Small Business Loans

Should I take out an SBA 7(a) loan during a business crisis?

Updated: September 11th, 2020

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Running a small business hasn’t been easy lately. Nobody knows this better than entrepreneurs like you, whether you run a restaurant, bar, fitness center, barber shop, or something else. The COVID-19 pandemic caused the economy to all but come to a stop for months. Now that it is back to a slow crawl, business owners are beginning to return to what has become a new normal. 

But just because you’re turning on the lights and opening your doors once again doesn’t mean that you’re necessarily ready for business. The economy has been hit hard, and so has cash flow for many small businesses as employers struggle to keep employees on the payroll. Even before the pandemic, most businesses only had enough money locked away in savings to carry them for 27 days

So you may be wondering if now is a good time to take out an SBA 7(a) loan, right smack in the middle of a business crisis. You don’t want to take on more debt than you’re able to repay, but the funds could really come in handy. So what are your SBA options during COVID?

The first thing to do is to leave any pride at the door and take any relief you can get, whether it’s a grant or something else. In 2019, before COVID, the SBA’s disaster assistance program issued more than $2 billion in loans. With interest rates at rock-bottom levels and the government making it easier than ever to repay debt, there is no time like the present to act. Something to remember is you’ve got options and a loan could be the very thing to keep your business afloat during these tumultuous times. 

Business interruptions 

While the pandemic is the current crisis that has gripped the economy and healthcare systems, it’s not the only type of interruption the small business community has ever known. A report by McKinsey & Company illustrates the different types of catastrophes that can occur and the frequency in which interruptions historically tend to happen. And by the looks of things, there is never a perfect time to take out a loan. While the likelihood of a pandemic is low, and an extreme pandemic even rarer, they represent a couple of many possible shocks.  

Types of catastrophes and frequency by McKinsey & Company

Source: McKinsey & Company 

Some sectors of the economy have been harder hit than others. But one common thread among most businesses is that the current crisis is a result of the lockdown measures, high unemployment and a slowing economy, not anything specific to a certain business or industry. As a result, once the economy bounces back, which some economists suggest has already begun to happen, so should businesses. This dynamic supports the argument for taking out an SBA 7(a) loan during a business crisis. You, yourself, might be wondering if an SBA loan will help your struggling business.

PPP loan relief 

Maybe you’ve already taken advantage of the government’s relief programs, such as a loan from the CARES Act program. The Small Business Administration’s Payroll Protection Program (PPP) falls under the SBA’s 7(a) category and it has earmarked more than $650 billion for entrepreneurs, and there is ongoing discussion of a possible expansion. 

One of the most attractive benefits of the PPP loan is that borrowers aren’t on the hook for all of it, if they direct a certain amount of the funds toward their payroll costs including benefits like healthcare and retirement. Plus the SBA has a deferral mechanism in place so that borrowers aren’t required to make payments until the forgiven amount of the loan is remitted to the lender. 

The SBA has agreed to defer the first 6 months of payments on the PPP loan for borrowers.  

As the economy slowly begins to restart, business owners should be in a better position to repay the debt later, which has an interest rate of a mere 1% attached. In addition, the government agency is guaranteeing 100% of the loan, which gives lenders more confidence to issue the financing amid the risk of default. 

Should the PPP program be extended by Congress, it could be just the type of 7(a) loan relief you are looking for throughout the pandemic. 

SBA 7(a) loan 

The traditional 7(a) loan is another low-rate product, and it could also be a lifeline during these tumultuous times. If you believe that the current hardship won’t be short lived, an SBA 7(a) loan could be a lifeline. 

While the SBA doesn’t back 100% of the 7(a) loan, it does guarantee a large percentage of it, which gives lenders more confidence to issue the loans to business owners. It’s the SBA’s most widely used loan for a reason, and the agency has stepped up when traditional bank financing isn’t available. It’s hard to beat the lengthy maturity of up to 10 years for working capital or machinery/equipment purchases. The 7(a) loan also puts a cap on interest rates, resulting in below-market rates. 

Additionally, the SBA has also proven its willingness to include its loan products in its debt relief programs. For instance, during COVID, the agency extended a six-month moratorium on loan payments to its 7(a), 504 and microloan product suites. 

Loan amounts can be as much as $5 million. The SBA backs 85% of loans up to $150,000 and 75% for loans greater than that amount. And while the SBA leaves interest rate negotiation  up to the lender and the business owner, the agency caps the rate for loans with less than a seven-year maturity at the Prime Rate + between 2.25-4.25% depending on the loan amount. For loans of seven years or more, the interest rate range inches up to Prime + 2.75-4.75%. 

Keep in mind that even in a crisis, the application process for a 7(a) loan can take up to 30 days or longer with a bank. You have a better chance of receiving the financing quicker with an experienced SBA Preferred Lender or online lender. 

There are also other varieties of the SBA’s 7(a) loan, including the Small Loan, SBA Express, Export Working Capital, and a couple of others. 

Ultimately, whether or not you should apply for an SBA 7(a) loan during a business crisis is up to you On the one hand, it can save your business. But on the other hand, the loan funds will eventually run out. You want to be sure that you expect your business to be in a position to carry on afterward. But now that you know the nuts and bolts of what to expect, you can make a more informed decision about whether accessing credit is the way to go. 

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