When you apply for a business loan, you won’t necessarily get your funds right after your loan closing. This is usually the case for U.S. Small Business Administration (SBA) loans. For example, with 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 release loan funds in pieces because it keeps you accountable for how you use the funding. It also encourages you to spend your own money and investors’ money before the loan funds are used.
A common issue business owners face in this situation is delays in disbursements. Follow the key steps outlined here to prove your business is ready for the next loan disbursement, and keep your project and business on track.
How do lenders control SBA loan disbursements?
Your lender will make sure you’re using your loan funds as intended by using equipment quotes, construction contracts, rental lease, and financial projections from your loan application. They’ll check in to verify that you’re paying for all the things you proposed when you applied for the loan.
There are several items that lenders will want you to pay for yourself or with investor funds, including the cost of your lease deposit and some of your developmental costs, among others. This is the amount of equity that you and your lender agreed would be spent before you receive funds from your loan. They’ll also want to see that any 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 usually follow the natural progression of a project. Here’s a sample timeline:
- Construction/renovation: These loan disbursements are made directly to your construction contractor according to their invoices. If you paid those invoices in advance from your business account, you could also receive a disbursement as a reimbursement. With each disbursement, your lender will need some documentation that shows the progress being made and the percentage completed to ensure that the construction work stays on budget.
- Machinery, equipment, furniture, and fixtures: The next cost to consider 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.
Your transactions for this part of the project will be smaller than those related to construction. With that, your lender will focus on reimbursing batches of costs paid by your business rather than paying your vendors. To get reimbursed, you’ll submit a log of all the purchases you made, including copies of your invoices and receipts (copies of checks, bank statements, and credit card statements).
- Startup expenses and working capital: As your business gets started, you’ll move into a new phase of disbursements to cover your working capital needs. More than likely, you’ll be using the proceeds from your loan to pay for 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 make working capital disbursements on a monthly or quarterly basis. Your lenders will review your profit and loss statement each time to see how your business is progressing towards reaching that break-even point.
What causes delays in SBA loan disbursements?
There are a few reasons why a loan disbursement may be delayed, but most are avoidable with proactive communication and preparation. Here are a couple of scenarios where delays in disbursements can happen and why.
Delays before the first loan disbursement:
Before closing on the loan your lender will make sure that all the funds you agreed to invest in the business were successfully deposited. The first loan disbursement after your closing usually takes place after you’ve spent these funds. Your business will need documentation to prove that all of the money contributed through equity has been used.
This is something you’ll want to approach carefully. Make sure your business makes the necessary payments quickly for costs that you planned to cover through your equity contribution. Focus on maintaining adequate payment records throughout the process to show that you spent the money and prevent delays on any construction work.
You’ll also want to stay in close contact with your lender during this time. As you get close to using up your funds (with some still left in your account), you can apply for an additional loan disbursement.
Delays after the first loan disbursement:
After the first loan disbursement, delays can be caused by:
- inadequate documentation on spending
- changes to how you plan to spend your loan funds (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)
It can’t be stated enough: throughout the process you’ll need to make sure that you’re keeping complete and detailed documentation. Stick with your proposed plan, and use your funds appropriately to keep your loan disbursements on time.
Keeping in touch with your lender
Staying in touch with the loan closing and disbursement team is the best way to keep your funding distributed on time. The loan closing team is experienced in dealing with all types of situations. They’ll be able to give you advice on how to 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.