes a few minutes, and you can receive funds in as fast as 24 hours. 

National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.