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The 7(a) loan program is one of the most popular options available to small businesses. Offered by traditional lenders and backed by the Small Business Administration (SBA), these loans can be a source of funding for companies who might not otherwise qualify.
Before you apply, it is helpful to understand the basic terms and benefits of SBA 7(a) loans. Among some of the potential benefits are flexible repayment terms and the broad ability to spend the money on your business as you see fit.
There are different types of SBA 7(a) loans to choose from. The most common type is referred to as a standard loan, and it provides between $500,001 and $5 million in funding.
Another popular version—known as small loans—are capped at $500,000, with the federal government guaranteeing between 75% and 85% of the money. The interest rate can vary, but the SBA sets a maximum allowable percentage.
There are numerous benefits that come with obtaining a 7(a) small business loan. For some companies, the highlight is the favorable repayment terms. For others, it is the numerous options on how to spend the money. Some of the major benefits include the following:
In our view, the primary advantage of an SBA loan over a conventional bank loan is the longer repayment period.
For working capital loans, if you opt for a non-SBA loan, the maximum repayment period is usually around five years. In contrast, SBA loans offer terms of up to ten years, providing greater flexibility and ease on cash flow.
And if you wanted to purchase real estate for your business typical payment periods for commercial loans are 5-20 years vs. SBA 7(a) of 25 years.
In many traditional bank loans, there are many restrictions on how the loan can be used. SBA loans have much more flexibility, in that the loan proceeds can be used for virtually any legitimate business purpose.
If you are interested in both purchasing real estate and working capital for your business, there are ways under the SBA 7(a) program to structure a loan that combines both, as long as 51% of the loan amount goes to the purchase price, over a 25-year term.
Unlike 504 loans that can only be used on real estate purchases, these funds can be spent on a variety of things. Some companies use it as working capital, while others earmark the money for a new office.
Some of the most common uses include the following:
Unlike many traditional loans, the 7(a) program does not come with penalties for prepayment in most cases. This means there is the option to pay what is owed early without having to pay any penalties or future interest.
10-year SBA 7(a) loans for working capital have 0 prepayment penalties.
The 25-year real estate (or combination with working capital) have a 3 year prepayment penalty, 5% in the first year, then 3% and in the third year only 1%.
Traditional commercial real estate loans usually require a downpayment of between 20-30% whereas SBA only require 10%.
Through our relationships with our lenders, we are able to secure real estate loans with 0 downpayment, as long as you cashflow.
When it comes to business acquisitions, traditional bank loans can require a downpayment of anything from 20-50%, while SBA only requires 10%.
Most traditional bank loans have so many conditions and covenants that it is extremely difficult to always be in compliance, risking that the loan can be called early. SBA loans do have some covenants, but essentially the loan can only be defaulted for nonpayment.
The collateral and equity requirements are often much lower than traditional lenders. Collateral is any kind of property a company puts up in exchange for the loan. If they default, the lender can take possession of the collateral and sell it. Often, the item purchased is used for these purposes. Lower equity requirements also make it easier to buy a new business.
If you have questions about the basic terms and benefits of SBA 7(a) loans, now is the time to ask. Let the team at the Business Funding Group help you secure the loan you need to grow your business.
Talk to one of our experts right away to see if this program meets your needs.
(917) 593-5013