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How Paycheck Protection Program Loans are Different from the SBA 7(a) Program

Updated: Jul 6, 2020

sba 7a program - feature image

The COVID-19 pandemic has thrust business loans into the spotlight for millions of American entrepreneurs. If you are one of the many business owners who were thrown a lifeline by the SBA’s Paycheck Protection Program (PPP), you know how critical financing can be to stay afloat. If not, you might be wondering,” what is an SBA 7(a) loan? And how much can you borrow from the SBA?. Of course, business crises don’t last forever. Therefore, neither do the terms associated with this type of rescue financing. 

The good news is that there is more traditional financing available, such as the SBA’s most popular program:  7 (a) loans. In fact, PPP products were added to the SBA 7(a) program. And while PPP loans are delivered through 7(a)-approved lenders, the terms of the two programs are not identical. 

The SBA 7(a) loan program at a glance 

The SBA’s PPP launched in response to the economic slowdown caused by the COVID-19 pandemic. It’s part of the government’s $350 billion stimulus plan dedicated to small businesses. The funds initially depleted in April. In response, the government launched the second round of loans. The second round came with guidance that made it easier for business owners to qualify for loan forgiveness — a key and unique feature to these loans — and giving them more time to spend the money.

The SBA 7(a) loan program was carved out from Section 7(a) of the Small Business Act of 1953. It was designed to reach business owners that had been shut out of other financing opportunities. While the program is not new, it’s still going strong. The SBA green-lit nearly 52,000 loans last fiscal year across more than $23 billion (during which time the average loan size was close to $450,000).  

What is the difference between an SBA 7(a) loan and PPP loan: Use cases

You will find that the use cases for PPP loans are more limited in nature than 7(a) products. The rescue loans are meant to keep your business solvent and employees on the payroll in a crisis. Meanwhile, the SBA 7(a) program aims to help your business grow when times are good.  

PPP loans

If you are considering a PPP loan, you can direct the proceeds toward the following: 

  • Payroll costs and employee benefits including group healthcare, insurance premiums, retirement benefits, vacation or different types of leave across parental, family, medical, and sickness-related  
  • Mortgage interest for loans that were in effect prior to Feb. 15, 2020 
  • Rent for leases that were in effect prior to Feb. 15, 2020
  • Utilities, such as your light bill, for accounts that were in effect prior to Feb. 15, 2020

The SBA 7(a) program 

Use cases for the SBA 7(a) loan program pretty much run the gamut. That’s part of the reason why these are the most widely issued loans that the agency has to offer. The proceeds received from the SBA 7(a) program can be used for basically any legal business purpose, including: 

  • Buying real estate including land or buildings 
  • Renovation
  • New construction 
  • Purchasing inventory 
  • Investing in machinery or equipment 
  • Working capital
  • Seasonal-related line of credit 
  • Refinancing debt 
  • Mergers and acquisitions 
  • Financing the buyout of a partner 

SBA 7(a) program vs. PPP loan terms  

Paycheck Protection Program loan forgiveness 

The loan terms for the PPP are quite generous and lend themselves to the financing’s rescue nature. Nowhere is this more obvious than it pertains to loan forgiveness, exclusive to the PPP loans. To qualify for loan forgiveness, the borrower must direct the proceeds toward certain expenses, including: 

  • Payroll costs 
  • Mortgage interest
  • Rent
  • Utilities 

However, keep in mind that more than half — or 60% — of the free money must have been directed toward payroll. 

How much can you borrow from the SBA for a PPP vs. 7(a) loan?

Another difference is in loan amounts. Their loan amounts can go up to $10 million for PPP compared to a cap of $5 million on the SBA 7(a) loan program. To that end, the SBA will back 100% of the loan amount for PPP. For 7(a) loans, the percent of guaranty scale is as follows: 

  • 85% for loans up to $150,000 
  • 75% for loans greater than $150,000, with a maximum guaranty of up to $3.75 million 

Loan maturity

Here is where the SBA 7(a) program shines as for the length of the loan. You can receive a loan maturity of up to 5 or 10 years in many cases or even 25 years for real estate financing. Much of this feature will depend on the borrower’s ability to repay, which is assessed during the application process

For the PPP loan, the maturity of the loan boils down to when you received the financing.  Remember, there were two waves of the PPP program; the latter came with more borrower-friendly features. If you received funding after June 5, you’re looking at a two-year maturity date. For loans issued on or after that date, the maturity date is five years.

Interest rates

Whether you took out a PPP loan in the first or second wave, the interest rate is a flat 1%. While this isn’t the case with the traditional SBA 7(a) loan rates, the good news is that the agency still places a ceiling on the amount that lenders can charge in interest. The SBA gives lenders some leeway to charge what the agency expects will be a “reasonable” fixed or variable interest rate.  

As for whether or not you’ll need collateral, the answer is yes for traditional 7(a) loans of more than $25,000. For PPP loans, there is zero collateral requirement. 

Where to apply for the PPP and SBA 7(a) program 

One thing that PPP loans and traditional SBA 7(a) loans have in common is where you apply. Neither PPP nor 7(a) loans are delivered directly through the SBA. Instead, they are distributed via lenders, credit unions, and fintech companies, such as alternative lender Funding Circle

As the lockdown measures ease around the country and businesses open their doors again, the economy expects to begin rebound. As the economy continues to expand, business loans like those offered through Funding Circle — including the SBA 7(a) program — are there to grow with you. 

Jessica Holcomb

Jessica Holcomb is the Content Marketing Manager at Funding Circle, specializing in small business marketing and social media. She has a degree from the Fashion Institute of Design and Merchandising. Prior to Funding Circle, Jessica was a Marketing Manager at a successful social games company and a freelancer for many small businesses in the Bay Area. Her work can be seen in top retail, gaming, and financial small business resource sites.

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