Can I Use an SBA Loan to Pay Off Personal Debt?

Like many small business owners, your business exists as an extension of yourself. It is your identity and your hard work. However, you cannot use you SBA loan to pay off your personal debt, such as credit cards, mortgage or other debts.

The SBA Designates Proper Uses of Funds

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Pursuant to the SBA's Standard Operating Procedures (SOP), the use of 7a loan funds is limited to the following:

1. Permanent working capital; 
2. Revolving working capital; 
3. Furniture and fixtures; 
4. Machinery and equipment; 
5. Purchase of land as part of an eligible project; 
6. Purchase, construction, or renovations to buildings; 
7. Business acquisition; and 
8. Refinancing of existing debt 

Paying your personal debts does not fit the bill of any of the approved categories.

The SBA Also Designates Improper Uses of Funds

Similarly, the SBA SOP contain a list of business loan proceeds restrictions:

1. Payments, distributions or loans to an Associate of the Applicant , except for compensation for services actually rendered at a fair and reasonable rate; 
2. A loan to an Applicant for the benefit of an ineligible affiliated business; 
3. Refinancing debt owed to an SBIC or a New Markets Venture Capital Company (NMVCC); 
4. Floorplan financing; 
5. Investments in real or personal property acquired and held primarily for sale, lease or investment; 
6. Payment of Delinquent Taxes; or Loan proceeds must not be used to pay past-due Federal, state, or local payroll taxes, sales taxes, or similar taxes that are required to be collected by the Applicant and held in trust on behalf of a Federal, state, or local government entity. Payment of delinquent business income taxes may be permitted if the Applicant has an approved payment arrangement with the IRS and the Applicant is current on the payments in the arrangement. 
7. To finance the relocation of the Applicant business out of a community, if there will be a net reduction of one-third of its jobs or a substantial increase in unemployment in any area of the country. 

Notice the first category would exclude payment of your personal debts. Part of the reason for this restriction consists of the tax implication. Money used to pay your personal debts should be claimed as income and therefore income taxes paid thereon. However, if you use your SBA funds to pay your personal debts, you receive income tax free. The other reason for the restriction surrounds the primary goal of the SBA program to help small businesses and create jobs. Using loan funds for you personal debts accomplishes neither of those goals.

What Are the Ramifications If I Use SBA Funds for Personal Use?

The ramifications will cause a great deal of potential legal and financial problems. The loan could be declared in default and called immediately. You could face legal issues for fraud as well as tax issues with the IRS for failing to report income. The business loan is for the business and you should always keep that in mind.

Contact Protect Law Group Today

If you are facing an SBA loan default, contact our offices today to speak with an experienced SBA attorney. Call toll free 833-428-0937 or submit your information on our website.