With their low interest rates, low monthly payments, and longer repayment terms, SBA 7(a) loans have long been considered the gold standard when it comes to small business loans. Find out how to best use the proceeds from your SBA loan to help your business evolve faster.
Use of proceeds with an SBA loan
When you apply for an SBA 7(a) loan, you must provide a detailed plan of what you’ll do with the money. You can use these loans for a variety of purposes, but they must include one or more of the following:
- Acquiring, refinancing, or improving real estate and buildings
- Short- and long-term working capital
- Refinancing current business debt
- Purchasing and installation of machinery and equipment, including AI-related expenses
- Purchasing furniture, fixtures, and supplies
- Changes of ownership (complete or partial)
- Multiple-purpose loans, including any of the above
Take a more detailed look at how you can use the proceeds of your SBA 7(a) loan.
1. Acquiring, refinancing, or improving real estate and buildings
You can use your SBA loan to buy a new facility, refinance your mortgage, or perform upgrades on current real estate and buildings. This is especially important for businesses that are moving into a space that was formerly used for another purpose, as well as those that need to expand their footprint.
2. Short- and long-term working capital
Working capital supports day-to-day business operations and is calculated as current assets minus current liabilities. Maintaining positive working capital helps cover ongoing expenses.
You may also use SBA loan funds to support hiring, marketing, and other operational needs.
3. Refinancing current business debt
Leveraging debt is a tried-and-true method of scaling your business. However, depending on the type of debt that you’re carrying on your books, refinancing your debt may be a better option. For example, if you have several high-interest debts, such as credit cards, or you’re dealing with merchant loans that dip into your daily income, refinancing can get you ahead of the debt.
It’s important to note that you’ll need to provide compelling reasons that you want to use a loan to refinance other debt. For example, being on the brink of bankruptcy because you can’t manage existing debt may make you a less appealing option to potential lenders. However, if you have steady cash flow and want to reduce interest rates and make your debt repayments more predictable, an SBA loan is a great option.
4. Purchasing and installation of machinery and equipment, including AI-related expenses
Upgrading and maintaining equipment is essential for operational efficiency. An SBA loan is often a lower-cost way to finance equipment with repayment terms that better match cash flow.
This option is especially helpful if your business operates in an industry in which technology is constantly evolving. Ensuring that you continue to operate efficiently while exceeding the expectations of your clientele is crucial, and purchasing new equipment is a great way to do that.
5. Purchasing furniture, fixtures, and supplies
SBA loan proceeds can typically be used to purchase fixtures, furniture, materials, machinery, and other items needed to outfit or upgrade a business location.
6. Changes of ownership (complete or partial)
Many borrowers are surprised to find that they can use an SBA 7(a) loan to purchase all or part of a company. If you’ve found a potential business venture but lack the funding, you can apply for an SBA loan. Typically, lenders require you to have a good personal credit score, and you may have to offer a personal guarantee.
If you already own a business with others and need to buy out one or more of your partners, you may also be able to use SBA 7(a) funds for that.
7. Multipurpose loans
SBA loans may be used for any combination of the purposes we’ve already discussed. For example, if you need to hire new staff members while investing in new equipment, you can use one loan for multiple purposes.
What can’t an SBA loan be used for?
In general, SBA loans must be used for long-term business development rather than temporary financial relief.
You cannot use an SBA loan for any of the following purposes:
- Refinancing personal debt
- Paying delinquent payroll, sales, or real estate taxes
- Payments or loans to business owners or associates
- Real estate held primarily for resale, lease, or investment
An SBA loan may be able to help your small business grow
While all loans have limitations, SBA loans are designed to help small businesses meet long-term growth goals.
By evaluating where your business is today and where you want it to go, you can determine whether SBA financing is the right fit.
If you’re ready to take the next step and apply for an SBA loan, see if you pre-qualify today.
FAQs
What can SBA loan proceeds be used for?
SBA loans can be used for a variety of purposes, including working capital, hiring, inventory, real estate, and more. You can also use an SBA loan for a combination of permissible reasons.
What are ineligible uses of SBA loan funds?
There are several things that you cannot use SBA loan funds for, including personal debt. You also cannot use funds from an SBA loan for real estate that you plan on flipping, delinquent debts, or payments owed to business partners.
Can SBA loans be used to refinance existing debt?
SBA loans can be used to refinance existing business debt. However, you cannot use an SBA loan to deal with any type of personal debt that you may have.
Can SBA loans be used for refinancing debt or investing in inventory?
Yes, you can use an SBA loan to refinance debt or to invest in inventory. If you want to do both at the same time, you can take out a single loan and use the funds for both purposes.
