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Use of proceeds
Also called purpose of loan, permitted use, loan purpose.
What the money is for — stated on the application, restricted in the agreement, and a covenant you can breach while making every payment on time.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
On most products other than a cash advance, purpose is not a formality. It drives eligibility, sets the maturity, shapes the collateral package, and appears in the documents as a restriction you are bound by after closing.
Why it sets the term
Lenders match the life of the money to the life of what it buys. Real estate gets the longest amortisation, equipment gets something close to its useful life, working capital gets the shortest. On SBA loans this is explicit: permitted uses and their maximum maturities are set by programme rules, and a loan with mixed uses carries a maturity blended by allocation.
Typical restrictions in the documents
- No use to retire other debt without written consent
- No distributions or loans to owners or affiliates out of proceeds
- No acquisition of another business, no investment outside the ordinary course
- Direct disbursement to a vendor or a settlement agent rather than to you, with invoices or a closing statement as evidence
- On construction and equipment facilities, draws released against certified progress rather than in a lump
Where accuracy is not optional
Stating a purpose you do not intend is a misrepresentation in the application and a breach of the use covenant. On an SBA loan, a materially false statement on the application is a federal criminal matter, and the forms say so directly above the signature line.
Where this one catches people
Cash advances mostly do not restrict use, and business owners carry that expectation into a bank, equipment or SBA file where it is wrong. Using a term loan or a line draw for something other than the stated purpose is an event of default even where every payment has been made on time — and it surfaces later, at an annual review, a field examination, an SBA servicing action or a refinance, when someone reconciles the disbursement to what you actually bought. By then it is a defaulted loan you have been servicing perfectly, which is a much worse conversation than the one you avoided.
The other direction catches people too. If you need the money to retire an existing advance, say so. Some lenders will decline. Some run refinance programmes built specifically for it, and disclosure is the only route to that second group. Concealing the payoff puts you in default on the new facility while still owing the old one.
Where you will meet this term
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Use of proceeds — common questions
What does use of proceeds mean?
What the money is for — stated on the application, restricted in the agreement, and a covenant you can breach while making every payment on time.
Where does use of proceeds catch people out?
Cash advances mostly do not restrict use, and business owners carry that expectation into a bank, equipment or SBA file where it is wrong. Using a term loan or a line draw for something other than the stated purpose is an event of default even where every payment has been made on time — and it surfaces later, at an annual review, a field examination, an SBA servicing action or a refinance, when someone reconciles the disbursement to what you actually bought. By then it is a defaulted loan you have been servicing perfectly, which is a much worse conversation than the one you avoided.
Is use of proceeds the same as an interest rate?
Use of proceeds is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does use of proceeds apply to?
Term Loan, Business Line of Credit, SBA Loan, Equipment Financing, Asset-Based Lending.
Is there a worked example of use of proceeds?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside use of proceeds?
Conditions precedent, Consolidation, Covenant, Disbursement, Event of default.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.