What to Expect from Your SBA Loan Disbursement

Loan Disbursement

Loan Disbursement: How to Get Funds from your Business Loan

When you apply for a loan, the disbursement process doesn’t necessarily end at your loan closing. You’ll need to understand how and when you’ll receive your small business loan funds. In the case of SBA 7(a) and Community Advantage loans, you won’t get your loan disbursement in one big check, but rather in “controlled disbursements.”

Lenders choose to disburse business loan funds in chunks because it keeps you accountable for how you use the funding. It also helps them to steer you into spending your own money and investors’ money before the loan funds are used.

There are key steps that you’ll need to take to prove your business is ready for the next loan disbursement, and to keep your project and business on track.

How do lenders control disbursements?

Lenders control distributions carefully based on the information you provided in your loan application. Using the quotes, contracts, rental lease, and financial projections in your loan application, the lender will make sure you’re using your loan funds as intended. They’ll check in to make sure that you’re paying for all the things you proposed in your application.

There are several items that lenders will insist that you pay for yourself or with investor funds, including the cost of your lease deposit and some of your developmental costs, among others. They’ll also want to see that all your proposed investor funding has been deposited into your business’s bank account, and that all of it (or nearly all of it) has been spent before they begin their disbursements.

Once your lender disbursements start, they generally fall into this timeline:

  • Construction/renovation: These loan disbursements are usually made directly to your construction contractor according to their invoices. In certain circumstances, they can be paid directly to you as a reimbursement in case you paid those invoices in advance. With each disbursement, the lender will need some documentation that shows the progress that has been made and the percent of completion to ensure that the construction work stays on budget.

  • Machinery, equipment, furniture, and fixtures: The next cost that’s subject to loan funds is machinery and equipment. You’ll want to time when you buy or lease your equipment and machinery well into the construction period so that payment isn’t delayed.

    At this point, the size of each transaction (each piece of machinery and equipment) is smaller than the transactions related to construction. With that, lenders tend to focus on reimbursing batches of costs paid by you rather than directly paying your vendors. This is done using a log that you submit showing all the purchases you made, a copy of the invoice from the vendor, and a copy of your check or credit card receipt proving the payment was made.

  • Startup expenses and working capital: Business loans can be used to fund working capital and startup expenses. Working capital, in this context, means the proceeds from the loan that are used to pay for all your business’s regular operating costs while revenues ramp-up to a point where you can cover these costs.

    Because working capital covers many small and frequently occurring expenses, this portion of your business loan isn’t based upon fulfilling individual transactions. Instead, lenders will often disburse working capital in monthly or quarterly chunks, each time reviewing a profit and loss statement to see how your business is proceeding towards reaching that break-even point.

What causes delays in disbursements?

There are a few reasons why a loan disbursement may be delayed. Let’s take a look at a couple of scenarios where delays in disbursements can happen and why.

Delays before the first disbursement:

The first loan disbursement (after the closing of the loan) usually requires you, the business owner, to prove that all of the money they pledged to contribute to the business has been used. This is a matter that should be approached carefully. You’ll want to make sure you quickly make your payments for your lease deposit and your portion of the construction costs with adequate payment records. This will allow you to prove that you spent the money and not delay any construction work.

Keep in close contact with your lender. As your funds deplete and you get close to using up all your funding (with some still left in your account), you can apply for your disbursement. Before closing on the loan your lender will make sure that all the funds that you proposed to invest in the business were successfully deposited, so the majority of the work after closing is making sure that these funds are spent.

Delays after the first disbursement:

After the first disbursement, delays can be caused by:

  • inadequate documentation on spending
  • changes to what you plan to spend your loan funds on (for example, if you need to make a major adjustment to the construction work
  • funds being used for inappropriate purposes, (for example, payments made from the business to the business owners)

Make sure that you’re keeping complete and detailed documentation, staying with your proposed plan, and using your fund appropriately to keep your disbursements on time.

Keeping in touch with your lender

Staying in touch with the loan closing and disbursement team is the number one factor in ensuring that funding is distributed on time. The loan closing team is experienced in dealing with all types of situations. They’ll be able to advise you on how to best approach changes to your project as they come along and how to provide documents that justify your use of funds.

Pursuit can help

Want to learn more about what small business lenders like Pursuit can offer you? With more than 15 small business loan programs and a range of additional services, we’re committed to helping your small business get stronger today and thrive tomorrow.

To learn more about how we can help you, contact us today.

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