Small business owners have shown incredible resilience in the face of rising costs, a tight labor market and the highest inflation in decades. As the Federal Reserve raises interest rates to fight inflation, small businesses face another challenge — obtaining the right financing tools in a rising interest rate environment.
On June 15, the Federal Reserve raised interest rates by three-quarters of a percentage point and signaled its intention for future increases this year. Higher interest rates make it more expensive to borrow money, which can have a ripple effect across your entire business.
That’s why it’s important to identify the right type of financing to help you maintain cashflow and meet the growing needs of your business. In a rising interest rate environment, every entrepreneur should know about the valuable benefits of U.S. Small Business Administration 7(a) loans.
Overview of SBA Loans
SBA 7(a) loans are 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.
In most cases, the SBA does not make direct loans to entrepreneurs, so it provides guidelines for banks, community development organizations and micro-lending institutions. Financial institutions must be designated as an approved lender or as a Preferred Lending Partner by the SBA. PLP’s have the authority to make final credit decisions, saving you time and streamlining the application process. SBA loans are subject to credit and SBA approval — so being creditworthy makes it more likely that your loan will be approved.
SBA 7(a) loans have many advantages, but there are three reasons why they are particularly valuable for small business owners in a rising interest rate environment.
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.
For most traditional financing, lenders require a 20 percent down payment. In contrast, certain SBA 7(a) loan programs may allow down payments of as little as 10 percent. By making a smaller down payment, you can preserve cash that can be reinvested in your business.
3. 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.
Get Ahead of Rising Interest Rates
Because more interest rate increases are likely on the way, now is the time to get your finances in order. Evaluating the financial needs of your business, with the help of an experienced banker, can help position your business for future success.
— Brad Brockbank is the Idaho Community Banking sales manager for Zions Bank. Zions Bank is a division of Zions Bancorporation, N.A. Member FDIC. NMLS #467014. Zions Bank is an Equal Housing Lender.