First, check the debt agreement to see what is permitted. Talk to your banker if its not clear. Second, the tax treatment depends on the tax classification of the entity (C-Corp, S-Corp, Partnership).

If I recall correctly, they typically prohibit one-time returns of capital, but are OK w/ regular course of business distributions (at least SBA loans in real estate).

Check out "restricted payments" in your loan docs.

Hi Angela, good question. I'm actually wondering the same regarding dividends and other distributions to investors, particualrly in non-SBA loans. Maybe ^Brian Hartman, ^Lisa Forrest and ^Colin McNulty can give us their thoughts?

The model tends to break down if you can't make payouts--everything depends on your ability to pay that SBA loan at low interest over a 10-year term while giving your investors returns faster (thus boosting ROI). In my experience you should be able to get a debt structure where as long as you are making your monthly debt service obligation and the business remains healthy, there aren't any restrictions on your ability to make distributions. (It would be understandable to have covenants where if the lender saw the business deteriorating significantly that they would have the ability to then prevent distributions.)
As far as taxes, that is a really tricky area to model. Any principal repayments you make on the loan represent taxable profit that is not available as cash flow. And (though I'm not an accountant) my understanding is that for S-Corps or LLCs all of the business' profits pass through to their shareholders' individual tax returns one way or another--regardless of whether those profits were distributed. So with S-Corps and LLCs you can have some tricky situations where investors might be incurring tax liability even if they haven't received a distribution. But I don't think distributing the funds incurs any additional liability.

The short answer is yes. The SBA allows distributions of earnings.


The loans docs typically say that the bank has to approve distributions but that is rarely enforced. And it isn't unusual for the bank to limit how much can be distributed.

If there is a technical (non-monetary) default you will need to get approval from your bank first. If there is a monetary default (your payments are late) or if you're about to declare bankruptcy I would suggest but taking distributions.

The tax consequences depend upon the entity type, the nature of the distribution and the investors personal situation.

From SBA’s perspective equity is supposed to be equity without a designated repayment schedule. However as long as the business is making its sba loan payments as agreed and the business cashflow appears adequate, there is generally no prohibition against reasonable dividends and disruptions being paid. Under strict interpretation, SBA might construe formal written agreements on guaranteed distributions as debt so be mindful. Happy to discuss directly. [redacted]

Yes. as long as you make debt payments, they do not care if you take out regular distributions below the line.

In addition to being sure you follow your loan covenants, it might be a good idea to discuss the options thoroughly with your investors and your accountant before deciding. Aligning everyone's goals and expectations is a big part of the "correct" solution, since everyone's situation is slightly different. There are many different ways you can use your profits and cashflow. Your CPA (and other advisors) can help you understand the advantages/disadvantages of returning capital versus paying distributions versus accelerating debt repayment versus internal investment.