Is an SBA 7(a) Loan the Right Business Financing Option for Right Now?
With the National Federation of Independent Businesses (NFIB) reporting that 92% of small businesses have been negatively impacted by the COVID-19 pandemic, the Small Business Administration (SBA) has become an even more critical financial resource.
The SBA’s business relief Payroll Protection Program (PPP) has captured a great deal of attention recently, but its narrow focus on maintaining payrolls during the pandemic means the funds can only be used for very specific purposes: payroll, rent, mortgage interest and utilities. For businesses that need longer-term financing for more flexible purposes, the SBA’s flagship 7(a) program offers many benefits.
Though it’s been around for decades, many business owners aren’t familiar with the SBA 7(a) program — which gets its name from section 7(a) of the Small Business Act of 1953 — and may have never considered a 7(a) loan.
Particularly when the economy is uncertain and business cycles are unpredictable, an SBA 7(a) loan can be critically valuable. There are many reasons a business may be a good candidate, including factors such as:
- Being a startup without an established history
- Experiencing a temporary slowdown in revenue
- Having seasonal income
- Not having enough collateral to secure your desired loan amount
Does anything on that list apply to you?
Is a 7(a) Loan Right for You?
An SBA loan may not have been on your radar screen before, but today’s business climate is like nothing we’ve seen in the past. Now may the right time to give the 7(a) program a fresh (or first) look. Here’s an overview of the key features.
Access Up to $5 million in Capital
If needed, a business can access high amounts of capital with an SBA 7(a) loan. This can be particularly helpful for companies that need to invest in expensive equipment, materials or technology. Businesses that don’t have as sizable financial needs will be happy to learn that for loans under $350,000, there is a more streamlined process and faster turnaround time.
Obtain a Loan with Little or No Physical Collateral
Most conventional commercial loans are fully secured with physical collateral, which mitigates risk for the lender. An SBA loan offsets the lender’s risk when collateral is missing because it is backed by the U.S. government.
Longer Terms for Lower Monthly Payments
A key benefit of 7(a) loans is the option to extend the terms beyond what conventional business loans offer. This can mean up to 10 years for equipment loans, and 25 years for real estate loans. Businesses that take advantage of the maximum terms can lower monthly payments and significantly improve cash flow — a particularly attractive benefit while the economy is uncertain.
Competitive Interest Rates
The growth of financial technology in recent years has created a new arena of nonbank lenders that companies can turn to for fast capital — but, this often comes at a cost. An SBA 7(a) loan almost always offers better interest rates for long-term financing, saving companies thousands of dollars over the long run.
Six Months of Payment Relief
For new 7(a) loans authorized prior to Sunday, September 27, 2020, the SBA is offering six months of payment relief as part of its coronavirus business aid. This means the SBA will make six months of payments, interest and associated fees, beginning with your first loan payment. This is not a payment deferral, and you won’t be required to apply for loan forgiveness. You are automatically eligible when your loan is approved by the SBA.
SBA 7(a) loans are here to help small businesses succeed whether the economy is up, down or somewhere in-between. In any business climate, an experienced SBA lender can be an important partner in supporting the long-term health of your business.
Discover more about The Partnership’s tools to help Greater Des Moines (DSM) startups and small businesses develop and grow their ventures with The Partnership’s Small Business Resources.
You can count on The Partnership to continue to share accurate and fact-based updates as well. See more on COVID-19 here.
Ryan Collins is a commercial lender with Lincoln Savings Bank, a community bank proudly serving Iowans since 1902.