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Why the SBA 7(a) is the Most Popular Small Business Loan

Small Business Administration (SBA) loans

Why the SBA 7(a) is the Most Popular Small Business Loan

Updated: August 10th, 2020

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There comes a time for every small business to pursue growth. Whether it be to ward off the competition or add more people, accessing financing is generally the way to go. The Small Business Administration takes it upon itself to be there for entrepreneurs, and no other product has gained more popularity than the SBA 7(a) loan program. It’s not that there’s a shortage of options out there, but the SBA 7(a) program repeatedly finds itself on the A-List of business owners everywhere

In these financially precarious times, the question on a lot of minds is: how much can you borrow from the SBA? In FY 2019 alone, small businesses accessed $23.1 billion in financing across 52,000 7(a) loans. The economy has slowed in 2020 as a result of the COVID-fueled lockdowns. Yet the US government backs a majority percentage of the loans. This gives lenders more confidence to issue them to business owners. 

But that is just a drop in the bucket to explain why the SBA 7(a) program is the most popular small business loan around. Let’s explore what an SBA 7(a) loan is and why it’s so widely used. 

What is an SBA 7(a) loan? 

The SBA 7(a) loan program has been around for years. It gives business owners with fewer than 500 employees a chance to access financing when other lenders say no. Through the SBA 7(a) program, business owners can access up to $5 million in financing, which can be directed toward a wide variety of use cases.  At Funding Circle, the loan amounts range from $20,000-$5 million. 

While the 7(a) is an SBA product, loans are facilitated through approved financial institutions. These include banks, credit unions, and online lenders ( some of which deliver the funds faster than others). The SBA 7(a) program was specifically created for business owners who may have been shut out of other loan products. 

To qualify, you should meet the following criteria

  • Run a for-profit business 
  • Have a good credit score (680 FICO or higher at Funding Circle) and good character demonstrating your ability to repay the loan.  
  • Have an operating history of at least three years to apply with Funding Circle 
  • Revenue of at least $500,000 
  • Greater assets than liabilities 
  • Be domiciled/operate in the United States or its territories 
  • Exhaust other financing options 
  • Have both a financial stake and sweat equity invested in your business.  

The SBA 7(a) program gives you options galore 

So why all the fuss about the SBA 7(a) business loans? The program has helped entrepreneurs across the country, jumpstart their business across a wide swath of industries. Specialty stores, restaurants, dental practices, and barbershops have benefited from the SBA 7(a) program. Chief among the reasons that business owners flock to the 7(a) standard loan is likely the flexibility in which the proceeds can be directed for business purposes such as: 

  • Real estate purchases including buildings and land  
  • Convert/expand/renovate buildings 
  • New construction 
  • Purchase inventory, supplies, and materials
  • Expansion/buy a company/open another location 
  • Working capital
  • Refinance existing debt 
  • Consolidating debt 

How much can you borrow from the SBA, and at what rates?

The SBA boasts below-market interest rates thanks to a cap it sets on what lenders can charge you. This amount will vary based on what’s known as the Prime Rate, which can change. At online lender Funding Circle, SBA 7(a) loans from $20,000-$5 million have a rate of 6% with a term of up to 10 years and no prepayment penalties. 

You may also be able to negotiate the rate with your lender. Here’s a breakdown of what you can expect for standard SBA 7(a) loans with a term of less than seven years: 

  • Loan amount up to $25,000 = Prime + 4.25%
  • Loan amount between $25,001-$50,000 = Prime + 3.25% 
  • Loan amount over $50,000 = Prime + 2.255%   

 For loans with a term of seven years or longer, the breakdown is as follows: 

  • Loan amount up to $25,000 = Prime + 4.75% 
  • Loan amount between $25,001-$50,000 = Prime + 3.75% 
  • Loan amount over $50,000 = Prime + 2.75% 

As of July 2020, the current Prime Rate is 3.25%. 

Generous terms 

When a small business pursues financing, the terms of the loan will impact what they can do with cash flow and how much of it. That’s why the generous maturity periods of the SBA 7(a) program are a breath of fresh air for millions of business owners. 

According to the SBA, loans used toward working capital, machinery, and equipment will have a maturity date of up to 10 years (though the loan can’t outlive the life of the equipment). For real estate, the term is as much as 25 years. 

The SBA 7(a) program is free from collateral

You may have heard that you’ll need collateral to get a business loan, such as business assets or a lien on personal real estate. For loans up to $25,000, however, you’re off the hook as no collateral is needed. 

And while you’ll need to provide a downpayment on an SBA 7(a) loan, the amount is widely considered to be lower than you’d find elsewhere. While you could negotiate a downpayment as low as 5%, a downpayment of 10% is more likely for a 7(a) loan, which is still competitive. 

Fintech access

While the US government’s wheels tend to turn slowly, you don’t have to expect to wait forever for your SBA 7(a) loan. If you apply through an online lender, its financial technology capabilities will give them an advantage over the banks. At Funding Circle, you can get the online application process started in less than 10 minutes. After this, you are assigned a dedicated account manager to walk you through the rest of the process. 

Types of SBA 7(a) loan programs 

In addition to the standard product, there are multiple loans under the 7(a) umbrella. This gives  you more options to find a solution that is best tailored for your needs: 

  • 7(a) Small Loan — Maximum amount = $350,000/10-year maturity 
  • SBA Express — Maximum amount = $350,000/credit decision between 24-36 hours/50% SBA guaranty  
  • Export Express — Loans and lines of credit up to $500,000 
  • Export Working Capital — Up to $5 million for working capital needs of businesses generating export sales 
  • International Trade  — Up to $5 million 

With the SBA 7(a) program, entrepreneurs like you have been able to do things like pursuing an expansion they wouldn’t otherwise have achieved. That in and of itself explains the popularity of the program. If you’re ready to take the next step in getting a 7(a) loan, you can apply directly through Funding Circle. Start your application today!

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