September 29, 2022

SBA 7(a) Loans - The ultimate business funding tool

Zach Renta

It takes money to make money. You have heard it all your life, and as you got older you only realized how true it is. If you have done any research at all into getting funding for your business there’s a decent chance the SBA 7(a) loan has popped up more than a couple of times.

But what is an SBA loan? A loan is a loan is a loan is a loan, right?

The Small Business Administration (SBA) is a federal agency created solely for the purpose of assisting America’s small businesses. In short, SBA approved small business lenders make loans to businesses, and the SBA provides a guarantee of 75% (85% on loans under 150,000). While it sounds easy, there are quite a few steps involved between meeting a business customer and getting the SBA to sign off and approve a guarantee.

But that sounds like a benefit to the bank, how does it help the borrower?

The benefit to the borrower is being able to obtain financing for needs the bank might not normally approve. Imagine: You have been managing a restaurant for the past decade. The owner comes to you and says he is ready to retire and would love to sell you the business. Awesome! You go to the bank and try to get a traditional term loan. The restaurant is making money and you have everything running smoothly. So, cash flow isn’t going to be a problem. The restaurant leases its space, the equipment is still in good shape, but does not really have much value and the bulk of what you are paying for is the customer base of the restaurant. You have some savings in the bank, good credit but the loan officer just cannot get over the fact that there is not anything to fall back on if the business had to close. It does not mean you don’t have a good business, or that they don’t think you can run the business. Their job is to mitigate the bank’s risk as much as possible. So they have a couple of options: offer you a conventional business loan with a large down payment requirement and a short term (3 to 7 years usually) or decline the loan.

What would be different if you went to someone that specialized in SBA 7(a) loans?

SBA lenders aren’t looking for collateral, in fact, low collateral is one of the leading reasons for banks to use the SBA program. The SBA also dictates the majority of the terms for these loans. In this particular scenario you would be looking at a 10% down payment (sometimes less) and a 10 year fully amortizing loan. SBA 7(a) loans also have a maximum interest rate that banks can charge.

Another benefit of SBA loans is having your closing costs financed into the loan (if you want). Conventional lenders are looking for a certain percentage of down payment and usually want you to cover the closing costs as well. With the SBA loan you’re down payment is going to be a percentage of all costs, and in some cases there isn’t a down payment required at all.

This is just one example of how an SBA loan can be a useful tool for a business owner, or prospective business owner. There truly is {almost} no limit to the ways you can use an SBA 7(a) loan to start or grow your business.

7(a) Loans can be used for any of the following purposes:

  • Business Acquisition funding
  • Working Capital Loans
  • Commercial Real Estate Purchase or Refinance
  • Refinance/Consolidation of business loans
  • Equipment purchases
  • Inventory
  • Partner Buyouts

General SBA 7(a) Loan terms:

  • Terms from 10 to 25 years (25 years if Real Estate is the main purpose of the loan)
  • Fully amortizing (no balloon payments/no early maturities)
  • Maximum interest rate of WSJ Prime Rate + 2.75% (6.0% today)

Basic Eligibility Requirements:

  • For Profit company
  • Money is for a legitimate business need.
  • Small by SBA standards. Every industry has a different qualifier, but the general rule is less than $5 million in net income, and less than a $15 million tangible net worth.
  • Not banned from doing business with the government, or have defaulted on loans that caused a loss to the government.

If you aren’t sure whether your project is a good fit, or if you are ready to apply. Give us a call or send us a message.

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