Use of Proceeds

Use of Proceeds in a commercial loan describes the specific purposes for which the borrowed funds will be applied, such as property acquisition, refinance of existing debt, construction or renovation, tenant improvements, working capital, or funding reserves. Lenders underwrite the loan based on the stated use because each purpose carries different collateral, timing, disbursement, and risk profiles. Clear, documented allocation of proceeds is required in loan agreements and funding conditions to ensure the lender’s security interest is aligned with the intended project outcomes and cash flow projections.

When assembling a loan application and negotiating term sheets, sponsors should provide a detailed Use of Proceeds schedule that allocates amounts to acquisition, closing costs, tenant improvements, reserves, and soft costs. Lenders will tie disbursements to milestones for construction or capex draws and may restrict use of proceeds to avoid diversion to unrelated liabilities or distributions. Accurate categorization affects required covenants, funding mechanics, reporting obligations, and whether the loan qualifies for particular product lines like construction financing or cash-out refinancing.

Use of Proceeds matters because it drives underwriting assumptions, loan structure, pricing, and permissible borrower behavior post-closing; lenders price acquisition loans differently than construction or cash-out refinances due to differing risk. Misstated or poorly controlled uses can lead to covenant breaches, misallocation of collateral, and enforcement actions. For borrowers and brokers, a transparent and realistic use-of-proceeds plan reduces closing friction, aligns expectations around reserves and draws, and helps preserve lender confidence that the financing will support the pro forma business plan.