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Updated: April 15th, 2021
Last year, the government launched the Paycheck Protection Program (PPP) to save the US economy from the COVID-19 crisis. The program provided PPP loans to more than 5 million businesses, with loans averaging about $107,000.
With a new round of funding, PPP loans are back in 2021. However, while these loans have the potential for full forgiveness, they’re not the best financing option for every small business.
The SBA’s existing 7(a) loan program (the SBA’s primary program) has always been a powerful funding tool for small businesses—and that’s still the case in 2021. These loans have all the right terms, lending amounts, and approved uses to be the more appropriate financing tool in various scenarios.
But which is right for your business: a 7(a) loan or a PPP 2.0 loan?
Below, we’ll compare and contrast the two financing options to help you discover which is the better loan for your business.
SBA 7(a) and PPP loans are intended for different purposes. Businesses primarily use 7(a) loans for business expansion and working capital, while the government provides PPP loans to cover payroll expenses and rent.
SBA 7(a) loans have a lot more flexibility when it comes to eligible spending. PPP loans are a bit more limited, and they also have stricter requirements for full forgiveness. If you want to qualify for full loan forgiveness, then you’ll need to spend at least 60% of your loan on payroll costs—anything less than that will reduce your eligible forgiveness proportionately.
If you’re looking to expand your business or finance working capital needs, a SBA 7(a) loan is going to be the better option. If you need funds to pay your employees or cover rent, then a PPP loan will be your better choice.
You’ll also want to consider when you’ll be spending your loan. With a SBA 7(a) loan, you can spend the funds on your own timeline. With a PPP loan, you’ll have to use the entirety of your funds over the 8 or 24-week covered period—any money spent outside of that time frame won’t qualify for forgiveness.
SBA 7(a) loans are generally competitive and difficult to qualify for, while PPP loans are widely available to small businesses in need. However, certain eligibility requirements could prevent you from qualifying for a PPP loan—let’s look at the basic criteria to see which options your business qualifies for.
There are no minimum credit score or annual income qualifications for obtaining a PPP loan, making it a fantastic financing tool for younger businesses. As long as you can prove a 25% reduction in gross revenue, your small business should have no problem qualifying for a PPP loan.
If time is of the essence, you’ll want to choose the loan option with a faster application, approval, and disbursement time. Specific timing will vary depending on your lender, but here’s the average wait you can expect for each loan:
All in all, you can expect to get your SBA 7(a) loan in about 2 months from when you submit your application.
All in all, you can expect to get your PPP loan in about two weeks from when you submit your application.
If you need immediate financing, then a PPP loan is going to be the better option. SBA 7(a) loans aren’t typically for emergencies—they’re for long-term investments.
It depends. One isn’t necessarily better than the other.
If the COVID-19 pandemic has impacted your business, you should strongly consider getting a PPP loan—especially since they can be completely forgiven. And if you need financing for a long-term investment (like equipment, a business acquisition, or land), then an SBA 7(a) loan will be a better option.
Both of these loans are fantastic financing options for small businesses, but they each serve a specific purpose. Depending on your situation, you may get a PPP loan now and an SBA 7(a) loan next year. It’s up to you to use this information to figure out which loan is better for your business right now.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.