The Advantages of Using a SBA 7(a) Loan

The Small Business Act used in conjunction with third party lenders, otherwise known as participants, join together and agree to something called an SBA 7(a) loan. This loan is particularly designed for businesses that are for-profit, without any internal resources to create proper financing, for taking care of repairs, expansion, machinery, equipment or some working capital. Such businesses must be willing to prove that they can be beneficial to their community by providing otherwise unavailable jobs. This loan is not for businesses looking to invest in other businesses or engage in speculative business transactions.

The advantages of using a SBA 7(a) loan includes the fact that the SBA 7(a) is a guaranteed loan. What this means is that for a certain percentage of the loan, the SBA guarantees payment to the lender, which makes a lender much more willing to make the loan. This does not mean that the borrower is not responsible to pay for that percentage. If the borrower defaults on the loan, they are still responsible for the full amount of the loan. The percentage of the loan that is guaranteed is a tiered amount based on the loan size. Current guarantee percentages range from 75% to 85% with a max SBA 7(a) loan amount of $2mm, however there is pending legislation that is expected to increase the loan amount to $3mm.

Other advantages to an SBA 7(a) loans are the availability of working capital and high leverage. In the finance world, credit equals leverage. If you have credit, then you have leverage and so a SBA 7(a) loan gives you high leverage by giving you the ability to finance most of the costs for your projects. For example: if a business looking expand by buying a second location needs to spend a total of $1 million to buy and renovate the location, the borrower would need to come up with at least 20% of the $1 million in order to be financed (that is $200,000 out of pocket). However, with a SBA 7(a) loan, the business has more credit, more leverage, and therefore would be able to finance up to 90% of the costs instead of just 80%. This means that instead of needing $200,000, the business only needs $100,000 in order to make an expansion. To a struggling business, that 10% makes a huge difference.

Finally, paying back a SBA 7(a) loan is easier than other loans. First of all, they are not pay-on-demand contracts. This means that a business can pay the loan for the amount of time that is agreed upon between it and the third party lender, up to 25 years. However, if the borrower decides to, he can pay the loan back within 3 years without being charged any prepayment penalties. Also, banks are not able to check into the businesses' month-to-month finances in order to ensure that the loan can be paid off. Instead a SBA 7(a) loan allows the borrower to pay at the rate agreed upon between them and the third party lender.