I read this article last month (https://www.bizjournals.com/triad/news/2021/09/22/sba-loans-ppp-7a-lender-expire-enhancements.html?utm_source=st&utm_medium=en&utm_campaign=me&utm_content=gr&ana=e_gr_me&j=25120996&senddate=2021-09-23) about SBA 7(a) loans, and thought that this post would be helpful to some of my clients and colleagues….
An SBA 7(a) loan is a form of financing overseen by the Small Business Administration (SBA). The funding doesn’t issue directly from the SBA itself. Rather, the SBA assists a small business owner in securing a loan by guaranteeing a percentage of the amount loaned, placing a cap on interest rates, and limiting certain fees.
What are SBA 7(a) Loans?
An SBA 7(a) loan is a form of financing overseen by the Small Business Administration (SBA). The funding doesn’t issue directly from the SBA itself. Rather, the SBA assists a small business owner in securing a loan by guaranteeing a percentage of the amount loaned, placing a cap on interest rates, and limiting certain fees.
How Do SBA 7(a) Loans Work?
Making an application for an SBA 7(a) loan means working with a lender. The SBA becomes a participant by guaranteeing a portion of the amount borrowed. This guarantee by a governmental agency helps businesses acquire funding even if they may have difficulty qualifying for a loan from other sources.
The SBA establishes a maximum interest rate based on the prime rate and the loan’s size and maturity. However, a borrower and lender can negotiate within that limit. In addition to interest rate caps, SBA loans also offer protection from certain fees.
The term “7(a) loan” refers to several different loan types. Each type is designed to meet a different need and varies with respect to the loan amount, SBA guarantees, and other term details. The following are the different types of SBA 7(a) loans.
Standard SBA 7(a) Loan
The majority of small businesses will qualify for this type of loan.
- Maximum Amount of Loan: $5 million.
- SBA Guarantee: 85% of loans up to $150,000; 75% of loans over $150,000.
- SBA 7(a) Small Loan – This loan maxes out at $350,000 but otherwise has the same features as the Standard 7(a) Loan.
Express SBA 7(a) Loan
This is an expedited loan for a business that needs a short turnaround. The SBA will respond to an application within 36 hours.
- Maximum Amount of Loan: $350,000.
- SBA Guarantee: 50% of the loan.
- Use: Revolving line of credit for up to 7 years.
Export Express SBA 7(a) Loan
This program is designed for exporters requiring credit lines. This loan comes with an expedited turnaround of 24 hours.
- Maximum Amount of Loan: $500,000.
- SBA Guarantee: Up to 90% of loans below $350,000; 75% of amounts over $350,000.
- Use: Lines of credit for up to 7 years.
Export Working Capital SBA 7(a) Loan
This loan is designed to support businesses that need additional working capital to sustain their export sales. Loans are made available through Export Assistance Centers.
- Maximum Amount of Loan: $5 million.
- SBA Guarantee: Up to 90% of the loan, no matter its size.
- Use: Lines of credit lasting for one year or less.
International Trade SBA 7(a) Loan
These are long-term loans for businesses that are either expanding because of increased export sales or have a need to modernize to counteract the adverse effects of imports from foreign competition.
- Maximum Amount of Loan: $5 million.
- SBA Guarantee: Up to 90% of the loan, no matter its size.
- Use: Lines of credit lasting for up to ten years for working capital, machinery, and equipment, and up to 25 years for real estate.
Veterans Advantage SBA Loan
These are low-fee loans available to businesses that are at least 51% owned and controlled by veterans (spouses and widows of veterans also count). Veterans apply for appropriate SBA loans, and then Veterans Advantage benefits are applied to those loans.
CAPLines SBA Loan
CAPLines loans follow the general parameters of Standard 7(a) Loans, but instead of a loan in the form of a lump sum, CAPLines provides an ongoing line of credit. This credit line is designed to help a small business meet cyclical and short-term working capital requirements. This program covers four different lines of credit, all lasting for up to 10 years except for the Builders CAPLines:
- Seasonal: Designed for businesses that have to cope with seasonal ebbs and flows, e.g., a retail store that needs to hire more employees during holiday shopping seasons.
- Contract: Designed to provide flexibility for businesses that need to ramp up staff and resources to meet an influx of contract jobs.
- Builders: Designed for small general builders and contractors that need assistance to meet material and labor requirements. Builders CAPLines only last for up to five years.
- Working: Designed for businesses that have cyclical growth or recurring short-term needs. Funds may be borrowed to obtain short-term assets, and the loan is repaid when those assets are converted to cash.
SBA’s Express Bridge Loan Pilot Program
This is a supplement program designed to augment the SBA’s direct disaster loan initiative. It provides an expedited bridging loan of up to $25,000 to small businesses in locales officially declared disaster areas.
Is Your Small Business Eligible for an SBA 7(a) Loan?
Here are the parameters a small business must meet:
- Be defined as a small business by the SBA. Depending on the industry, these standards may correspond to the number of employees or the average annual revenue.
- Operate for profit.
- Operate (or intend to operate) in the United States or its territories.
- Have sufficient resources to invest assets in the business.
- Demonstrate that the loan is for a sound business purpose.
- Have made use of other financial resources before applying for an SBA loan.
Final Thoughts
Running a small business can be challenging, especially when times are uncertain. One port in the storm for your business could be an SBA 7(a) Loan. This “do everything” loan could help you get back on your feet.