Resource Corner
The Many Uses of an Small Business Administration Loan
- Real Estate: SBA loans are offered to entrepreneurs who are looking to buy, construct, or improve commercial real estate, or purchase heavy equipment. For example, Chobani founder, Hamdi Ulukaya, financed 90% of the $700,000 purchase price for their first facility (a shutdown Kraft Foods plant) with an SBA 504 Commercial Real Estate loan and Ben & Jerry’s financed their third location with SBA funding.
- Partner Buyouts: Buying out a business partner can require significant cash. Once all partners have agreed on the business’ value, you can utilize an SBA 7(a) loan for a lump-sum buyout. Since the SBA’s 2018 update to their acquisition rules, it’s now easier for business owners to buy out their partners. The newer rules state that the borrower does not need to put down any equity provided that the business has a debt-to-net-worth ratio of 9:1 or less. If the ratio is larger than this, the borrower will need to put 10% down to qualify for the loan.
- Business Acquisitions: Similar to a partner buyout, small business owners can use SBA loans when purchasing an existing business, what the SBA refers to as a “change of ownership.” This is permissible when:
- a small business purchases 100% of the ownership interest in another business
- an individual who isn’t already an owner purchases 100% of the ownership interest in the business
- a small business acquires another small business through an asset purchase
- an Employee Stock Ownership Plan (ESOP) or equivalent trust purchases a controlling interest (51% or more) in the employer small business
- Equipment Purchases: Vehicles, machinery, computers, servers, raw input, etc.
- Working Capital: Includes any outlay you make to cover day-to-day expenses, such as salaries and consultancy fees, utilities, training and development, business travel, buying an existing franchise, etc.
- Inventory: Raw materials, semi-finished stock, merchandise and supplies, and finished wholesale purchases (for resale).
- Be an operating business
- Operate for profit
- Be located in the United States or its territories
- Be “small” under SBA size requirements
- Not be a pre-determined ineligible business
- Need to have tried to obtain alternate sources of financing, other than an SBA loan
- Be creditworthy and demonstrate a reasonable ability to repay the loan