Build a Use-of-Funds Plan Before Exploring an SBA Loan

A fictional New Mexico manufacturer wants to upgrade its workshop and buy extra seasonal inventory. Both expenses may help the company, but they need different explanations and perhaps different financing routes. Before comparing SBA small business loans, we recommend producing a one-page funding memo. It should show what you intend to purchase, when cash is needed and which business result might justify repayment.

Define the investment in one sentence

“Grow the business” is too broad to evaluate. A more useful statement says: “Purchase a production machine by March, improve workflow capacity and carry sufficient inventory for the summer order cycle.” It identifies a project without forecasting revenue.

Write the expected benefit beside each planned purchase: fewer outsourced production steps, shorter turnaround, more available stock or safer operations. Give each assumption an evidence source, such as supplier quotes, order history or capacity records. An expected benefit is not a confirmed order.

Identify the essential expenses and those that could wait. This clarifies the funding request.

Turn the idea into a use-of-funds memo

This hypothetical budget is a planning exercise, not a loan request submitted to an actual lender. The owner has $20,000 available for the project, while total proposed costs are $115,000. The resulting external funding gap is $95,000, before considering any additional financing expenses.

A quote has different weight from an estimate, and a paid invoice is different from a future obligation. Label each honestly. Avoid describing a contingency as an automatically eligible SBA expense.

Your cash request may arrive in stages. A vendor could require a deposit months before installation, while inventory orders might follow later. Note when the business must pay each invoice; otherwise a single headline figure can hide short-term cash shortages. Keep adequate operating cash outside the project.

We encourage readers to move from general business financing concepts to this dated, evidence-backed spending plan before approaching a lender.

Distinguish 7(a) from 504 by the expense

The SBA’s 7(a) program permits several eligible business uses, including working capital, purchasing equipment and improving qualifying real estate. Its flexibility does not mean every applicant or every proposed expense qualifies.

By contrast, 504 financing focuses on qualifying fixed assets such as eligible buildings, improvements and long-term equipment. SBA guidance specifically excludes working capital and inventory from ordinary 504 uses. Business eligibility, project purpose and program details still control the answer.

In the example, the machinery and buildout call for one set of questions, while the seasonal stock calls for another. Sorting costs by purpose helps a lender discuss possible structures. A 504 project generally involves a Certified Development Company, or CDC, working with a senior lender, whereas a 7(a) application goes through a participating lender.

Assemble evidence around repayment

A useful folder tells a reviewer where the numbers originated and how the company expects to make payments. Collect current business financial statements, recent tax information if requested, existing debt schedules, ownership details, supplier estimates, a concise business plan and a month-by-month cash-flow forecast.

That list is a preparation aid, not a universal application package. Depending on the program, lender and business, reviewers may ask about collateral, existing liens, projected operating expenses, management experience or other records.

Test the plan against a slower-sales case. If summer orders arrive six weeks late, can the company still cover payroll, supplier bills and projected debt service? Show the assumption openly rather than hiding it in the revenue forecast. The financing request should describe how repayments could come from operations; a hoped-for increase in sales alone is thin support.

Record who prepared each figure and its date. Retain prior versions when forecasts change.

Know who reviews the request

For ordinary 7(a) financing, borrowers work directly with an SBA participating lender. The SBA generally guarantees qualifying loans rather than processing the borrower’s entire request as a direct bank-style application. For 504, an authorized CDC is a key application partner. SBA’s Lender Match is an official way to find participating lenders, though a match does not mean approval.

Ask the institution which costs it will consider, what borrower contribution it expects, which documents are still missing and who determines credit eligibility. We do not imply this website itself originates SBA loans or can approve a project.

Decide what the memo says next

The owner can reduce the request if some purchases can wait, investigate a suitable SBA program with an eligible lender, or postpone borrowing until forecasts and records improve. The right next step follows from the purpose, evidence and repayment capacity—not the program name alone.

This material is educational, not an individual financing recommendation. Keep the memo current and ask an authorized lender or CDC to evaluate actual eligibility and terms.