The Small Business Administration, or SBA, loans are a versatile option for small business owners looking to help grow their businesses. Small business owners often wonder, ‘How does the SBA help small businesses like mine?’

The SBA loan program is designed to address specific challenges and foster growth. These loans provide flexible funding to support your business’s capital and cash flow needs.

However, SBA loans have specific requirements regarding the use of funds. While a hallmark of SBA loans is added financial flexibility, the SBA defines specific acceptable uses, and adhering to these guidelines is crucial for compliance.

SBA Loan Benefits Overview

If you meet the eligibility criteria, SBA loans offer significant benefits, all adding operational flexibility for your business. To participate in the SBA benefit program and qualify for loan assistance, businesses must meet certain criteria, including size standards, industry type, and creditworthiness. Benefits include:

• Bypassing strict loan-to-value ratio requirements: Allowing businesses to access funding without needing as much equity.
• Extended amortization periods: Offering longer repayment terms to ease cash flow management.
• Lower down-payment requirements: Freeing up capital for other essential business needs.

To be eligible, you must meet the following SBA loan guidelines:

• Be a for-profit business in an eligible industry physically located and operating in the US
• Be actively involved in the business
• Have acceptable creditworthiness and business character without delinquent government debt
• Demonstrate a need for funds
• Fit the SBA's definition of a small business, meets SBA's size standards

The SBA backs various loans, but the most common ones include the 7(a) and 504 loan programs. The following overview outlines the types of SBA term loans, acceptable uses of funding, and unique benefits each program offers to help small business owners make informed financing decisions:

SBA 7(a) Loans

The SBA 7(a) loan program offers financial assistance for a wide range of business purposes. Whether you’re looking to acquire a business, purchase commercial real estate, or need working capital, the 7(a) loan program can provide the funding you need.

Key benefits of SBA 7(a) loans:

• Funding from $500,000 to $5 million
• Up to 100% financing available
• Longer repayment terms for improved cash flow
• Competitive interest rates

SBA 504 Loans

The SBA 504 loan program is specifically designed to help businesses acquire funds for expansion and modernization. This includes purchasing land or buildings, constructing new facilities, or upgrading existing equipment.

Key benefits of SBA 504 loans:

• Funding up to $13.5 million
• Downpayments as low as 10%
• Longer repayment terms of up to 25 years
• Below-market, fixed interest rates for long-term stability

Each SBA term loan has specific requirements for meeting requirements and acceptable uses, which are covered in detail below. Make sure to review SBA loan eligibility terms and guidelines before applying and deploying funds.

Funds Are Available for a Variety of Needs

Consider your business plans and financing needs to find the best structure because not all loans may work for how you want to use the funds.

Here's a closer look at some of the SBA eligibility guidelines for acceptable ways to use the funds from these loan programs:

SBA 7(a) Loans

The SBA 7(a) loan program is the most flexible and covers many business needs, including:

• Acquiring a business: Access funding and flexible terms to acquire a new business
• Purchasing commercial real estate: Buy existing commercial buildings or land for new construction projects
• Funding construction and renovation: Access capital for large-scale construction or renovation projects to modernize or expand facilities
• Accessing working capital: Cover daily operational costs or needed capital injections
• Procuring equipment and inventory: Purchase equipment or cover inventory restocking needs
• Refinancing debt: Consolidate multiple loans into one loan and lower your monthly payments
• Buying a partner in or out: Provide funding for changes in business ownership
• Improving leased properties: Renovate or make improvements to leased properties

SBA 504 Loan Programs

These loans typically help support business expansion and job creation.

• Purchasing commercial real estate: Buy existing commercial buildings or land for new construction projects
• Funding construction and renovation: Access capital for large-scale construction or renovation projects to modernize or expand facilities
• Refinance for expansion or debt consolidation: Refinance existing commercial loan debt to lower monthly payments and consolidate debt

Each SBA loan program has its unique features and requirements. The best loan for your business depends on your project, funds needed, and the loan terms that work for you. If you’re considering one of these SBA loan programs, understanding how to get your first small business loan, including the application and eligibility requirements, is crucial.

Understanding Spending Limits

Of course, knowing what you can use SBA loans for is important, but you also want to be aware of unacceptable funding uses. This can help keep track of compliance and avoid any potential legal and financing issues later.

Here’s a breakdown of specific unacceptable uses for SBA 7(a) and 504 loans.

SBA 7(a) Loans

While SBA 7(a) loans offer versatile funding options, note that the following uses are strictly prohibited.

• Speculative real estate investments: These are investments in property purchased with the sole intent of reselling it for a profit.
• Refinancing existing debt under already favorable terms: If your current debt has favorable terms, using an SBA 7(a) loan to refinance isn’t allowed.
• Personal debts or distributions to associates of the business: This includes covering personal debts, distributions to owners, affiliates, or other associates of the business, or paying other non-business expenses.
• Investments in other businesses or the stock market: The loan can’t be used to invest in stocks, bonds, or other businesses.

SBA 504 Loans

SBA 504 loans are a valuable resource for eligible businesses, but there are specific restrictions on how the funds can be used.

• Working capital or inventory: These loans are for fixed assets, not expenses like payroll, rent, or inventory purchases.
• Refinancing existing debt with favorable terms: SBA 504 loans can’t be used to refinance existing debt unless it’s for favorable terms, expansion, or debt consolidation.
• Non-business-related purchases: These loans can’t be used for personal expenses, investments unrelated to the business, or other non-eligible activities.

There are a handful of unacceptable fund uses that apply to all SBA loans.

• Payment of delinquent taxes
• A purpose that doesn’t benefit the small business
• The use of SBA loan funds for political contributions or similar activities
• Illegal activities at the federal level or operations related to gambling

Funds Are Available for a Variety of Needs

While SBA loans are an option for many business owners, they may not be the perfect fit for your needs. There are alternatives if you need faster access to funding, don't meet all the eligibility requirements, or prefer a different approach.

• Find angel investors or venture capital firms for funds for early-stage businesses with growth potential.
• Explore microloan options from organizations that provide small loans to entrepreneurs.
• Lease or finance essential equipment through specialized lenders.
• Consider using business credit cards strategically for short-term needs.
• Apply to local, state, and federal grants specific to your industry.

Ready to Apply?

SBA loans offer an array of flexible funding options tailored to meet business owners' needs that can help set them up for long-term success. However, by understanding the restrictions and requirements, you can make informed decisions and avoid potential legal or financial complications.

Work with a SCORE mentor or an experienced SBA lender to navigate different options and understand the SBA loan benefits that best align with your business goals.