How to Determine Use of Proceeds with an SBA Loan | SmartBiz University

SBA 7(a) loans are generally regarded as the gold standard in the small business lending industry. SBA loans have long terms, low rates, and low monthly payments, making them attractive to small business owners because owners typically won’t end up paying as much in interest over the lifespan of the loan.

Here’s how an SBA loan proceeds can be used to help a small business grow.

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Use of proceeds with an SBA loan

According to the SBA Loan Chart, the eligible use of proceeds for a standard SBA 7(a) loan are as follows:

  • Expansion/renovation
  • New construction
  • Purchasing buildings
  • Purchasing equipment
  • Lighting and furniture
  • Leasehold improvements
  • Working capital
  • Refinancing debt for compelling reasons
  • Inventory

Here’s more detail.

1. Expansion/renovation

An SBA loan may help scale your company, offer more products, conduct market research, form strategic partnerships, and upgrade locations to serve a larger customer base.

Shari Bisquera and Carey Kiehn own Off-Road Vixens®, a business distributing functional fashion for women in extreme sports. The business was growing and they needed funds to fuel growth. Bisquera and Kiehn secured a $100,000 SBA loan and used the proceeds for working capital, inventory, and marketing. Their brand continues to evolve while the business continues to grow.

2. New construction

With an SBA 7(a) loan, small businesses can put the funds toward building a new building or renovating a current one. Whether you need to expand to make room for growing demand or your space simply needs an upgrade, this might be the right loan for you.

3. Purchasing buildings

SBA 7(a) loans can be used for purchasing or refinancing additional property to foster business growth. Whether you purchase your current location or expand into a new one, an SBA 7(a) loan may help afford you the funds you need.

Real World Example: Susan Rescigno of Rescigno’s Marketing Connections® returned to SmartBiz® after her first SBA working capital loan was funded. Our team noticed that her current commercial real estate loan had a short term with a big payment due, so we were able to help her obtain a low-cost, 25-year fully amortizing SBA loan that she could use instead of refinancing her property.

Find out how SmartBiz may be able to help with CRE loans.

4. Purchasing equipment

Maintaining and upgrading business equipment is an important way to keep your company running smoothly. An SBA loan is a low-cost option that may help you finance equipment and pay it off in a manner more comfortable for your small business.

Real World Example: At Puppy Love, Inc.®, owners Young and Eric put their SBA loan facilitated by SmartBiz to use by financing additional grooming equipment as well as freezers to hold more dog-friendly products.

5. Lighting and furniture

If you need to outfit your business, your SBA loan can typically be used for buying fixtures and additional items, like furniture, materials, equipment, and machinery.

6. Leasehold improvements

Having a leasehold means that you have the right to use a building, but you don’t actually own it. A small business can typically use its SBA loan to improve the leased space.

7. Working capital 

Working capital refers to the business funds that are used in day-to-day operations. Basically, working capital is your current assets after current liabilities. This amount should be positive, and it generally acts as a cushion for any expenses that come up on a daily basis.

Working capital may also be applied to a variety of other business purposes, from hiring to marketing.

* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.

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8. Refinancing debt for compelling reasons

Put simply, refinancing means replacing your current loan(s) with a new one that has better terms. This typically saves you money over time, due to the lower interest rate.

By refinancing costly debt with an SBA 7(a) loan, small business owners can put the monthly savings back into their businesses.

Real World Example: With their SBA loan, Cathy and Renee of Painting with a Twist® focused on debt consolidation as their first step. “We were putting out $6,000 a month and now we’re paying $1,100 a month. It’s a significant savings. We’re staying ahead of the curve instead of just trying to keep up.”

Learn more about debt refinance through SmartBiz.

9. Inventory

Expanding your inventory to keep up with demand is another way you may be able to put your SBA loan funds to use. During busy seasons or promotions, having additional funds on hand may help small businesses stay afloat and meet their customers’ needs. If you’re not sure whether this funding is necessary, consider using pro forma financial statements to forecast future inventory needs.

Real World Example: For Scott Morris of Roshambo Baby®, expanding his company’s inventory range was an important part of his plan to grow. SmartBiz helped open doors for Scott into national and international markets.

Follow the link for additional information about SBA working capital loans through SmartBiz.

10. Hiring

Small business owners wear many hats, but sometimes it takes a bit of help to get the job done. Hiring employees is one of the ways you can use an SBA loan to grow your business.

Real World Example: Jill Huggett from Bridgepath Career Advisors, LLC® used her SBA loan proceeds to hire new resume writers, coaches, and assistants that will help her clients find a career they love.

Marketing is another example of something you’ll likely need to invest in. Raising brand awareness is generally key when it comes to increasing sales and expanding operations. Marketing can come in many forms, from social media advertisements, to blog syndication, to direct mail campaigns.

Real World Example: The Growth CMO®, a marketing firm with the mission of helping entrepreneurs scale their businesses, worked with SmartBiz to secure an SBA loan that enabled them to reach more customers. They used their low-cost funds to launch targeted digital campaigns both regionally and on a national scale.

What are you not able to use an SBA loan for?

The key thing to remember is that, generally, an SBA loan must be used for development, rather than as a temporary solution for a small business’s financial troubles.

According to the SBA, ineligible uses of funds include:

  • Refinancing personal debt
  • Payment of delinquent payroll, sales or real estate taxes
  • Payments, distributions, or loans to an associate or owner of the business
  • Real estate purchases held primarily for sale, lease, or investment
  • Floorplan financing (primarily used by auto dealers)

Additionally, individual lenders may have their own unique restrictions.

An SBA loan can help your small business grow and thrive

While all loans have restrictions, SBA loans typically make it easier for small businesses to meet their goals.

Consider your business plans, where you are now, and where you want to go, and you’ll generally have a better idea if an SBA loan is the right fit for your small business.

Ready to take the next step? Apply with SmartBiz today to see if you prequalify for up to $350,000 in five minutes*.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

 What you need to know: The information provided through SmartBiz® University and the articles contained therein are for educational purposes only. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.