SBA 7(a) loans are one of the most popular financing options for American small businesses, with over 50,000 loans being approved each year. The 7(a) program is part of the U.S. Federal Government’s Small Business Administration (SBA), and it’s intended to provide an alternative loan option for borrowers unable to get traditional financing.
SBA 7(a) loans are attractive due to two key advantages. First, their broad accessibility and flexibility makes them attainable by more borrowers. Second, their terms are favorable, including advantageous loan terms, repayment schedules, and pre-payment penalties.
However, SBA 7(a) loans also have some drawbacks. Their maximum loan amount of $5,000,000, slightly higher interest rates than other types of loans, and cumbersome loan process can dissuade potential borrowers.
The main alternatives to SBA 7(a) loans are conventional loans and SBA 504 loans. For more on these and their similarities and differences to SBA 7(a) loans, see:
Pros
Accessibility and Flexibility
SBA 7(a) loans are very accessible. The lowered risk to the lender from the SBA’s majority guarantee of the loan makes lenders more willing to give them out. As such, they’re attainable for many borrowers that are unable to access other sources of financing (such as conventional loans). They have a broad personal and business eligibility, including nearly all for-profit businesses in the U.S. They’re offered by banks, credit unions, and other lenders across the country, with over 1500 lenders giving out SBA 7(a) loans each year.
SBA 7(a) loans are also very flexible. They’re available for a wide variety of uses, including real estate purchase, business purchase, equipment, construction, startup, loan refinance, or a combination of multiple purposes. They’re an especially good fit for startup and construction loans due to their inherent risk.
Favorable Terms
SBA 7(a) loans have favorable terms. They have short pre-payment penalties, only lasting three years (5%-3%-1%). This means that the loan can be fully paid off after three years with no added cost, which allows for any future refinances.
They also have long repayment times, up to 25 years for loans involving real estate and up to 10 years for loans not involving real estate. These are longer than most conventional loans, meaning that monthly payments for a SBA 7(a) loan are lower than they would be for a conventional loan. Additionally, SBA 7(a) loans are fully amortized, meaning payments are consistent over the entire term of the loan. These long terms and this consistency makes the future of a business much easier to plan for.
Cons
Although SBA 7(a) loans have many advantages, they also have a few disadvantages. One is the relatively small maximum loan amount. The maximum loan amount for SBA 7(a) loans is $5,000,000, which can limit their usage, especially in areas of the U.S. with pricier real estate.
Another disadvantage involves interest rates. SBA 7(a) loan rates tend to be a bit higher than those of conventional or SBA 504 loans, although this can differ from loan to loan. The longer terms of 7(a) loans mean that loan payments are usually still lower than those of conventional loans, even with the higher rates, however.
The final disadvantage is the cumbersome loan process. Although the SBA 7(a) loan process is quicker and easier than it used to be, it’s still longer and more rigorous than that of a conventional loan. That may be an issue for some borrowers, especially those who need capital quickly.
