What is a use of proceeds statement, and why do lenders require one?

Why lenders require a use of proceeds statement

The number a borrower asks for and the number a business can support are rarely the same. A use of proceeds statement forces the request to be built from the bottom up: total project cost, less the borrower injection, less any seller or third-party financing, equals the loan requested. An analyst can check that arithmetic in thirty seconds.

Program eligibility also depends on it. SBA 7(a) proceeds cannot be used to repay delinquent taxes or to reimburse an owner for prior equity, and a 504 loan is restricted to fixed assets. If the allocation is vague, the lender cannot confirm eligibility and the file waits.

Finally, the mix drives structure. A request that is mostly equipment supports a longer term against the asset life; a request that is mostly working capital typically prices and amortizes differently. The allocation determines the term sheet.

What it tells a lender about the business or borrower

How to complete it

1. 1

   List every cost of the project

   Include soft costs most borrowers forget: freight and installation on equipment, permits, professional fees, initial inventory, and a working capital cushion for the first ninety days.

2. 2

   Describe each line, not just the amount

   Write the specific equipment model, the address being improved, or the creditor being refinanced. A line reading only "Other: 150,000" will be questioned.

3. 3

   Enter your cash injection

   State the amount you are contributing and where it comes from: business cash, personal savings, or a documented gift. Lenders verify the source.

4. 4

   Add seller notes and other financing

   Seller carryback, equipment vendor financing, or a grant reduces the requested amount and often strengthens the file.

5. 5

   Confirm the loan amount matches your application

   Total project cost less injection less other financing is the number that must appear on the application. Any mismatch triggers a rework.

Mistakes that send a file back

• Rounding the total to a convenient number instead of building it from real costs.
• Omitting installation, freight, and sales tax on equipment purchases.
• Allocating a large amount to "other" with no description.
• Requesting working capital that exceeds what the projections show the business can service.
• Including ineligible uses such as delinquent taxes or owner distributions in an SBA request.

Who needs one

Any borrower requesting term debt, an SBA loan, an acquisition facility, or equipment financing. Revolving lines of credit sometimes skip it, because the purpose is general working capital by definition, but many banks still want the projected usage.

It is required on virtually every SBA 7(a) and 504 file, and it is usually the first document a broker or advisor builds because everything else keys off the request amount.