SBA loans cannot be used for personal expenses, illegal activities, or non-business purposes like gambling, lobbying, or investing in passive real estate. Funds are strictly for business operations and cannot be used to pay off delinquent taxes, refinance debt that exposes the SBA to loss, or finance relocation.
What Can SBA Loans NOT be Used For? 7(a) cannot be used for refinancing debt that is reasonably structured (as defined by the SBA), to pay delinquent taxes, or for a loan that does not benefit your business directly.
SBA loans can be used for a wide range of business growth initiatives. These government-guaranteed loans can be used for any activity related to starting, growing, or building your business. The flexible eligible uses of proceeds enables business owners to have a high level of control over how they choose to use funds.
Key takeaways
Using business loan funds for personal expenses violates your loan agreement and can lead to financial, tax and legal consequences. If you need cash for personal expenses, consider paying yourself from your business, using a personal credit card or a personal loan.
Wrongful misapplication means the willful use of any loan proceeds without SBA approval contrary to the loan authorization. If you fail to use loan proceeds for authorized purposes for 60 days or more after receiving a loan disbursement check, such non-use also is considered a wrongful misapplication of the proceeds.
The SBA requires that the bank collateralize the SBA loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the owners as collateral. This more often than not includes your real estate, including your home.
To qualify for an SBA loan, your business must generally be a U.S.-based, for-profit entity, meet SBA size standards, have owners who are U.S. citizens/residents, demonstrate the need for funds and ability to repay, and show you've exhausted other financing options. Key requirements include good credit, a solid business purpose, owner equity investment, and providing extensive financial documentation like tax returns and business financials for several years.
The Targeted EIDL Advance provided funds of up to $10,000 to applicants who were in a low-income community, could demonstrate more than 30% reduction in revenue during an eight-week period beginning on March 2, 2020, or later, and had 300 or fewer employees.
I've been speaking with a number of lenders and recently learned about the SBA's rule that owners with 20% ownership or greater must provide a personal guaranty on the loan.
SBA 7(a) loan rates and terms
If a 7(a) loan is used for a real estate purchase, the repayment term is a maximum of 25 years. Interest rates tend to range from 7% to 9.5% but are subject to economic fluctuations. They will also require a down payment of anywhere from 10% to 20%.
You'll need to submit an offer in compromise to the SBA and provide evidence that you are unable to repay your loan. The offer you submit must be something you can reasonably repay and usually as a lump sum. Both your lender and the SBA must agree to the offer in compromise.
You cannot use an SBA Participation Loan for Personal Use. Generally, SBA loans must be used to support the operations of a business – start-up or existing. Specifically, the guidelines state: “An SBA-guaranteed loan cannot be made solely to an individual.” No personal homes, trips, jewelry or cars, etc.
Yes, a new LLC can get an SBA loan, but it's challenging as lenders often prefer established businesses (2+ years), requiring strong personal credit, a solid business plan, and sometimes collateral, though SBA microloans and certain 7(a) programs offer more flexibility for startups, focusing on the owner's creditworthiness and feasibility of the business idea.
For general SBA purposes, a small business must be for-profit, U.S.-based, independently owned, not dominant nationally in its field, and meet specific size standards (revenue/employees) for its industry, with variations for specific programs like loans or contracting. Key requirements include being a for-profit entity, operating in the U.S., being independently owned, not being nationally dominant, and meeting SBA's specific size definitions.
Cons of SBA Loans for Small Businesses
Yes, you can get a 0% interest loan, commonly found as promotional offers for cars, furniture, or credit cards, but they usually have strict terms like a high credit score requirement and a limited time period, with high retroactive interest or fees if you miss payments or don't pay in full by the deadline. True 0% APR loans are different from "deferred interest" offers where all accrued interest is charged if the balance isn't cleared by the end of the promo. Always read the fine print for details on fees, timelines, and what happens if you're late.
You cannot use an SBA loan for personal expenses (like homes, cars, or trips), to fund speculative investments or passive real estate, pay off delinquent taxes or other non-eligible debts, or for businesses in ineligible industries (like lending, insurance, or adult entertainment). Funds must be used for direct business operations and growth, not for personal benefit or non-qualifying business activities.
The IRS this week issued guidance clarifying that SBA payments on existing 7(a) and 504 loans under Section 1122 of the CARES Act are no longer considered taxable income to the borrower.