The government founded the Small Business Administration for the purpose of helping businesses that have trouble qualifying to receive loans from lending institutions. These businesses are typically too small to have sufficient collateral, too risky for investors to buy stock, or too new to have an established track record. The SBA encourages lenders to offer loans by guaranteeing a certain portion of the loan, which reduces the risk to the lender. The borrower is still required to repay the loan and the purpose of the program is not to exempt the recipient from payment but rather to offer an opportunity that otherwise would have been hard to obtain.
The 7 (a) Loan Program is a program that offers assistance to businesses with special requirements, especially those that serve some of the SBA’s specific goals. Revenue obtained from the 7 (a) program may be used to start up a new business or aid in the procurement, procedure, or development of an established business.
The ways in which 7 (a) loan proceeds can be used are very flexible; generally, anything that aids in the development and expansion of a small business is permitted. A business owner can use the revenue for the facilities a business needs, including land, real estate, construction, renovation, and restructuring of existing buildings. The money can go towards hard resources like heavy equipment, machinery, vehicles, and furniture, or soft resources such as smaller tools, raw materials, supplies, and fixtures. It can be used for working capital, both long-term (such as for inventory and accounts payable) and short-term (as with seasonal financing, construction financing, export production, or contract performance). In some cases, the money can go towards refinancing an established business or to finance inventory and accounts receivable, but there are many terms that the business owner must meet in order to use the revenue for such a purpose. The funds can also be put towards the acquisition of an existing business.
Inappropriate uses of the proceeds are typically those that use the money in order to shrug off some sort of burden onto the SBA. For instance, if a business owner wanted to refinance an old debt where the lending institution would lose money, and such refinancing would cause the SBA to take on a part of that loss, this would be an unacceptable use of the revenue provided. Using the money to transfer ownership of the business in a manner that does not serve the development of the business is also forbidden.
If a business owner is not sure whether his or her intent for the funds is acceptable, he or she should contact an SBA approved lender and discuss the matter.