SBA Loans: Eligible and Ineligible Uses of Proceeds

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When considering a Small Business Administration (SBA) loan, it is essential to understand the eligible uses of the loan proceeds. The SBA 7a loan offers flexibility to borrowers, allowing them to utilize the funds for various purposes that support the growth and development of their businesses. However, there are also restrictions on the use of proceeds to ensure that the funds are used appropriately. In this article, we will explore the eligible uses of SBA loan proceeds and the restrictions that borrowers need to be aware of.

Eligible Uses of Proceeds

Purchase of Land

SBA loan proceeds can be used to finance the acquisition of land to expand its operations or establish a new location.

Building, Building Improvements, and/or Building Construction

Businesses can use SBA loan proceeds to purchase buildings or make improvements to existing ones. This includes renovations, expansions, or even the construction of new facilities.

Fixed Assets

SBA loans can be used to finance the acquisition of fixed assets such as machinery, equipment, and vehicles.

Equipment, Furniture, and Furnishings

The loan proceeds can also be utilized to purchase equipment necessary for the business, including manufacturing machinery, office furniture, and other necessary fixtures and fittings.


SBA loans can be used to finance the purchase of inventory or supplies required to maintain operations.

Raw Materials (Including Work-in-Progress)

Manufacturing businesses can utilize SBA loan funds to acquire raw materials needed for production. The loan can also cover work-in-progress costs, ensuring a smooth production process.

Working Capital

SBA loans can provide working capital to small businesses to help cover operating expenses, manage cash flow, and support growth initiatives. Note, however, that although an eligible use of SBA loan proceeds, many SBA lenders will limit the working capital portion of a loan. Working capital only loans are rarely created by SBA lenders given the 10-year loan term for essentially a short-term borrowing need.

Revolving Lines of Credit

Certain SBA loan programs, such as CAPLines, SBA Express, Export Express, and the Export Working Capital Program (EWCP), offer revolving lines of credit. These credit lines can be utilized for ongoing operational needs, providing businesses with financial flexibility. Many SBA lenders do not do lines of credits as it requires a servicing departments within the bank, but some SBA lenders do have such teams.

Standby Letter of Credit

In some cases, an SBA loan can be used to secure a standby letter of credit. This can be required as a bid bond, performance bond, or advance payment guarantee under Export Express or the EWCP.

Refinancing of Non-SBA Debt

SBA loans can be used to refinance existing non-SBA debts, providing businesses with an opportunity to improve their financial situation and potentially secure better loan terms. The SBA bars borrowers from paying off one SBA loan with a new SBA loan. However, a borrower can add an SBA loan to a business with an existing SBA loan as long as the total SBA 7a loans combine for $5M or less.

Partner Buyouts or Buy-ins

If a small business wishes to facilitate a partner buyout or buy-in, SBA loan proceeds can be used to finance the transaction. This allows for the smooth transition of ownership within the business. Partial ownership changes were not allowed by the SBA until 8/1/23. We believe this change will open up SBA lending to a tremendous growth in financing for ownership changes. Previously, the buyer had to purchase 100% of the seller’ equity.

Restrictions on Uses of Proceeds

While the SBA loan offers a wide range of eligible uses for loan proceeds, there are certain restrictions in place to ensure the funds are used appropriately. It is important for borrowers to be aware of these restrictions before applying for an SBA loan. The following purposes are not permitted for the use of SBA loan proceeds:

  • For an existing building, the applicant must occupy at least 51% of the rentable property and can lease up to 49% to a third party.
  • Passive rental income, such as apartments or residential real estate, is not an eligible use of SBA loan proceeds.
  • Payments, distributions, or loans to an associate of the applicant for reasonable compensation for services rendered or to facilitate a change of ownership are not allowed.
  • Refinancing a debt owed to a New Markets Venture Capital Company (NMVCC) is not permitted.
  • Floor plan financing, typically used by car dealerships to finance their vehicle inventory, is not an eligible use of SBA loan proceeds.
  • Investments in real or personal property acquired and held primarily for sale, lease, or investment are not allowed.
  • The purchase of the borrower’s equity interest in the business cannot be financed using SBA loan proceeds.
  • Payment of delinquent taxes traditionally held in escrow by the borrower, such as payroll taxes or sales taxes, is not permitted. However, if the applicant has an approved payment arrangement with the IRS and is current on the payments, the payment of delinquent business income taxes may be allowed.
  • Finally, the SBA loan proceeds must be used for a purpose that benefits the small business. Any use that does not directly contribute to the growth or operation of the business would not be considered an eligible use of the funds.

SBA loans offer small businesses the opportunity to access financing for various purposes. The eligible uses of proceeds provide businesses with the flexibility to invest in assets, purchase inventory, and support working capital needs. However, it is crucial to adhere to the restrictions on use to ensure compliance with SBA regulations. By understanding the eligible uses and restrictions, small business owners’ can make informed decisions when utilizing SBA loan proceeds.

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