FAQ — 25 Common Questions
Answers compiled from 2026 SBA SOP 50 10 8, the lender packets at Wallis Bank's 2026 SBA application and People's Bank's complete 2026 guide, and direct experience packaging SBA and bank loan applications.
What is a use of funds statement?
A 1-2 page document that tells lenders or investors exactly how loan proceeds or investment capital will be allocated. Pairs an itemized table of uses (where the money goes) with a list of sources (where the money comes from), with totals balancing to the dollar. For SBA loans, banks, and commercial lenders, it's a required component of the application. For VC and angel pitches, it's typically a slide in the deck. Strongest statements pair the table with a strategic narrative connecting each line item to a measurable business outcome.
Is a use of funds statement required for SBA loans?
Yes — every SBA 7(a), 504, and Express loan application requires a use of funds breakdown. SBA Form 1919 explicitly asks for the loan amount and use of proceeds, and the lender's credit memo must document how the funds will be deployed and why each use is eligible under SBA SOP 50 10 8. Vague statements like "working capital" without a specific allocation will be returned for clarification. The loan committee approves a specific use of funds — material changes after approval require a formal modification request.
Is a use of funds statement required for business credit cards?
No — business credit cards, no-doc business lines of credit, vendor net-30 accounts (Uline, Quill), and most fintech revenue-based products do not require a written use of funds. The application asks for annual revenue, time in business, and personal credit, but does not ask how the credit line will be deployed. This is one of the structural reasons revolving credit products sit at the bottom of a capital stack while term loans (SBA, conventional bank) sit at the top — the documentation burden scales with the size and term of the facility.
What counts as "working capital" for SBA?
For SBA purposes, working capital is narrowly defined as day-to-day operational expenses — rent, payroll, insurance, utilities — plus one-time loan project expenses like permits, licenses, and business or equipment valuations. Critically, working capital does NOT include inventory purchases, equipment purchases, paying off accounts payable, or anything that improves the balance sheet. Those have to be separate line items. This is the single most-missed nuance in SBA applications and is the reason an inexperienced borrower's $20K "working capital" request gets restructured into $12K to the borrower plus $5K paid directly to inventory vendors and $3K paid to FF&E vendors.
Can I use SBA funds to pay off personal debt?
No. SBA 7(a) and 504 proceeds cannot be used to pay personal debt, reimburse owners for prior equity contributions, or fund any expense that does not directly support business operations. Personal credit cards, personal auto loans, personal mortgages, student loans, and personal lines of credit are all ineligible. The SBA explicitly prohibits use of proceeds for personal expenses under its Standard Operating Procedures, and a use of funds statement that includes personal debt payoff will trigger an automatic decline regardless of the rest of the file's strength.
Can I use SBA funds for delinquent taxes?
No — repaying delinquent federal, state, or local taxes is an explicit SBA ineligible use. This is one of the most-missed decline triggers because borrowers (reasonably) think a tax payoff is a legitimate business expense. The SBA's position: delinquent taxes signal financial distress, and the SBA program is not designed to bail out businesses that have failed to meet their tax obligations. Current taxes (paid in the ordinary course) are fine; delinquent taxes are not. The fix is typically to negotiate an installment agreement with the IRS or state taxing authority before applying for SBA financing.
Can I include cash reserves in my use of funds?
Yes — and you should. A 10-15% contingency reserve line item is one of the strongest signals to a sophisticated underwriter that you've thought through downside scenarios. The reserve must be specifically labeled as a contingency for project cost overruns or working capital cushion, not as a generic "reserves" or "miscellaneous" bucket. Lenders prefer borrowers who plan for the unexpected. The reserve is technically deployed as needed during the project; if unused, it becomes additional working capital cushion at project completion.
How specific does the breakdown need to be?
Specific enough that an experienced underwriter can verify each number against supporting documentation. "Equipment: $200,000" fails. "CNC machine — Mazak Integrex i-200 (vendor quote attached): $220,000" passes. The rule of thumb: every line item above $10K should have a supporting document (vendor quote, lease agreement, purchase contract, payroll projection) that backs the number. Generic categories signal an unprepared borrower; specific line items with supporting documentation signal a borrower who has actually built a deployable plan.
Can I change the use of funds after SBA approval?
Material changes require a formal modification request to the lender, who in turn submits to the SBA for approval. Minor reallocations within approved categories (shifting $5K from one piece of equipment to another in the same category) are generally fine. Material changes (using working capital for a real estate purchase, or shifting acquisition funds to inventory) require formal modification, typically take 2-4 weeks to process, and may not be approved if the change materially alters the deal's risk profile. Practical implication: write a use of funds you can actually execute.
Do sources and uses need to match?
Yes — this is the #1 mechanical rule. Sources (loan amount + equity injection + seller note + any other funding) must equal Uses (every dollar of deployment) to the dollar. A mismatch signals a borrower who can't do basic accounting and is one of the fastest ways to kill an application before an underwriter even reads the strategic narrative. Always verify the totals match before submission. If sources exceed uses, the excess is technically additional working capital reserve and should be reclassified. If uses exceed sources, the borrower needs more equity, a larger loan, or a smaller project.
What's a typical contingency reserve percentage?
10-15% of total project cost is the standard range for SBA and bank loan applications. Construction-heavy projects (build-out, renovation) lean toward 15%; equipment and acquisition deals lean toward 10%. VC pitches typically allocate 10-20% as "reserves" or "general working capital cushion" to demonstrate runway flexibility. Below 5% signals overconfidence; above 20% signals lack of cost visibility. The sweet spot is 10-12% with a specific contingency narrative explaining what the reserve is for.
Can I use SBA funds to refinance my existing SBA loan?
Generally no — SBA-on-SBA refinancing is restricted to specific permitted scenarios under SBA SOP rules. Conventional debt refinance is allowed under specific conditions (existing debt has unreasonable terms, was originally for an eligible SBA purpose, etc.). If you have an existing SBA 7(a) loan and want to refinance it with another SBA 7(a), the file goes through a special refinance review and is often denied. The exceptions are narrow and lender-specific; consult an SBA-experienced lender before assuming refinance eligibility.
Can I use SBA funds to buy out a partner?
Yes, under specific SBA-approved partner buyout structures. SBA SOP 50 10 8 permits change of ownership transactions where 100% of the business is being acquired (one partner buys out another to become sole owner, or a third party buys out all existing partners). The transaction must be at fair market value (supported by independent business valuation), the seller may need to remain on a seller note, and the new ownership structure must be SBA-eligible. Partial buyouts (one partner reducing from 50% to 25%) generally are NOT eligible. The use of funds line item should be labeled as "Change of ownership — buyout of departing partner" with the buyout agreement attached.
Can I include AI, software, or SaaS expenses in my use of funds?
Yes — AI-related and technology expenses became explicitly eligible under SBA SOP 50 10 8 in 2024. Eligible categories include AI software licenses, machine learning tools, cybersecurity software, ERP systems, CRM platforms, and the implementation/integration costs for these systems. The line item should be specific (vendor name, license duration, implementation scope) rather than generic "software." Multi-year prepaid SaaS is generally treated as a one-time expense; recurring monthly SaaS is typically treated as part of working capital. Hardware (servers, workstations) falls under equipment, not software.
What about real estate purchase?
Real estate purchase is eligible under both SBA 7(a) and SBA 504, with restrictions. Property must be at least 51% owner-occupied for existing buildings (60% for new construction). Investment property, buy-and-hold rentals, and speculative real estate are NOT eligible — those need conventional commercial financing or DSCR investor loans. For owner-occupied commercial real estate, SBA 504 is usually the better product because it offers lower down payment (10%) and longer fixed-rate terms than 7(a). See our
SBA 504 Real Estate guide for the deeper dive.
Working capital vs inventory — what's the difference for SBA?
Working capital is operational cash burn (rent, payroll, utilities, insurance). Inventory is products held for resale that improve the balance sheet. The SBA treats them as separate line items because the disbursement structure differs: working capital is typically disbursed to the borrower (lump sum or staged draws), while inventory is paid directly to the vendor against a purchase order or invoice. Mixing the two is the most common SBA application restructuring trigger. Always separate them: "Working capital (rent, payroll, utilities — 90 days): $50,000" on one line, "Inventory purchase (initial stock — vendor PO attached): $30,000" on another.
How does the SBA disburse the funds?
The SBA does not disburse funds itself — the lender disburses, and disbursement structure varies by use category. Working capital: lump sum or staged monthly draws to borrower. Equipment: paid directly to vendor against PO/invoice (borrower never touches the cash). Real estate: paid to seller at closing. Acquisition: paid to seller at closing, sometimes with seller note structure. Construction: 3-6 staged draws with lender inspection at each draw and 10% retainage held until project complete. The use of funds statement should reflect this disbursement reality.
Can the SBA disburse working capital all at once?
Sometimes — disbursement structure is set by the lender within SBA guidelines. For loans under $350K, lump-sum working capital disbursement at closing is common. For larger loans, staged monthly draws (with documentation of how the prior draw was deployed) are increasingly common, especially for new businesses or borrowers with less operating history. The advantage of staged draws: it forces disciplined deployment and prevents blowing through working capital in the first 90 days. The disadvantage: cash flow management requires more attention. Discuss the structure with your lender during underwriting.
Do I need supporting documentation for each line item?
Yes for major items, no for working capital. Equipment over $10K: vendor quote (3 quotes preferred). Real estate: purchase agreement and appraisal. Acquisition: business purchase agreement, business valuation, financial statements. Construction: contractor bid and scope of work. Working capital: a simple narrative breakdown (rent $X, payroll $X, utilities $X) without backing each line to a specific document is generally acceptable. The 80/20 rule: 80% of the loan amount should be backed by specific documentation, 20% can be working capital and contingency without document-by-document support.
What's the difference between sources and uses statement vs use of funds?
Same document, different naming convention. "Use of funds statement" typically refers to just the deployment side (where the money goes). "Sources and uses statement" explicitly includes both sides — where the money comes from (loan + equity + seller note) and where it goes (each itemized use). Most SBA applications require both sides, even if the document is titled "use of funds." Best practice: always include both sides regardless of what the lender's form calls it.
How long should the document be?
1-2 pages is the typical length. Page 1: sources and uses table with itemized line items, dollar amounts, percentages, and brief 1-2 sentence rationale per category. Page 2 (optional): expanded strategic narrative explaining timing, expected impact, and risk mitigation. For larger loans ($1M+), a 2-3 page document with detailed timing tables and milestone-based deployment schedules is appropriate. Beyond 3 pages, the document starts to lose focus. The strongest statements are dense — every sentence earns its place.
Can I include marketing in my use of funds?
Yes — marketing is an explicitly eligible SBA 7(a) use. The line item should be specific: "Google Ads + Meta Ads campaigns (Q1-Q2): $25,000" beats "Marketing: $25K." Better yet, tie the marketing spend to a measurable outcome: "Google Ads + Meta Ads (Q1-Q2) projected to generate 1,200 qualified leads at $20 CAC, supporting Year 1 revenue projection of $480K." Marketing line items above $50K typically benefit from a brief media plan attached as supporting documentation.
Can I pay myself a salary from loan proceeds?
Yes, under specific conditions. Reasonable owner compensation as part of payroll is eligible — meaning the owner is actively working in the business and the salary is at fair market rate for the role. Owner distributions (dividends, draws not tied to active management) are NOT eligible. If you're the working CEO of a $2M-revenue business and pay yourself $120K, that's reasonable payroll. If you're absentee and want to extract $200K from the loan as a distribution, that's prohibited. The line item should be "Payroll (including owner compensation as working CEO): $X" with role description and salary benchmark in supporting documentation.
How do I write the strategic rationale?
Use the 5-question framework: WHAT specifically (the equipment model, vendor name, scope of work), WHY this allocation drives outcomes (revenue lift, margin improvement, cost reduction, risk mitigation), WHEN deployment occurs (Day 1, Month 3, Quarter 2 milestones), HOW results are measured (KPI, conversion rate, capacity utilization), WHO executes (named team member or vendor). Two-to-three sentences per category is the sweet spot. The narrative should connect each dollar to a measurable business outcome — not just describe what's being purchased.
Should I include closing costs in the use of funds?
Yes — closing costs are an eligible SBA financed expense and should be included as a specific line item. Typical SBA closing costs include the SBA guarantee fee (2-3.75% of guaranteed portion), lender packaging fee ($500-$2,500), legal fees ($1,500-$5,000), title insurance and recording fees (real estate deals), environmental Phase I (real estate), business valuation (acquisition deals — $2,500-$7,500), and equipment appraisal (large equipment deals). Most lenders allow closing costs to be financed into the loan rather than paid out of pocket. The line item should be "Closing costs (financed): $X" with the breakdown attached.
What happens if I underestimate the use of funds?
If the project actually costs more than the use of funds anticipated, you have three options: (1) draw on the contingency reserve if it's sufficient; (2) bring additional owner equity to cover the gap; (3) modify the loan amount, which requires formal lender and SBA approval and typically takes 4-8 weeks. The third option is rarely fast enough to save a project mid-execution. This is why the 10-15% contingency reserve is critical — it's the buffer that prevents you from needing modifications mid-project. Underestimating the use of funds is one of the most expensive mistakes a borrower can make because the fix arrives slowly.
Does my use of funds need to match my business plan?
Yes — ideally exactly. The business plan describes the strategy; the use of funds operationalizes it. Inconsistencies between the two are red flags for underwriters. If the business plan says "we will hire 5 engineers in Year 1" but the use of funds doesn't include payroll for 5 engineers, the file gets flagged. If the business plan projects $2M Year 1 revenue but the use of funds doesn't include the marketing spend or capacity build that supports that projection, the projection looks unrealistic. Build both documents simultaneously, with the use of funds reflecting the business plan's quantitative reality.