If you’re considering an SBA loan to fund your business, you might be wondering about the allowable uses of the funds. SBA loans may be used for a variety of cases including eligible debt refinancing to working capital. Find out more about what you may be able to fund with an SBA loan and how to improve your chances of being approved.
What you need to know about an SBA loan
An SBA loan is a government-backed loan that you obtain from a bank. In other words, the Small Business Administration (SBA) isn’t the source of your funding. Instead, the SBA manages the loan program and guarantees a portion of eligible loans, which may help participating lenders provide financing to small businesses that meet SBA requirements. There are many types of SBA loans, of which SBA 7(a) loans are generally the most common.
Depending on eligibility, the SBA may guarantee 50% to 90% of your loan amount. This way, the bank knows it will still get most of its money back if you default on your loan. The bank typically takes on far less risk with this arrangement, which is a big deal as most banks are notoriously risk-averse.
Because the SBA guarantees a portion of eligible loans, participating lenders may be able to offer financing with more competitive terms. Loan amounts, interest rates, and repayment terms vary based on the SBA program, loan structure, and borrower qualifications.
SBA loan spending guidelines also help lay out the many ways that you may use the loan proceeds. Given these loans' versatility and competitive terms, most experts say they’re one of the best funding sources for small business. SBA 7(a) loans are typically the most commonly sought type of SBA loan.
To obtain an SBA loan, you must provide a detailed plan for how you’ll use the funds when you apply. As the loan application passes through the underwriting process, your intended use of funds may be closely examined.
How can you use your SBA loan?
You may use SBA 7(a) loans for many small business purposes, including the following.
1. Working capital
Working capital is perhaps the use case most associated with SBA 7(a) loans. Working capital is a relatively broad term. It refers to the money that you need for inventory, hiring staff, paying taxes, launching marketing campaigns, introducing new products or services, and investing in new equipment. Typically, SBA 7(a) loans may be used for all these purposes and more. A qualified SBA lender may help you better understand what short- and long-term working capital needs are SBA-eligible.
2. Business expansion
Some of the working capital expenses that you may cover with an SBA 7(a) loan are direct conduits to business expansion. This makes SBA 7(a) loans one of the most popular options for business expansion. You may use them to explore new markets, launch new products, renovate your storefront, or buy new equipment.
3. Equipment purchases
You may use your SBA 7(a) loan to obtain new equipment or upgrade your current systems. Similarly, you may use SBA 7(a) loan proceeds to buy furniture, fixtures, materials, and supplies. You may also use SBA loans to implement AI and automation technology into your business.
4. Debt refinancing
With an SBA 7(a) loan, you may be able to refinance certain existing business debt, subject to SBA requirements and the terms of the new loan. This strategy involves replacing one or more loans with an entirely new loan, ideally one with more competitive rates and longer repayment terms. Refinancing is typically a great way to consolidate debt, better manage cash flow, and decrease the amount of interest you pay each month.
5. Changes in ownership
You may be able to use an SBA loan to purchase an existing business. Additionally, if you’re in a partnership with one or more other owners, you may be able to obtain an SBA loan to buy out their shares.
What can an SBA loan not be used for?
You typically can’t use a small business loan from an SBA lender in the following ways.
1. Personal finances
Across the board, SBA loans are to be used solely for business finances. Typically, you may not use your loan proceeds to cover, for example, the purchase of personal property or a long-overdue personal credit card bill.
2. Any uses within certain industries and circumstances
SBA loan usage is entirely prohibited for the following industries and circumstances.
- Businesses that lend money to earn revenue are generally ineligible for SBA loans.
- Landlord- or developer-owned businesses may not use SBA loans for properties the small business owner doesn’t occupy. This rule does not apply to properties the business is leasing without the property owner profiting.
- Companies based outside the United States are ineligible for SBA loans unless the owner is a “resident alien” of the U.S.
- Life insurance providers, pyramid-scheme companies, businesses with at least one-third of their revenue stemming from legal gambling, and speculative businesses may not use SBA loans.
- Private, membership-limited businesses and clubs may not use SBA loans unless their limits are based solely on a physical space’s capacity.
- Any business that instructs, teaches, counsels, or indoctrinates religious beliefs may not use SBA loans.
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If your business needs fall within SBA loan spending guidelines, SmartBiz Bank® may be able to help. Find out if you pre-qualify today.
FAQ
What can you spend an SBA loan on?
The answer depends on the SBA program and the terms of your loan. You may use SBA 7(a) funds for eligible purposes such as working capital, purchasing or improving real estate and buildings, refinancing current business debt, purchasing and installing machinery and equipment, buying furniture, fixtures and supplies, and complete or partial changes of ownership. The maximum 7(a) loan amount is $5 million.
Can an SBA 7(a) loan be used for working capital?
Yes. SBA 7(a) loans may be used for both short- and long-term working capital. Qualifying businesses may also be eligible for the SBA 7(a) Working Capital Pilot, which provides monitored lines of credit for certain working-capital needs, including accounts receivable, inventory, and large contracts or projects.
Can you use an SBA loan to refinance business debt?
Yes, SBA 7(a) loans may be used to refinance current business debt when the transaction meets applicable SBA requirements. The 504 program also permits certain debt refinancing under specific conditions. Since eligibility requirements may vary based on the debt and loan structure, you need to work with a participating SBA lender to determine whether your particular debt qualifies.
Can you use an SBA loan to buy equipment?
Yes, an SBA 7(a) loan may be used to purchase and install eligible machinery and equipment, including certain AI-related equipment and expenses. The SBA 504 program may be used for qualifying long-term machinery and equipment with a useful life of at least 10 years remaining.
Can you use an SBA loan to buy a business?
SBA 7(a) loans may be used for complete or partial changes of ownership, which includes financing the purchase of an existing business when the transaction meets SBA requirements. The business and borrower must also meet the program's applicable eligibility and credit requirements, including demonstrating a reasonable ability to repay the loan.
What can you not use SBA loan funds for?
SBA loan proceeds must be used for eligible business purposes specified by the applicable loan program and loan authorization. For instance, an SBA 7(a) loan may not be used for any expense a business owner chooses. The SBA also excludes certain types of businesses and activities from its loan programs, including businesses engaged in nonprofit, passive, or speculative activities.
