You might be aware that the Small Business Administration offers help to business owners through services such as grants. They also have various lending programs which can be invaluable to business owners who have tried other financing options.
If you are struggling to secure a small business loan, the SBA 7(a) program can provide you with cash to flourish with low down-payments and interest rates. Today, we will go over everything you need to know about SBA 7(a) loans.
What Is the SBA 7(a)?
The SBA 7(a) is one of the several programs the SBA has to offer to businesses who need access to capital. Instead of lending to entrepreneurs directly, the SBA acts as a guarantor on a controlled loan through commercial lenders.
Interest rates on SBA loans are capped at a percentage over the prime rate, or the lowest possible rate available to commercial customers. Qualifying for an SBA loan means having an attractive interest rate than business owners can receive otherwise. This means entrepreneurs can borrow money that is less expensive which helps with managing cash flow.
How to Use an SBA 7(a)
The 7(a) program is the most commonly used because it can be used for various expenses. Other SBA lending programs, such as the SBA 504, has more restrictions on who qualifies and how the loan can be used. The 7(a) program can help people borrow up to $5 million to use for a range of expenses such as real estate, buying equipment, expansion, or debt refinancing. In rare cases, you might even qualify for an SBA loan to start a new business. Lenders are more comfortable working with businesses that are established because they pose a lower threat of default.
There are several factors that make someone eligible for the 7(a) including size requirements and industry. The company needs to be a for-profit, small to medium sized business based in the United States. More qualitative requirements include the likelihood that the business owner will repay the loan.
How to Apply
The SBA only acts as the guarantor on loans, which are administered through partnered commercial lenders. The banks decide whether to extend credit to the business or entrepreneur. Given the attractive benefits of an SBA-backed loan, it can be a strict process. You should expect to provide financial documentation such as your business plan, financial statements, and profit projections. Lenders might also want to evaluate your personal credit and financial history, so prepare to provide personal financial documents.
The Bottom Line
Unlike an ordinary loan, which has to be approved by the lender, 7(a) loans must receive approval from the SBA which means there are more requirements that must be met. The benefits are often worth the trouble. The SBA 7(a) program gives entrepreneurs access to low-cost, long-term loans with other features like fixed maturities, no prepayment penalties, and predictable payment schedules. Make sure that you explore your lending options and consider the features that matter most to your business.