SBA Loan Use of Funds
Russ Combs, Business Consultant
Duquesne University/Palumbo/Donahue School of Business Development Center (SBDC)
Whenever I create a blog regarding the Small Business Administration (SBA), I always begin with a clarifying statement, aka disclaimer.
The SBA “does not” offer loans directly, they have no money to lend, in the traditional manner or sense. You need to involve a lender.
To assist anyone who is interested in an SBA guaranteed loan, SBA provides a lenders list on their website. Also, you can contact financial institutions directly, just ask if they participate in SBA lending offerings.
It is true that the SBA provides guidelines, but the lenders can determine credit score requirements, loan eligibility “use of funds” specifics in accordance with the policies of that individual institution. When looking for where to apply for an SBA loan, you can contact the financial institution directly or use the SBA 100 most active lenders list on their website.
With all that being said, let’s look at what you can use your loan funds for when enlisting SBA participation.
First let’s get the BIG No-No out of the way. You cannot use an SBA Participation Loan for Personal Use. Generally, SBA loans must be used to support the operations of a business – start-up or existing. Specifically, the guidelines state: “An SBA-guaranteed loan cannot be made solely to an individual.” No personal homes, trips, jewelry or cars, etc. A term used directly by the SBA -- Nothing to unjustly enrich owners.
Additionally, SBA prohibits loan proceeds to be used for:
· Payments, distributions, or loans to an associate of the applicant, (with a few very defined and limited exceptions)
· Investments in real or personal property acquired and held primarily for sale, lease, or investment, it must be a direct, exclusive use by the business;
· Paying delinquent taxes (though there is an exception if the applicant has an approved payment arrangement with the IRS and is current on those payments)
· Relocation: To finance the relocation of the Applicant out of a community. (with a few will define and exclusive exceptions);
· To refinance a debt that would expose the SBA to a loss.
Since, SBA has created and designated an array of programs to meet a variety of business needs and scenarios, the exact approved and exempted uses may vary. This can be determined by both SBA and the financial institution of choice. Yet, let’s try to break it down simply.
1. Land and necessary land improvements
a. For example, grading, new streets including curbs and gutters, parking lots, utilities, and landscaping. This may also include the costs of building and building improvements such as facade expenditures, heating, electrical, plumbing and roofing costs.
2. Machinery and equipment:
a. All costs associated with the purchase, transportation, dismantling or installation of machinery and equipment with a useful life of at least 10 years;
3. Furniture and fixtures;
4. Professional fees (such as title insurance or surveys)
5. Working Capital (when applying under an SBA 7a loan application)
Confusing? Yes, it can be. Yet, with the assistance of experienced and qualified business consultants and knowledgeable loan officers it can be an endeavor made much easier.
If I could leave you with a few key considerations, they would be:
First, talk with a qualified business consultant, i.e., contact your local Small Business Development Center for guidance.
Second, talk with your Financial Institution Loan Officer to investigate their policies, procedures and protocols.
Third, take a deep breath and relax. You’ve got a lot of work ahead but it could be worth all the effort --- IF DONE RIGHT