As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.

Many businesses are suffering in the midst of the coronavirus pandemic. In some instances, companies are still unable to open for business at all. In others, sales haven’t returned to normal as customers remain wary about going out to eat, shopping in brick-and-mortar stores, and having contractors come to their houses, among other things

To help businesses handle these unprecedented times, the United States federal government and the U.S. Small Business Administration have enacted loan programs with funding made available through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a massive $2 trillion economic stimulus bill passed earlier this year in response to COVID-19.

While small business owners might have earned enough relief to keep afloat under the Economic Injury Disaster Loan (EIDL) program and the Paycheck Protection Program (PPP), a number of them have likely exhausted the bulk of those funds and may be wondering where else they can turn for financing.

Truth be told, there are all kinds of different financing options available to businesses in all industries. One option is SBA loans, and 7(a) loans in particular, which is the most popular financing vehicle available through the government agency.

What is the SBA 7(a) loan program?

The SBA 7(a) loan program is designed to help small businesses get the funding they need to supercharge their growth. Under the program, qualified small businesses are eligible to receive a maximum loan amount of $5 million to cover working capital, equipment, inventory, and more.

Several different kinds of loans are available under this program, each with different loan terms, and we’ll examine them all a little later in this article.

How does the SBA 7(a) loan program work?

Despite what the name might have you believe, the SBA isn’t the entity that finances these loans. Business owners who opt to go this route will have to apply for financing through an SBA-approved lender—which could be banks, credit unions, or alternative lenders.

Under this program, SBA lenders are incentivized to give money to applicants they normally might not finance because the government guarantees the majority of the loan.

For example, the SBA guarantees 85 percent on standard 7(a) loans up to $150,000 and 75 percent on loans greater than $150,000. That way, in the event the borrower defaults, the lender will still be able to recoup the bulk of their money.

While interest rates vary on a lender-by-lender basis, the SBA does set caps on what financiers are allowed to charge. At the time of this writing, the interest rates for SBA 7(a) loans can’t exceed the following:

  • Prime rate plus 2.25 percent for loans greater than $50,000 that mature in less than seven years
  • Prime rate plus 2.75 percent for loans greater than $50,000 that mature in more than seven years

If the loans are lower than $50,000, lenders have an option of tacking on a little more interest:

  • Prime rate plus 3.25 percent for loans between $25,000 and $50,000 that mature in less than seven years
  • Prime rate plus 3.75 percent for loans between $25,000 and $50,000 that mature in more than seven years
  • Prime rate plus 4.25 percent for loans $25,000 or less that mature in less than seven years
  • Prime rate plus 4.75 percent for loans $25,000 or less than mature in more than seven years

The SBA also charges a small fee for the part of the loan that they’re guaranteeing. Read more about that here.

If you’re considering getting financing for your small business and you’ve exhausted your options under the EIDL and PPP, don’t let these fees scare you. Generally speaking, SBA loans are more affordable than loans secured through traditional banking institutions, and they’re also cheaper than other popular small business financing options, like business lines of credit, invoice factoring, and merchant cash advances.

Keep in mind that the SBA forbids lenders to tack on processing fees, loan origination fees, application fees, points, brokerage fees, and more.

What are the eligibility requirements of SBA 7(a) loans?

Not everyone is eligible for financing under the SBA 7(a) loan program. But most are. According to the Small Business Administration, to qualify for funding un the 7(a) loan program, existing businesses must:

  • Be for-profit
  • Do business in the United States or its territories
  • Have the ability to invest reasonable owner equity
  • Have already depleted other financial resources, including personal assets, before applying

There are a number of businesses that aren’t eligible to participate in this program, including real estate investment firms, rare coin dealers, and companies that are in the lending business. The SBA also won’t approve financing for businesses led by someone who is currently incarcerated, on parole, on probation, or is a defendant in a criminal trial.

There are, however, some exemptions here, too, and you can read all about them here. Very broadly speaking, the SBA reviews applications on a case-by-case basis and considers a multitude of factors before making a final decision.

Now that you have a better idea of what the SBA 7(a) loans are, how they work, and who is eligible for them, let’s take a look at the different financial instruments available under the 7(a) loan program.

What are the different types of SBA loan programs?

1. Standard 7(a) loan

If you ever hear someone talking about a 7(a) small business loan in the general sense, chances are they will be referring to this particular SBA program. Eligible small business owners can secure up to $5 million through the standard 7(a) business loan. Interest rates are negotiated by the borrower and lender but can’t exceed the rates discussed earlier in this article. Depending on the size of your loan, you may have to put up collateral in order to obtain financing.

2. 7(a) small loan

This instrument is the same as the standard loan, it just only provides up to $350,000 worth of financing. If you borrow less than $25,000, qualified lenders aren’t required to ask you to put up collateral to obtain financing.

3. SBA Express loan

Like the name suggests, SBA Express loans move quickly. If you qualify, your application should be approved within 36 hours — faster than two business days — and you may be eligible for up to $350,000 in small business financing under this program.

Due to the speed of the program, however, the SBA only guarantees 50 percent of the loan — compared to 75 percent to 85 percent of other loans, depending on the amount. SBA Express loans can be used as a revolving line of credit for up to seven years.

4. Export Express loan

If you’re an exporter who needs business financing or a line of credit quickly, an Export Express loan might be just what the doctor ordered. Through this program, you may be eligible for up to $500,000 of business financing, and the SBA should let you know whether you’re approved within 24 hours.

Under this program, the SBA guarantees up to 90 percent of loans under $350,000 and 75 percent on loan amounts that are lower.

5. Export Working Capital loan

Similar to the previous instrument, the Export Working Capital loan is designed to help exporters who need working capital to secure up to $5 million in business financing if they qualify. While these credit lines are only extended for one year, the SBA guarantees up to 90 percent of each loan, giving lenders more incentive to finance them.

6. International Trade loan

According to SBA.gov, International Trade loans are available to exporters that are growing their businesses through more export sales or have been hurt by imports and need to update their operations to keep up with foreign competitors.

If that sounds like your business, you may be able to secure up to $5 million in financing, with a 90 percent SBA guarantee. These loans are good for a longer term (10 years) if they’re used for working capital, 10 years if the money goes to machinery and equipment purchases, and up to 25 years if the funds are used for real estate.

7. CAPLines

The Small Business Administration also offers four different kinds of CAPLines loans, which are lines of credit instead of term loans you get all at once. This program was designed to help small businesses overcome cyclical working capital and related business needs—like an arcade in a beach town that closes for the winter. There are four different CAPLines loans:

  • Seasonal loans, which are designed for seasonal businesses like the beach town arcade and last up to 10 years
  • Contract loans, which also last for 10 years and give capital to businesses that have landed a number of contracts and need to hire new staff to take care of all of them
  • Working loans, which are designed for businesses that have recurring short-term needs and last for 10 years, too
  • Builders loans, which helps contractors and builders pay for materials and labor for up to five years

What are the pros and cons of accepting 7(a) financing?

Like any other financing option, there are pros and cons to consider when it comes to SBA 7(a) loans. You know your unique situation better than anyone else, so weigh these pros and cons to determine whether loans from the SBA are right for you.

Pro #1: Ease of financing

Because of the SBA guarantee, many lenders are willing to take bigger chances on approvals than they would with non-guaranteed loans.

In general, this means that SBA loans are easier to obtain than loans from traditional financial institutions. Still, it may be difficult to obtain financing if you have a poor credit score and suboptimal business finances.

Pro #2: Flexibility

In most cases, SBA loans are flexible by design. You can use them as working capital to overcome cash flow problems. You can also use them to purchase equipment, to expand your business or acquire another business, to purchase commercial real estate, to buy materials and inventory, and more.

Pro #3: Lower interest

Thanks to SBA rules, loans that originate with the Small Business Administration have lower interest rates than term loans that originate elsewhere. In the world of business loans, SBA financing is often the more affordable option.

Pro #4: Fewer upfront requirements

When you secure financing from a traditional banking institution, you usually have to put up a big down payment or more collateral than you would than SBA loans require. As a result, SBA loans are less risky on the entrepreneur themselves.

Con #1: Tough loan application process

The SBA loan application process is tricky to say the least. When you apply, you’ll often have to present a number of documents—including a borrower information form, tax returns, personal financial statements, credit reports, business plans, and other legal documents. You’ll also fill out a mountain of paperwork, too. Making matters worse, you might not hear back on financing for several weeks or months in some cases.

Add it all up, and it’s a tough loan application process that turns many away.

Con #2: You may have to put up collateral

While the SBA generally requires less collateral than other lenders, you still have to put up collateral. If you’re uncomfortable with doing so, you may want to explore different small business financing options.

Con #3: Lenders charge different rates

Remember, each SBA-approved lender is able to charge a slightly different rate. So, you can’t just apply for an SBA loan with any lender and expect the best rates. You’ll have to shop around.

Con #4: They may be confusing

As you know by now, there are a ton of SBA 7(a) loans to choose from. That being the case, you’ll have to do your due diligence to research your options and see which one makes the most sense for your particular situation. It takes time. Let’s hope you end up with a loan when all is said and done.

How do I apply for an SBA 7(a) loan?

At this point, you know a good deal about the SBA 7(a) loan program. There’s just one thing missing: how to apply for an SBA loan.

We’ve got you covered.

Check out our complete guide to SBA loans to find out what you need to do to get ready to apply, what to expect during the process, and what other options may make more sense for your situation if SBA loans aren’t the right match.

Here’s to helping your business thrive during these unprecedented times!

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