A use of funds memo is a borrower-prepared narrative explaining exactly how loan proceeds will be spent — itemized by category and amount — required for SBA loan applications and standard practice for most bank commercial loans.
The use of funds (UoF) memo, also called a use of proceeds statement, serves two purposes for the lender: (1) it ensures the loan purpose is eligible (SBA and bank loans have prohibited uses — passive investment, loan payoffs in certain circumstances, etc.); and (2) it provides a check on the loan amount — if you're requesting $400,000 but the use of funds only accounts for $280,000, the underwriter will question the discrepancy. A strong UoF memo is specific and itemized: 'Equipment purchase — walk-in cooler and commercial range: $42,000; Leasehold improvements — kitchen renovation: $78,000; Working capital reserve: $30,000; Total: $150,000.' Vague memos ('general business purposes' or 'working capital') prompt underwriter requests for more detail and slow down the process. For SBA 7(a) loans, eligible use of proceeds includes: acquisition of land or buildings, construction, renovation, equipment purchase, working capital, business acquisition (goodwill + assets), inventory, and debt refinancing (in limited circumstances and with SBA approval). Ineligible uses include: repaying delinquent IRS taxes (without a current repayment agreement), passive investment, speculation, or lending activities.
At application, estimates are acceptable. At closing, SBA loans typically require supporting documentation (vendor quotes, contracts, invoices) for major items. Proceeds may be disbursed in stages (via an escrow or controlled disbursement) tied to receipt of invoices — particularly for construction draws.
In limited circumstances — SBA permits refinancing of existing business debt that is on 'unreasonable terms' with a specific analysis required. Paying off credit card debt or high-rate MCAs with SBA proceeds is not automatically permitted; it requires showing the refinancing improves the business's financial position. Consult the lender's SBA specialist for current eligibility.
Yes. Working capital is explicitly an eligible SBA 7(a) use of proceeds, and SBA Express loans are frequently used for working capital lines. For term loans, lenders generally want working capital to be paired with a specific need (ramp-up period, seasonal gap, post-acquisition operating costs) rather than indefinite general purposes.