Sign up for Funding Circle newsletter!
Get our latest news and information on business finance, management and growth.
Updated: September 2nd, 2020
If you’re considering an SBA 7(a) loan, you’re in good company. Not only is the 7(a) the SBA’s most popular program, but it has helped many business owners reach goals that might otherwise have fallen by the wayside. In fiscal year 2019, the SBA green-lighted tens of thousands of loans totalling more than $28 billion across two of its most popular loan programs, one of which is the 7(a). So you shouldn’t have any trouble finding a place to start.
Borrowers flock to the 7(a) loan program for a number of reasons. These include the wide variety of use cases for the proceeds to the capped interest rates. The Small Business Administration even backs a large percentage of the loan. The SBA itself, however, is not the one facilitating the financing and instead leaves that to a group of approved lenders, including banks, online lenders, and credit unions.
And while key features of the SBA 7(a) program are held to a similar standard, not every loan is the same. That’s why it makes sense to be picky when you’re choosing an SBA 7(a) lender. To start, decide which features of the loan are most important to you, such as the interest rate or turnaround time. We’ve broken it down for you from there.
When it comes to accessing capital, it’s no doubt that time is of the essence. Whether you are looking to grow your business to be more competitive, handle an emergency, or consolidate business debt so that you can free up more cash flow each month, you don’t want to wait longer than you have to for the funds. Some lenders may be able to process loans more quickly than others.
First and foremost, you’ll want to make sure the lender you’re considering is an SBA-certified lender, which means their loans are backed by the federal guaranty. But there are also different levels of SBA authorization.
For example, Funding Circle’s network of lenders includes SBA preferred lenders have already been successful at issuing 7(a) loans and has the most leeway for decision making with the SBA. As a result, you can generally expect for a highly streamlined process. If possible, find out how many SBA loans the lender has processed in the last 12 months to get a sense of their experience with this type of loan. The more experience they have, the less chance there is for hiccups and delays in the process.
By nature, financial technology (fintech) companies are able to process loan applications more quickly than their legacy financial institution peers. As a result, by using an online lender like Funding Circle, you can expect to get the wheels of the online application process turning in fewer than 6 minutes.
While the SBA places a cap on SBA 7(a) interest rates, lenders are given some discretion on the final rate. So, it’s negotiated between the lender and the business owner. As a result, there could be a difference of thousands of dollars in the final cost of the loan, depending on which lender you choose. That’s why you might want to get quotes from more than one lender and compare the terms of the loans.
For example, let’s say you are seeking a $30,000 SBA 7(a) loan at the standard 10-year repayment period (real estate loans have a 25-year maturity.) At a 6% rate, your monthly payments would be approximately $333.06 in principal and interest. The same loan at a rate of 7% would increase the monthly payments to $348.33 in principal and interest. The difference in interest in the total amount paid is nearly $2,000.
When it comes to collateral with the SBA’s 7(a) loan, you’ll have to read the fine print. For instance, on a loan of up to $25,000, lenders don’t need to gather any collateral. However, there is a collateral requirement for loans of more than $350,000. There is a gray area in which the lender has some say in whether or not collateral is needed, so you may want to shop around. Keep in mind the SBA says it won’t decline a loan if the only issue is a lack of collateral.
When you’re applying for an SBA 7(a) loan, your credit matters. This includes both your personal and business scores. You can expect the lender to pull your credit report, but some may only do what’s known as a “soft pull” early in the application process before deciding to move forward with the full report. The soft pull won’t affect your credit score, and if every point counts then you might want to ask the lender their approach before you apply.
What you don’t know can hurt you, and that’s another reason to be picky when choosing an SBA 7(a) lender. The last thing you want to be is blindsided when you access financing through a business loan. Financing should benefit business owners, not burden them. After all, the small businesses are the lifeblood of the economy. That’s why Funding Circle co-authored the Small Business Borrowers’ Bill of Rights, which basically spells out what you should expect as a business owner when accessing financing.
Chief among the features on the list is transparency. So, not only are you aware of the cost of the loan, but you could see how it compares side by side with other options. You’ll notice right away that applying for a SBA 7(a) loan through Funding Circle has no prepayment penalties and that the interest rate is Prime + 2.75%, which is currently a rate of 6% (based on WSJ prime as of 4/13/2020). You’ll also know upfront the fees you can expect with SBA loans.
Not every lender’s business model is something to be proud of, and you don’t want to get left holding the bag for the mistakes that they have made. For instance, don’t settle for unnecessarily high fees just because a lender needs to offset bad credit decisions or a high instance of loan defaults. By the same token, steer clear of lenders whose products leave you in a cycle of debt so that they can improve their own bottom line. Also, you don’t have to settle for anything less than fair and equal treatment. If your ability to repay the loan goes south, you are entitled to a fair collection process that’s not abusive. If you’re ready, you can apply for an SBA 7(a) loan directly through Funding Circle. You’ll get access to an entire network of lenders — including SBA preferred lenders — that are ready to go to work on your behalf.