SBA rules · SOP 50 10 8.1

What can't an SBA loan be used for?

SBA loan proceeds cannot fund transactions that fail to benefit the small business, shift potential lender losses to the SBA, or finance prohibited expenses, nor may financing be provided to businesses deemed ineligible by statute or SBA policy.

Quoted from SBA SOP 50 10 8.1Every quote checked word for word

In detail

Core prohibited uses of proceeds: Under SOP 50 10 8.1, loan proceeds cannot be used for payments, distributions, or loans to Associates (except reasonable compensation for services or eligible ownership changes), refinancing debt owed to an SBIC or NMVCC, floor plan financing, unauthorized lines of credit, purchasing excess land, paying delinquent trust fund taxes such as payroll or sales taxes, or paying any creditor in a position to sustain a loss.
Program-specific and structure restrictions: Proceeds cannot be used to improve rentable property subleased to third parties, fund C-PACE obligations, or pay 401(k), ESOP, or cooperative setup and formation costs. For 504 loans, proceeds cannot fund any costs not directly attributable to or necessary for the project, foreign projects, or business relocations causing substantial job losses.
Ineligible business types: Ineligible entities include non-profits (with limited exceptions for for-profit subsidiaries), businesses primarily engaged in lending, financing, or factoring whose stock in trade is money, life insurance carriers, foreign-located businesses, pyramid sales distribution plans, speculative ventures, and passive investment businesses or landlords not occupying the required rentable space.
Legal, character, and policy exclusions: Ineligibility applies to businesses engaged in activity that is illegal under federal, state, or local law (including marijuana businesses), businesses deriving more than one-third of gross revenue from legal gambling or more than 5 percent from prurient sexual activities, government-owned entities (outside eligible tribal concerns), and businesses with unresolved delinquent federal debt or prior losses to the government.
Ownership and status restrictions: Assistance is barred if an Associate is incarcerated, serving a sentence, or under indictment for a felony or financial misconduct (an owner on parole or probation can still qualify), if an SBA Lender holds an equity interest (outside SBICs), or if any direct or indirect owner or required guarantor is an Ineligible Person under citizenship and residency requirements.

The source

What the SOP says

“Loan proceeds may not be used for any of the following purposes (including the replacement of funds used or borrowed for any such purpose):

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > 13 CFR § 120.130 (lines 803-817)✓ Verified

“Payments, distributions, or loans to an Associate of the Applicant (as defined in 13 CFR § 120.10), except for compensation for services actually rendered at a fair and reasonable rate or to facilitate 7(a) loans for changes of ownership in accordance with 13 CFR § 120.202 and the guidance in Section B of this SOP on partial changes of ownership;

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > 13 CFR § 120.130 (lines 803-817)✓ Verified

“To pay any creditor in a position to sustain a loss causing a shift to SBA of all or part of a potential loss from an existing debt 13 CFR § 120.201 and 13 CFR § 120.884(b).

SOP 50 10 8.1, Chapter 3: Uses of Proceeds > 13 CFR § 120.130 (lines 803-817)✓ Verified

“The SBA Lender must determine whether the Applicant is one of the types of businesses listed as ineligible (13 CFR § 120.110).

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Types of Ineligible Businesses (lines 388-399)✓ Verified

“Businesses that are engaged in any activity that is illegal under federal, state, or local law are not eligible. 13 CFR § 120.110 (h)

SOP 50 10 8.1, Chapter 1: Primary Applicant Eligibility Requirements > Life insurance carriers are not eligible. 13 CFR § 120.110(d) (lines 435-444)✓ Verified

“activity that is illegal under Federal, state or local law

SOP 50 10 8.1, Chapter 6: SBA Terms and Conditions through Disbursement for all 7(a) Loans > Borrower Certifications: (lines 3005-3019)✓ Verified

“Any costs not directly attributable to or necessary for the Project may not be paid with proceeds of the 504 loan.

SOP 50 10 8.1, Chapter 1: Eligibility through Submission of Application > Ineligible Costs (lines 3365-3367)✓ Verified

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