SBA loans are popular small business loans because they offer attractive rates and terms, and may be available to small business owners who otherwise have trouble qualifying for similar financing. If you’re considering an SBA loan, one of your questions may be “What can I use an SBA loan for?” We’ll answer that question here.
First, by way of background, most SBA loans are not made by the U.S. Small Business Administration. Instead, the SBA guarantees loans made by participating lenders, up to a certain amount. This guaranty reduces the risk to lenders, but they must still carefully follow SBA guidelines. A notable exception is Disaster Loans (including EIDL) which are made directly by the SBA.
Can you use an SBA loan for anything?
In short, no. There are several different SBA loan programs, and each program carries its own guidelines describing how funds can and can’t be used. You may hear these referred to as “acceptable” or “allowable” use of proceeds or use of funds. Loan program guidelines also include “prohibited use of proceeds”, or things you can’t spend funds on. We’ll cover both of these in more detail.
That said, the guidelines may not spell out every single way you can and cannot use your SBA loan funds. For example, “working capital” may be an acceptable way to spend loan funds, but the guidelines may not define every example of working capital.
In addition, there may be certain uses of funds that may be acceptable in one scenario but not another. Using an SBA loan to refinance debt is a great example of this; in some cases it is allowed, but in others it is not.
What can an SBA loan be spent on?
Here we’ll share some of the ways you can spend SBA loan funds by program.
There are many types of loans available under the SBA program, including 7(a), Export Finance Loans Disaster Loans, 504 CDC loans, and Microloans.
For any SBA loan, the guidelines state that loan proceeds may be used to:
- Acquire land (by purchase or lease) as part of an eligible project;
- Improve a site (e.g., grading, streets, parking lots, landscaping) including up to 5 percent for community improvements such as curbs and sidewalks;
- Purchase one or more existing buildings;
- Convert, expand, or renovate one or more existing buildings;
- Construct one or more new buildings;
- Acquire (by purchase or lease) and install fixed assets;
- Refinance certain outstanding business debts.
There are restrictions on the use of SBA loan funds for real estate projects, though, including owner-occupancy requirements. Generally the business must occupy 51% of the property; or for new construction occupy 60% to start, and gradually occupy all of it within ten years. (The lender may allow time for the business to meet this requirement if, for example, space is already leased to another tenant.)
Many of the program guidelines overlap, but we’ll cover some of the most common acceptable uses for various types of SBA loans in this section.
The 7(a) program has traditionally been the SBA’s most popular program offering loan amounts of up to $5 million through participating lenders. In addition to the uses listed above, proceeds from a 7(a) loan may also be used for:
- Raw materials (including work-in-progress);
- Working capital
- Standby Letter of Credit when required as a bid bond, performance bond, or advance payment guarantee under Export Express or EWCP.
Farm enterprises have their own list of ways they can use 7(a) loan funds, among them the purchase of land, buildings, and land improvements; the construction, renovation, or improvement (including water systems) of farm buildings; and the purchase of farm machinery and equipment.
SBA Express Loans
These are loans under the 7(a) program for up to $500,000. (The limit used to be $350,000 but it has been permanently raised.) They may be used for purposes similar 7(a) loans listed above with a few differences that don’t affect most borrowers. If you are seeking an SBA Express Loan, your lender can guide you.
These lines of credit (up to $5 million) may be used to finance the short-term operating capital needs (revolving and non-revolving) of eligible small businesses. There are specific restrictions on using them to refinance debt or for other purposes, and variations of CAPLines have their own acceptable uses.
Seasonal CAPlines must be used for seasonal increases of accounts receivable and inventory (or in some cases associated increased labor costs).
Builder’s CAPLine proceeds must be used for direct expenses related to the construction and/or “substantial” renovation costs of a specific eligible project (residential or commercial buildings for resale), including labor, supplies, materials, equipment rental, direct fees (building permits, interim disbursement inspection fees, etc.), utility connections (above or below ground), construction of septic tanks, and landscaping.
Export Express Loans
Proceeds from Export Express Loans (which go up to $500,000 may be used for export development activity, including:
- Obtaining a Standby Letter of Credit when required;
- Participation in a trade show that takes place outside the United States;
- Translation of product brochures or catalogues for use in markets outside the United States;
- Obtaining a general line of credit for export purposes (as a normal course of business, the Borrower may use portions of the line of credit for domestic purposes, as long as no less than 70% of the line of credit will be used for export purposes);
- Performing a service contract from buyers located outside the United States;
- Obtaining transaction-specific financing associated with completing export orders;
- Purchasing real estate or equipment to be used in the production of goods or services for export;
- Acquiring, constructing, renovating, modernizing, improving, or expanding a production facility or equipment to be used in the United States in the production of goods or services for export;
Providing term loans and other financing to enable a small business concern, including an export trading company and an export management company, to develop a market outside the United States.
- Financing indirect exports.
These loans may also be used to refinance debt with certain restrictions (see the debt consolidation section below) with additional requirements, including a vary important one– that the new loan or line of credit will be used for export development activities.
Export Working Capital (EWCP) Loans
Export Working Capital Program loans (up to $5 million) are short-term working capital loans made to small business exporters. They may be used for many purposes:
- Acquiring inventory for export or to be used to manufacture goods for export;
- Paying the manufacturing costs of goods for export;
- Purchasing goods or services for export;
- Supporting standby letters of credit related to export transactions
- For working capital directly related to export orders
- For foreign accounts receivable and inventory financing
- Support an indirect export (where they are selling to a customer who will then sell it to a foreign buyer)
- Pre-shipment working capital;
- Post-shipment foreign accounts receivable financing; and
- Lender fees and charges and any packaging fees paid
The SBA Microloan program offers loans of up to $50,000, with an average amount of just under $15,000. SBA microloans may be used for the purchase of furniture, fixtures, supplies, materials, equipment, and/or for working capital.
Paycheck Protection Program (PPP) Loans
PPP loans were made available to eligible businesses during the pandemic. These loans provided short-term working capital loans to certain businesses (and nonprofits) impacted by the pandemic. Loans could be forgiven if spent on certain expenses– primarily payroll– within a limited period of time. These loans are no longer available.
Economic Injury Disaster Loans (EIDL)
The Economic Injury Disaster Loan program (EIDL) has become very popular with entrepreneurs during the pandemic. (It’s worth noting that these loans have been available for many years before that for businesses impacted by a federally declared disaster.) EIDL offers loans of up to $2 million to eligible businesses that meet SBA size standards, certain nonprofits, and other businesses determined to qualify. (Eligibility requirements were expanded for businesses and nonprofits impacted by the coronavirus pandemic.)
They are primarily designed as working capital loans designed to help the small business pay expenses it otherwise would be able to cover if the disaster had not occured. The SBA describes it this way:
“Economic injury loan proceeds can only be used for working capital necessary to carry the concern until resumption of normal operations and for expenditures necessary to alleviate the specific economic injury (emphasis added).”
What Can An SBA Loan Not Be Used For?
There are a number of ways that SBA loan funds may not be used, and some apply to specific programs. But the most important thing to keep in mind is that an SBA loan cannot be used for a purpose that does not benefit the Applicant small business, including a loan to an Applicant for the benefit of an affiliated business;
Specific prohibited uses include:
- Payments, distributions, or loans to an associate of the applicant, except for compensation for services actually rendered at a fair and reasonable rate (emphasis added);
- Investments in real or personal property acquired and held primarily for sale, lease, or investment;
- 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, if there will be a net reduction of one-third of its jobs or a substantial increase in unemployment in any area of the country (with a few exceptions);
- To refinance a debt that would expose the SBA to a loss. (We’ll talk more about debt consolidation momentarily.)
Each loan program may carry specific ineligible uses, for example:
Seasonal CAPLines may not be used to maintain activity during the slow periods of the business’s cycle; or to refinance existing debt
Builder’s CAPLine proceeds cannot be used to purchase vacant land for possible future construction; operate or hold rental property for future rehabilitation; or refinance existing debt.
Export Working Capital Loans cannot be used to:
- Support the Borrower’s domestic sales, except in the case of an indirect export;
- Acquire fixed assets or capital goods for use in the Borrower’s business;
- Acquire, equip, or rent commercial space overseas; or
- Finance professional export marketing advice or services, foreign business travel, participation in trade shows or support staff in overseas offices, except to the extent it relates directly to the transaction being financed.
CDC 504 Loans
CDC 504 loans are very popular. They have three main partners generally: a third party lender provides 50% or more of the financing; a Certified Development Company (CDC) provides up to 40% of the financing through a 504 debenture (guaranteed 100% by the SBA); and the small business applicant contributes at least 10% of the financing.
SBA 504 loans may be used to finance fixed assets for eligible small businesses. These are some of the acceptable use of funds:
- Land and necessary land improvements (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.
- Machinery and equipment: All costs associated with the purchase, transportation, dismantling or installation of machinery and equipment with a useful life of at least 10 years;
- Furniture and fixtures;
- Professional fees (such as title insurance or surveys).
Can I Use an SBA Loan for Debt Consolidation?
Using an SBA loan to refinance debt is allowed in certain circumstances, but there is always an underlying rule that must be followed:
“SBA-guaranteed loan proceeds may not be used to pay a creditor in a position to sustain a loss (including the same institution’s debt). This includes any refinancing that will shift all or part of a potential loss from the original Lender to the SBA.”
In other words, the SBA is going to do all it can to avoid refinancing debt that the business is not going to be able to pay back. If the business defaults and the SBA can’t collect from the borrower, taxpayers ultimately will pick up the tab and the SBA wants to avoid that scenario.
Another caveat that applies to 7(a) loans and 7(a) Small Loans is that SBA loan proceeds can’t be used to finance a loan if the original loan purpose would have been ineligible for financing. (Unless those conditions no longer exist.)
And SBA guidelines also prohibits refinancing debt that is already on reasonable terms, with some exceptions below:
Here are some specific examples the SBA spells out where business debt may be refinanced using 7(a) loans:
- Any debt structured with a demand note or balloon payment;
- Debt with an interest rate that exceeds the SBA maximum interest rate based on size or term
- Debt that is over-collateralized based on SBA’s collateral requirements
- Revolving lines of credit (short-term or long-term) where the original lender is unwilling to renew the line, or the business owner is restructuring its financing in order to obtain a lower interest rate or a longer term;
- Debt with a maturity that was not appropriate for the purpose of the financing (e.g. a 3 year term loan to finance a piece of equipment with a useful life of 15 years).
As mentioned before, there are other scenarios that may affect whether you can use your SBA loan funds for debt consolidation, but hopefully this helps you understand that overall the SBA often considers it acceptable to use an SBA loan to refinance debt that improves the financial health of the business.
Along that vein, the SBA has a requirement called “Ten Percent Payment Improvement:”
“When refinancing debt, the new installment amount must be at least 10 percent less than the existing installment amount(s) in the aggregate.”
That doesn’t apply to every scenario; loans with balloon payments, lines of credit the original lender won’t renew and credit card debt refinancing are all excluded from the 10% Payment Improvement Rule.
Credit Card Debt Consolidation
Good news! You may be able to refinance credit card debt used for business purposes with an SBA loan. For business credit cards, the card must be in the name of the business and you must certify that any debt incurred was used exclusively for business-related purposes. If you commingled personal expenses on your business credit card, the lender must make sure to deduct those charges from the amount to be refinanced. For personal credit cards used for business, the lender will require statements, receipts and other verification to make sure you used the debt strictly for business purposes.
EIDL Debt Consolidation
When COVID-19 EIDL loans were first made, borrowers were not allowed to use them to refinance long-term debt. Eventually, though, the guidelines changed and these funds may be used to refinance debt. Specifically they may be used to:
In its Interim Final Rule published September 8, 2021, the SBA made this change:
“(The SBA will) permit COVID EIDL working capital loan proceeds to be used to pay any type of business debt, including loans owned by a Federal agency (including SBA) or an SBIC…COVID EIDL loan proceeds may be used to make debt payments including monthly payments, payments of deferred interest, and pre-payments, except that prepayments will not be permitted on debt that is owned by a Federal agency (including SBA) or an SBIC.”
Can I Use an SBA Loan to Start or Buy a New Business?
Some SBA loans are only available to existing businesses; Disaster Loans (including EIDL) and PPP are two examples. But others, such as 7(a) loans, may be used to purchase a business or fund a startup. The loan application will need to detail how the business expects to pay back the loan, and most lenders are going to require a solid business plan, but it can be done in certain situations.
SBA startup loans (including loans to buy a business) typically require an equity injection of at least 10% and there are a few options that dont’ require a cash down payment.
The SBA spells out a number of scenarios where an SBA loan may be used to finance a change in ownership through stock purchase or an asset purchase. Among them:
- One or more current owners is purchasing the entire interest of another current owner, resulting in 100% ownership of the business by the remaining owner(s);
- A small business is purchasing 100% of the ownership interest in another business;
- An individual(s) who is not an existing owner is purchasing 100% of the ownership interest in the small business;
- A small business is acquiring another small business through an asset purchase; and
- An Employee Stock Ownership Plan (ESOP) or equivalent trust is purchasing a controlling interest (51% or more) in the employer’s small business.
Here, again, there is an underlying principle that must be followed:
“The change of ownership must promote the sound development and/or preserve the existence of a small business.”
A number of SBA loans may be used for a change in ownership, including 7(a) and Export Express loans.
Can I Use an SBA Loan for Personal Use?
Generally no. SBA loans must be used to support the operations of the business. Specifically, the guidelines state: “An SBA-guaranteed loan cannot be made solely to an individual.” You can’t use a SBA loan to buy a personal home or car, for example, or unjustly enrich owners. In recent months the Department of Justice has taken action against individuals who used SBA loans to buy luxury cars, vehicles, jewelry and more. This is a crime that can carry severe penalties, including jail time.
In the guidelines, the SBA points out that if you use an SBA loan to refinance credit card debt, you must certify in writing that you are only refinancing credit card debt used exclusively for business purposes, and the lender may have to obtain documentation to back your request, The same thing is true if you are using the loan to refinance a home equity line of credit (HELOC) on your personal residence. The SBA says the “lender must document and the applicant must certify that the amount being refinanced was used exclusively for business purposes. For example, a sole proprietor would demonstrate that the debt was used for business purposes by providing documentation that shows the interest deduction is reported on the Schedule “C” of the proprietor’s tax return.”
There are situations, though, where you may use loan proceeds to pay yourself for services/work you provide to the business at a reasonable rate. So you may be able to cover part or all of your paycheck with the loan, then pay your personal expenses from your income. Check with your lender and/or the SBA to make sure you follow their rules.
Alternatives to SBA Loans
While SBA loans are a popular form of business financing, they aren’t for everyone. The application process can seem intimidating and may require significant documentation including personal and business financial statements, bank statements, tax returns etc. If you need a loan quickly, or if you want to choose how you spend the funds without restrictions, you may want to look into other financing options including small business loans, invoice financing, equipment leasing or even small business credit cards.
An SBA loan does require a rather stringent application process, but it’s not terribly different from any other commercial bank loan. If you qualify, it can be an excellent way to start or acquire a business or finance business growth.