How to Finance Business Expenses Not Covered by SBA Loans

Since the coronavirus pandemic began in early 2020, businesses have increasingly turned to Small Business Administration loans to cover payroll and fixed costs like rent, utilities and payments on long-term debt. 

While these SBA loan programs were funded through the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide critical funding for U.S. small businesses, they won't cover all of the expenses that businesses incur. 

Depending on how your business is set up, these SBA loans may not pay for a business owner's lost wages. They certainly weren't designed to cover things like inventory or property maintenance, let alone new or ongoing expansion projects. 

So, business owners have been left wondering how to finance these other outlays.

What expenses do SBA loans cover?

To figure out how to finance other expenses, it's important to first understand what SBA relief loans can be used for. The short answer is this: Anything. However, for business owners who ultimately want their loans forgiven (one of the major selling points for the PPP loans), loan proceeds can only be used for certain things. 

Loans provided through the SBA's 7(a) Paycheck Protection Program, for example, are based on a company's monthly payroll expenses. These loans were designed to help businesses avoid layoffs by covering payroll expenses for up to eight weeks of payroll. These loans can also be used for rent, utilities and other fixed costs, but employers who take PPP money and still lay off employees may not qualify for loan forgiveness later. 

The SBA's Economic Injury Disaster Loan program was also designed to help businesses meet payroll and recover lost wages. Unlike the SBA's 7(a) loans, which are issued by SBA-approved lenders, EIDL funds are issued directly by the SBA as part of the agency's disaster loan program. In addition to helping small employers, these loans are meant to help independent contractors, gig workers and other self-employed individuals. 

Like the PPP, EIDL funds are meant to cover payroll and fixed expenses like rent, utilities and long-term debt payments. However, because much of this money is going to self-employed individuals, the funds are also intended to replace their lost wages so they can cover personal expenses, like mortgage payments, which are normally supported by their business.

What isn't covered by SBA 7(a) and 7(b) loans?

The SBA's PPP 7(a) and EIDL 7(b) programs are designed to help business owners cover many of their fixed expenses, but they aren't meant to pay for everything. Many business owners will have other costs that they'll likely need to finance if revenue remains low. 

First and foremost are the business owner's wages. Both the PPP and the EIDL limit the amount of money that businesses can borrow for employee compensation. The PPP, for example, will only finance the equivalent of eight weeks of wages for up to $100,000 of salary per employee. The EIDL provides a maximum of $1,000 per employee. 

What's more, if a business is organized as an LLC, any money typically distributed to owners isn't considered wages – the IRS characterizes these as "profit distributions" – so they may not be covered. Other items likely not covered by SBA loans include inventory and property maintenance or repairs. So how are business owners supposed to pay for those? 

That's to say nothing of expansion projects. Before the outbreak of COVID-19 and the ensuing shutdown, many businesses were contemplating or pursuing expansion projects. Many still see opportunities emerging from this crisis and want to position themselves to take advantage. While SBA loans are designed to help businesses cover fixed expenses through this crisis, they're not intended to provide businesses with all the funds they need to survive and thrive.

Coronavirus funding for restaurants

Already, we're seeing cases of certain businesses or industries that are having an especially hard time benefiting from SBA relief loans. Restaurants are one such industry, with many businesses having trouble even qualifying for these programs. This is at least partly due to the fact that restaurants have extremely low payroll costs – servers and bartenders are paid predominantly through customer tips. 

As a result, many restaurant owners have been left wondering how to pay their rent or buy inventory and supplies, not to mention replacing equipment that breaks or acquiring what they need to allow for increased takeout dining.

Non-SBA sources of business funding

Before we explore some of the ways small business owners can get the funding they need to keep their companies afloat, it's important to note that most of these alternatives aren't mutually exclusive. Many of them can be used in combination with or even in addition to SBA loans if you can secure funding to cover some of your business expenses. 

Here are some of the other places to get the funds you need to pay business expenses. 

1. Savings

It's never fun to tap into personal savings to pay business expenses. Your business is supposed to put money in your pocket, not take it out. Nevertheless, many business owners can't get the funds they need from the SBA and don't have other options, so they face the unfortunate decision of either keeping their business going themselves or letting it go under. 

Tapping savings to cover business expenses should be done sparingly and strategically. This is not a renewable or expandable funding source – once you spend your savings, they're gone until you accumulate more. So, before you tap into savings, make sure you've cut expenses however you can and that paying your business expenses yourself will position you to earn that money back in the future.

When it makes sense to tap savings

• You need to cover personal expenses and your SBA funding precludes you from taking money out of your business.
• You need to pay employees incentive compensation that keeps them performing well.
• You need to invest in your business to improve efficiency.

2. Friends or family

Capital from friends or family can come in two different forms: equity (selling them a piece of the business) or debt (borrowing money that you pay back later). While these options might seem unlikely, if they're available, they may actually be your best bet. This is because terms that you can get raising money from friends and family may be better than you'd get from a lot of alternative lenders. 

If you have friends or family in a related industry, you can also gain a strategic partner who can help you run or grow your business. Also, while friends and family may be rooting for you, they'll be even more supportive if they have a vested interest in your success.

When it makes sense

• Your friends or family have skills that can help you run your business.
• They work in a related industry and can help your business grow by partnering with you.
• You can get better terms than what's available from other investors or lenders.

3. Business credit cards

Business credit cards are just like personal credit cards, and business owners can typically qualify just based on their personal credit. The interest rates on credit cards are among the highest available through alternative financing options, but many cards offer long 0% introductory periods that allow business owners to finance certain purchases for free for a year or more. 

Low introductory interest rates and other rewards can make a business credit card a great funding option for expenses not covered by SBA loans. Because these cards are only used to make credit card purchases, they aren't designed to cover the expenses that the SBA's PPP or EIDL loans cover anyway. 

However, in order to use a business credit card, you need to have good personal credit, you can't need to borrow a lot (because credit limits typically start small), and you need to be able to pay for expenses that can actually be funded with a credit card.

When they make sense

• You just need to buy supplies or cover small businesses expenses.
• You can find a card with a long 0% introductory period.
• You only need a few thousand dollars to cover expenses aside from payroll, rent, utilities and other fixed costs.

4. Business lines of credit

For business owners who qualify, a business line of credit is a great way to cover business expenses through the slowdown. This is especially true for business owners who have collateral to secure their loans, which may qualify them for lower interest rates. Business lines of credit are ideal because business owners can draw funds when they need them, then pay them back over time and borrow the money again when they need it. 

Most business lines of credit are issued for 12 months, and borrowers are only charged interest on the money they've drawn against their line. Once the first 12 months over, lines may need to be paid back, but they can often be extended or expanded for borrowers who qualify. Rates are typically 6% to 12% per year depending on your credit.

When it makes sense

• You only need credit periodically and can pay back borrowed funds quickly.
• You have abundant collateral to secure your line.

5. Merchant cash advance

A merchant cash advance is credit that some business owners can get against future credit card sales. Business owners are advanced a certain amount of money, and then the funder takes a portion of the business's credit card receipts until the advance is paid. 

While many business owners can qualify for merchant cash advances, they aren't always the best choice. That's because this type of financing may cost more than conventional financing options. Loans are also generally inflexible products – they can't always be expanded like lines of credit, and they aren't renewable. Merchant cash advances are flexible, as payments are variable and based on your credit card sales and other receivables. 

Merchant cash advances are typically very easy to qualify for. They usually fund quickly and can be used for just about anything.

When it makes sense

• You have a lot of credit card sales and need money to buy inventory or supplies.
• You don't have great credit or have received as much financing as you can from other sources.

6. Invoice financing

There are two different types of invoice financing: conventional invoice financing and factoring. Both options allow business owners to obtain financing against invoices owed by their customers. The biggest difference is that invoice financing involves receiving financing against outstanding invoices, while factoring is more akin to selling outstanding invoices. 

Like a merchant cash advance, invoice financing usually isn't very cheap – it usually costs between 1.5% and 4% per month, making it very expensive on an annual basis. Also, only businesses that invoice clients can use this option. 

If you own a service business or regularly invoice customers and need quick access to capital for 30 to 90 days, invoice financing may be a good option.

When it makes sense

• You regularly invoice customers and only need a short-term loan.
• Your customers pay their invoices in full and promptly.
• You've already borrowed as much as you can through conventional business loans.

7. Home equity line of credit (HELOC)

Most lenders will allow homeowners to borrow up to 80% of their home's value. If you bought your house five or more years ago, put down more than 20% when you bought it or have made additional payments against your mortgage, then you may have equity in your home that you can borrow against through a home equity line of credit. 

While HELOCs allow business owners to borrow against their personal homes, they aren't like conventional mortgages. Loans are structured more like lines of credit and usually extend for up to one year. For the first year, payments are interest only, and then the loan must be extended (if you qualify) or paid back. Also, while interest rates start around 4% for conventional mortgages, interest rates for HELOCs usually start around 6%. 

The biggest risk that business owners need to be aware of before using a HELOC, though, is that they are borrowing against their personal property and are personally liable for the loan. If they default on their HELOC, they may lose their house.

When it makes sense

• You're investing to grow your business.
• You've already borrowed against your business's assets and can't get funding elsewhere.
• You have extra equity in your home and good personal credit.

Wrapping up

For business owners who have secured an SBA loan, it's important to consider outside funding sources to cover expenses outside of payroll, rent, utilities and other fixed costs. For those who need additional funding to pay for things like inventory, supplies and incentive-based compensation, it can be difficult to find a conventional business loan. 

So, if you've been approved for an SBA loan to cover payroll and other fixed expenses and want to make sure you can have your loan forgiven later, be sure to consider some of these other funding sources to finance business expenses that aren't covered by SBA loans.