In a survey executed by the Small Business Majority, a minute number of small businesses received funding through the Paycheck Protection Program with only 30% receiving the requested amount. Hence, many Small Business Owners were forced to start looking for high interest Loans to keep their business Afloat. Many of them turned to SBA for a Loan. Are you a Small Business Owner and experienced the same struggles as other small business owners who often face loan denial? Continue reading below for information about our detailed Loan program”7A Loans: The Pros and Cons You Should Know About”
Did you find small business loans hard to get?
You aren’t alone as many small businesses don’t or can’t qualify for loan programs with steep interest rates or 100% collateral needs.
That is why the Small Business Administration (SBA) becomes critical to small business growth by providing opportunities for accessible loans. We are here to share more information about affordable 7A loans that could change your business’s scale.
SBA’s Work as a Small Business Supporter
Small business owners often face hardship when applying for business loans or lines of credit to support their growth. Reinvesting revenue back into the organization may be impossible when faced with yearly income taxes, high-interest debt, and operational bills.
Insert the Small Business Administration to champion these business owners.
More commonly referred to as the SBA, the Administration’s work focuses solely on supporting U.S.-based small businesses. It accomplishes this through business consulting, federal contracting, and, importantly to this discussion, small business loans.
The SBA doesn’t distribute loan funding to the businesses itself. Rather, it works with established lenders who provide SBA-guaranteed loans to small businesses. Lenders include banking institutions, community development partners, and micro-lending agencies who follow the SBA’s guidelines on lending to small businesses.
You may wonder why a lending institution would want to work with the SBA’s rules to provide funding when they already have an expansive client base. Places such as banks, credit unions, or loan agencies always look to increase their loan portfolio as this means a direct increase in their profits. Further, small businesses present an untapped market for a lending agency to claim.
Banks and the like need to see creditworthiness in the organizations that apply for loans. However, small businesses are inherently risky without long-term financial health to show their credibility. The SBA de-risks these loans for banking institutions and creates affordable loan access for small businesses – a winning combination for both parties.
Types of Loans via the SBA
The SBA developed three types of loans for small business owners, each specific to use of funds. These include:
- 7A loans
- 504 loans
The SBA 7A loan is the most utilized loan program that is used for short and long-term working capital, office or supply expenses, and debt refinancing. Microloans create startup expenses of up to $50,000 for business owners, being a great option for early-stage companies. Individuals apply for 504 loans to repair or purchase major equipment or real estate.
Knowledge of each type makes applying for the proper loan easier. As a more established small business, you will most often apply for a 7A loan. Yet each SBA-guaranteed loan type becomes significant throughout the lifecycle of a scaling business.
Your Guide to 7A Loans
7A loans, also appearing as 7(a) loans via the SBA, provides small businesses with up to $5 million to cover a host of business expenses. Many owners use these funds to build short and long-term working capital, refinance business debt, or make office or supply purchases. The loan type is also common for those who want to buy real estate as a business purchase.
This is the most common SBA-guaranteed loan that you’ll come in contact with, maybe even applying for a 7A loan yourself.
The wide range in funding amounts and use cases make it accessible for many small businesses. The funds can purchase real estate for a brick-and-mortar location or create short-term capital for seasonal marketing.
Variety of 7A Loan Types
The SBA 7A loan program includes several types of loans that you can apply for based on your capital needs and the turnaround time needed. This includes standard, small, and express loans.
The standard 7A loan has a maximum $5 million loan amount which comes with the normal SBA guarantee percentages that fluctuate with loan size. Loans above $350K require the lender to collect collateral to the maximum amount possible. Credit and eligibility decisions go through the SBA, and it is turned around in 5-10 business days.
The 7A small loan has a maximum $350K limit with the same guarantee and turnaround time as the standard. The main difference between these two loan types comes in the need for collateral. Loans from $25K to $350K must be collateralized in the same manner the lender takes collateral for non-SBA loans.
The SBA express has a maximum loan amount of $500K with a maximum guarantee of 50%. The credit and eligibility decision is in the hands of the lender, and the SBA can turn around its necessary steps in 36 hours. Collateral follows the style of the 7A small loan.
What Are the SBA 7A Loan Requirements?
Any SBA loan comes with requirements a small business must meet to apply. Being ineligible for one type of SBA loan doesn’t mean you’re ineligible for them all.
Work with a small business consultant or financial advisor to discuss your options.
When it comes to a 7A loan, you must meet several requirements that focus on how your business makes money, outstanding credit, and fund uses. The full list as shared by the SBA includes:
- Being considered a small business
- Operating for profit and doing business in the US
- Demonstrating a responsible need and use for the loan
- Not being delinquent on current debt
- Have decent owner equity
Official Small Business Consideration
The SBA sets specific standards on what is considered a small business. The main factors included in this decision are the number of employees or annual receipts.
These numbers change depending on the industry you do business in, and it’s important to note the number of employees and receipts can differ vastly across industries. For example, the Electric Code of Regulations lists a radio broadcast business as a small business with up to $41.5 million in annual receipts. But many agricultural businesses surpass small at $1 million in annual receipts.
The regulations list doesn’t take into account business structure, such as LLC or S corp, as that is not an eligibility requirement.
There is an upper limit per industry when you would no longer qualify for SBA loans. But your chances of applying for traditional forms of funding drastically increase as you scale past small business size.
What Makes a Business Ineligible for 7A Loans?
Most small businesses are eligible for SBA loans as represented by the nearly 61,000 loans generated in 2021 with $36.5 billion in just 7A loans. However, specific business types and those doing illegal business are ineligible for loans. Some specific business types this guideline applies to includes:
- Gambling organizations
- Lending businesses
- Real estate investment firms
- Multi-level marketing businesses
- Religious or charitable organizations
- Business whose owner is on parole
You’ll want to review the requirements if you feel your business type appears on this list. The SBA makes exceptions for certain businesses, depending upon the holistic picture of the business and owner.
Demonstration of Responsible Use
One of the eligibility requirements includes showing the use of funds for a strong business purpose. There are many ways to prove use, and the SBA most commonly fields asks for:
- Short term capital (money covering expenses within one year)
- Long term capital (money covering expenses beyond one year)
- Purchase of real estate for business, such as moving operations to an Opportunity Zone
- Purchase of equipment, supplies, or furniture
- Construction or renovation
- Refinancing expensive debt
- Establishing a new business
- Operating through an acquisition
These and more would represent a sound business use to highlight in your SBA 7A loan application. There could be other reasons that you can qualify with documentation and a strong business case.
Explaining the SBA Guarantee
The SBA works to make loans accessible for small businesses without long-term financial health. How it follows through on its mission is by guaranteeing each 7A loan that vendors approve.
The guarantee process looks like this:
- A small business loan goes into default
- The lender goes through normal processes to get repayment from the business
- The small business doesn’t make attempts to pay or contact the lender
- If normal processes don’t result in total payment, the lender uses the guarantee to receive excess payment from SBA
The SBA creates certain guarantee percentages based on loan amounts. For loans under $150K, the SBA guarantees 85%. For loans over $150K, it guarantees 75%.
A guaranteed loan may sound like a fantasy, but it doesn’t mean the business owner is off the hook for payback. The most important thing to remember is simple: the business owner still needs to pay the loan and interest on time.
Benefits to the Business Owner
Many small businesses struggle to get traditional funding or other loan sources. Further, non-SBA loans come with unreasonable interest rates or repayment periods. A business owner reaps a huge benefit from the SBA guarantee in the form of accepted, reasonable loans.
SBA guarantees de-risk the process for lending agencies. Small business loan applications are more likely to be accepted at reasonable terms as the guarantee gives businesses more to stand on when it comes to repayment.
The guarantee often creates smaller monthly payments for business owners, making it a more accessible form of debt.
Benefits to the Lending Agency
A guarantee makes accepting a small business loan a sound financial decision for a lending agency. Simply put, the loan institution can count on at least the guaranteed percentage returning to them.
More so, the guarantee allows the lender the chance to build out a bigger and more diverse portfolio they can rely on for profits.
You Still Need to Payback the Loan
There’s a catch for small business owners when it comes to SBA guarantees. This doesn’t mean the owner is off the hook for repaying the loan.
A business owner who defaults on a 7A loan or similar will first face consequences from the lender. Consequences could look like revenue funneling to loan payments. A worst-case scenario means repossession of business or personal assets.
Owner payments and other financial consequences don’t end once the SBA guarantee is enacted. At this point, the SBA takes revenue or assets from the owner to cover the guaranteed portion. Court cases are not uncommon, whether started by the lender, the SBA, or the Department of Treasury.
7A Loan Benefits to Consider
Many small business owners benefit from SBA guaranteed loans, but the 7A program ranks above the 504 and microloans options through its expansive loan amounts and use cases. The unique advantages come down to accessibility and lower costs associated with repayment.
1. Long Repayment Periods
One of the major benefits of the loan is longer repayment terms from the lender. Longer maturity rates create lower monthly payments that take less cash flow from a business. Rather than sinking profits into debt payments, owners can pay off the loan while also reinvesting in their business.
The maturity rate is up to 10 years for non-real estate purchases and up to 25 years for real estate use.
2. Low-Interest Rates + Down Payments
The SBA promises affordable and accessible loans to small businesses by restricting the interest rates a lender can charge you on 7A loans. Small business owners can bank on low-cost payments because of the SBA maximum rate allowances. The ultimate interest rate comes down to discussions between borrower and lender, and you can negotiate for a better rate if needed.
In combination with low-interest rates also comes a decreased down payment that lenders ask for when receiving this type of loan. Lenders working with SBA loans often keep down payments around 10%, retaining more of the business cash flow upfront.
3. Low Collateral Requirements
A major reason why lenders reject small business loans is that the businesses don’t have enough collateral. That’s understandable as the business is applying for a loan in the first place to create future collateral through scaling operations. Lenders of traditional loans need tangible collateral that meets the full loan amount, but SBA lenders are different.
A 7A loan, depending on the amount, comes with little to no collateral requirements. The SBA guarantee almost acts as the collateral, ensuring the future payment of the loan.
Don’t forget that a defaulted loan means the lender or the SBA can come after your business or personal assets (i.e. collateral) to recoup the loan balance.
4. Easier to Secure
Small business owners love 7A loans for one key reason: they are easier to secure than a traditional form of business funding. Traditional lenders use the 75% to 85% SBA guarantee to de-risk the loan, meaning business owners have a greater opportunity at low rates and accepted applications.
Disadvantages to Keep in Mind
The many advantages of an SBA loan often outweigh the disadvantages. Small business owners may not have other, affordable loan options to advance their businesses, and 7A presents a great opportunity. However, there are a few drawbacks to keep in mind.
1. Personal Guarantee
SBA guidelines state that lenders cannot ask for collateral for loans under $25K for express and small types or under $350K for standard. But, when asked for collateral, small business owners often have to make a personal guarantee to cover the need. That means the lender can use personal assets, such as your home or savings account, to cover default payments.
Individuals who own may need to provide Unconditional Guarantee. See SBA webpage here for details.
2. Long Application/Approval Processes
The SBA 7A loan application includes a hefty checklist of items you’ll need to have ready for submitting your application. Many business owners lament the long application and approval process as lenders may continue asking for further documentation. Prepare to speed through the process by having all documents ready and being responsive to lender inquiries.
The SBA can turn around your application in 36 hours for express loans or up to 10 days for standard or small loans. Most of the time is in the application prep and lender, borrower conversations.
3. Lender Discretion in Final Terms
Remember that the funding for an SBA loan doesn’t come from the SBA; it comes from the lending organization. That means you are at the whim of the bank’s final word when it comes to loan terms. The organization must function within the SBA’s limits and guidelines, but they could still charge top interest rate or smallest repayment schedule.
Be aware of the maximum and minimum terms so you can negotiate the best deal.
4. Good Credit Is Needed
An SBA guarantee, though helpful, doesn’t mean you will qualify straightaway for 7A loans. You as the business owner need to show a sound personal and business credit score. The necessary credit score changes based on lender requirements, though 620+ is a good average to base your eligibility on.
Don’t have the strongest credit score? Talk with potential lenders to see if they can consider the total financial health of your business.
5. Prepayment Penalties
Let’s say you hit a major stride in your revenue and wanted to reduce some of your business debt during a profitable season. The SBA 7A loan comes with a pretty significant prepayment penalty for loans that have a 15-year maturity rate.
A penalty applies when a business prepays 25% or more of the outstanding balance. It also kicks in when prepayment is made in the first 3 years after funding distribution. Fees range anywhere from 1% to 5% of the prepayment made, making some prepayments an unattractive option on a small business budget. Learn More Here
An Overview of Interest Rates
The interest rate on each SBA-guaranteed loan ultimately comes down to the lender and borrower agreements. However, the SBA works to support small businesses in receiving affordable and fair rates via SBA maximums. Lenders cannot exceed the maximums for fixed or variable rates.
On average, interest rates range from 2.25% on the low end to 4.75% on the high end. The final interest rate decided upon between lender and borrower is dependent on things such as total loan amount, maturity length, and the prime rate.
How to Apply for the SBA 7A Loan
The process to apply for a 7A loan is one of the downsides to SBA programs because it can be time-consuming to gather and submit the documentation. Prepare in advance using this checklist to smooth out the process:
- Fill out the SBA Form 1919 to cover business info
- Fill out the SBA Form 912 as a character reference
- Fill out the SBA Form 413 to showcase personal financial info
- Have a profit and loss statement ready
- Create a 1-year income and finance projection
- Provide ownership and affiliation info (names, addresses, etc.)
- Share your business license
- Gather records of any loans you’ve applied for in the past
- Gather previous 3 years of personal income tax returns
- Gather previous 3 years of business tax returns
- Create resumes for the owner and any affiliates
- Create a written history of your business, its challenges, and use of SBA funds
- Have a copy of your business lease or proposed lease
This process remains the same across 7A loan types but isn’t exhaustive of what you may have to provide. For example, a 7A loan being used to acquire a business must include the current balance sheet, proposed bill of sale, and licensing agreements. Each lender may need extra paperwork to portray the business accurately.
The more responsive you are to lender requests, the quicker they can send to SBA for a decision. Further, the more paperwork you have created and gathered from the start, the easier you can hit the submit button on your SBA 7A loan application.
How to Cancel SBA Loan Application| How to Withdraw SBA Loan Application
If you applied for SBA loan and later determined that you have enough capital or you were able to secure another financing for your business, you can cancel your SBA loan Application or simply Withdraw SBA loan application by contact SBA. SBA will require you to submit your request in writing via email, fax or mail.
For help with EIDL loan cancellation, call 833-853-5638 (TTY: 855-440-4960) or email email@example.com. You can also cc this email as a customer service representative as SBA suggesting cc both firstname.lastname@example.org
Please note that due to share volume of calls, email and correspondence SBA is receiving, it takes them sometimes days or sometimes even weeks to respond to your request. So don’t worry, your request of cancellation or withdraw will be processed as soon as possible.
Apply for an SBA Loan Today
7A loans give you as a small business owner access to affordable credit at great terms. Many business owners find the benefits to offset any disadvantages if you need a cash influx for purchases, refinancing, or working capital. You may still be denied an SBA loan if you haven’t exhausted your financial options, but the 7A acts as a strong backup plan.
Want to become a more savvy small business owner by knowing the best tax strategies, loan options, and more? Review our articles to cover these topics and more so that you can scale your business.