Entrepreneurs keenly understand that access to capital is essential for growth. But for many business owners evaluating their funding options, it can be challenging to find the right fit — especially for small businesses and startups. For small business owners who need the kind of loan typically reserved for large, well-established businesses, the SBA 7(a) loan program can be a great source of financing.
The SBA 7(a) loan is guaranteed by the U.S. Small Business Administration, a government agency that supports America’s small businesses. Because the SBA guarantee helps banks mitigate some of the lending risk, more businesses can qualify for funding. Although the SBA offers many types of loan programs, the 7(a) loan is among the most popular because of its versatility.
The maximum amount for an SBA 7(a) loan is $5 million, and it is typically used for business acquisitions, expansions and startups. It can also be used to fund an owner-occupied real estate purchase, construction or improvements, as well as inventory, tenant/leasehold improvements, debt refinance or to provide working capital. Qualified loan applicants are typically for-profit businesses that meet the SBA’s size standards, can repay the loan and have a sound business purpose.
The SBA works with lenders to provide guidelines for banks, community development organizations and micro-lending institutions. Because the SBA does not make direct loans to entrepreneurs, financial institutions must be designated as preferred or approved lenders by the SBA. Preferred lenders have the authority to make final credit decisions, saving you time and streamlining the application process.
SBA 7(a) loans have many advantages, but there are four reasons why they are particularly valuable for small business owners:
1. Easier to Obtain Compared to Conventional Loans
Many early-stage businesses often do not have the business credit history, established revenues, length of time in business or enough down payment capital typically required for traditional financing. Because the SBA guarantee helps mitigate the bank’s lending risk, many financial institutions may be able to consider your financing request using SBA loan programs in situations where conventional underwriting would have resulted in a denial. If you’ve had difficulty qualifying for other types of funding, such as a line of credit or traditional loan, the SBA 7(a) program may be an option.
2. Reasonable Interest Rates
Because the SBA wants loans to be viable for small business owners, it sets a reasonable maximum interest rate. These rates may be fixed or variable, but are considered affordable for a business loan. Rates vary by lender and are influenced by the prime rate, loan size, term and situational factors such as the borrower’s industry and personal credit.
3. Low Down Payments
For most traditional financing, lenders require a 20% down payment. In contrast, certain SBA 7(a) loan programs may allow down payments of as little as 10%. By making a smaller down payment, you can reduce the burden on your business’ cash flow.
4. Long Payment Terms
SBA 7 (a) loans have longer terms compared to traditional financing — up to 25 years for real estate, up to 10 years for equipment and seven years for working capital. Thanks to the longer terms, monthly loan payments are more affordable.
Be strategic with your SBA loan application
Although the SBA 7(a) loan program is among the best financial sources for small businesses, it’s still important to find an experienced banker who can help with the process and determine if this type of loan is right for your business. The low interest rate environment makes it a great time to apply for financing. If you meet the requirements, the SBA 7(a) loan could provide the boost you need to help start or grow your business.
Jerry Gamb is vice president and retail lending manager for Zions Bank in Western Idaho. To contact Jerry, call (208) 740-9133 or email Jerry.Gamb@zionsbank.com.