The SBA 7(a) Loan Program: A Smart Loan Alternative

When a small business client needs a commercial loan, but they don’t meet all of the criteria for conventional financing, introduce them to a smart alternative: The U.S. Small Business Administration (SBA) 7(a) loan program. SBA 7(a) loans are a terrific option for growing businesses and are available from $50,000 to $5 million; in addition, SBA Community Advantage loans are a type of 7(a) loan that provide funding for businesses in underserved geographic areas, with funding available up to $250,000.

In many cases, the SBA 7(a) is the optimal solution for you and your small business clients, which is one of many reasons why it’s the most popular choice among the SBA’s options. 

Unparalleled benefits for small business borrowers

While all SBA loan programs are specifically developed to help borrowers that don’t quite meet the criteria that banks have set for conventional loans, there are clear reasons why the SBA’s 7(a) loan program is the one that borrowers choose most often.

In fact, the SBA 7(a) loan program is a tailor-made loan option for borrowers with unconventional credit histories, such as credit scores that are lower than typical minimums for business lending or insufficient credit histories in terms of length, mix or other criteria. 

In addition, the SBA 7(a) offers borrowers:

• Generous loan maximums, up to $5 million for qualified projects and borrowers (or up to $250,000 for Community Advantage loans).
• Lower owner-equity requirements – typically, just a 10% equity injection when the business is a startup (less than two years of business operations) or when a client is acquiring an existing business (note: some lenders require a 10% equity for any SBA 7(a) or Community Advantage loan). This means that more of your clients will qualify and because this is significantly less than conventional loans require, it enables them to keep more cash available to invest in their businesses.
• Reasonable (and flexible) collateral requirements that enable lenders to determine the best path forward for each borrower.
• Flexible loan uses that help borrowers apply funds in areas of critical need now – including startup costs, working capital, equipment purchases and more – while planning for future growth.
• Competitive interest rates and extended repayments terms so that monthly payments are lower overall, enabling business owners to have more cash in-hand for working capital and reinvestment.

Lender incentives

The SBA 7(a) program is not only an excellent loan option for small business borrowers, it’s a consistently useful alternative for the lenders who serve them. Here are a few reasons why:

• Lenders can present their clients with a viable loan option even when conventional financing is off the table.
• Lenders have access to a credit enhancement—in the form of an SBA loan guarantee—for up to 85% of the credit request.
• Controlled disbursements enable you to better manage the flow of funds and ensure that loans are used as agreed, keeping borrowers accountable. This extra step provides an additional level of security for your bank while further protecting your SBA guarantees.

In addition, with SBA 7(a) and Community Advantage options, lenders build loyalty: When you offer solutions instead of closing doors, then small business clients can stay with you, enabling your institution to maintain and build banking relationships for the long run.

About loan guarantees for SBA 7(a) loans

As with all SBA options, one of the most important aspects of the SBA program for financial institutions is the loan guarantee that comes with every approved SBA deal, including 7(a) and Community Advantage loans. These guarantees are the hallmark of the SBA program, which has significant benefits to lenders and your clients. With the SBA 7(a) program, your bank:

• Gains a credit enhancement that reduces your institution’s risk, meaning that you can approve more and better small business loans
• Keeps the financing door open for small business borrowers, which increases customer loyalty and retention
• Expands your small business portfolio and increases your institution’s profitability

How does the SBA guarantee work for the SBA 7(a)?

SBA guarantees helps you be a more responsive banker for your clients by:

• Reducing the financial risks taken on by your institution. The SBA provides a guarantee up to 85% for 7(a) loans up to $150,000 and up to 75% for loans exceeding $150,000.
• Making it possible for banks to lend to borrowers in industries that are often typically difficult to fund – such as retail, restaurants and childcare – or for small business clients who may have difficulty obtaining traditional bank loans.
• Enabling lenders to provide financing with competitive terms to small businesses when traditional or conventional funding is otherwise unavailable.

Win – win: Why offer 7(a) loans?

Here’s a summary of how the SBA 7(a) loan requirements and program requirements may be useful to you and your clients now:

Loan maximums: With loan amounts up to $5 million, the SBA 7(a) program provides businesses a viable alternative when conventional loans won’t work.  This is especially true when a business lacks collateral. 

Flexible uses of loan proceeds: Several eligible uses of 7(a) loan proceeds include:

• Owner-occupied commercial real estate acquisitions or construction
• Leasehold improvements
• Equipment purchases
• Working capital
• Expansion or acquisition of existing businesses including some franchises (the SBA’s franchise directory outlines eligibility)
• Inventory acquisition
• Debt refinance.

Favorable rates and terms: The SBA 7(a) program ensures that borrowers’ monthly payments are affordable. This option offers competitive interest rates and extended repayment terms (up to 10 years for working capital and up to 25 years for real estate). When compared to a conventional loan, the SBA’s extended terms generally result in a reduced monthly payment, which also means that it’s easier for borrowers to qualify for and repay loans. And as for your institution, these benefits help you increase your loan volume by getting to a “yes” more frequently and safely.

Expanded credit box: SBA loan programs enable lenders to serve borrowers who fall outside their existing loan requirements while managing their financial risk. As an added incentive, there’s a secondary market that enables lenders to sell the guaranteed portion of their loans. This can increase your institution’s liquidity so that you can issue more loans to your small business clients. 

Low owner-equity requirements enable more business owners to qualify

As a lender, you know that one of the most significant challenges for small business owners looking to secure a loan is the equity requirement. The SBA 7(a) program makes it much easier for more entrepreneurs to meet this requirement, with low owner-equity requirements (10% of the project total) and flexible (albeit, documented) sourcing, including, but not limited to:

• Cash that’s not borrowed, such as:
• Cash in the business account (for an existing business) or personal cash that’s provided for the business (such as from personal savings).
• Funds that are gifted (given) to borrowers, as long as it’s documented through a gift letter that the funds aren’t borrowed from the source and there’s no repayment due.
• Stocks or securities that are withdrawn or cashed out, with the funds deposited into the owner’s personal or business account for use toward the business.
• Funds from retirement accounts, in accordance with the borrower’s accountant, the IRS and SBA requirements, including:
• Cash that’s withdrawn from a retirement account, provided that your client can also pay any penalties for early withdrawal, as applicable to the account.
• Cash that’s rolled over into the business from a retirement account, as long as this is done with a reputable organization that specializes in the “rollover for business startups,” or ROBS, program.
• Cash that’s personally borrowed, as long as the repayment comes from a source that’s not the business or the owner’s salary from the business.

In addition, funds that an owner already spent on business expenses related to the project that the loan is funding may be used, when these can be appropriately documented.

Even more benefits when you work with Prudent Lenders

When you work with Prudent Lenders as your lender-service provider, you gain a team with decades of experience in SBA lending and servicing, including SBA 7(a) loans. We offer:

• Our proprietary Fast Track Assessment tool, which provides you and your clients with a fast and easy way to prequalify potential SBA borrowers before moving ahead with a full application. You receive the information needed to determine eligibility within two business days, which significantly reduces the time and resources your team spends on ineligible applicants and projects while enabling you to focus on businesses that you can help.
• Underwriting and loan-approval services
• Loan-closing services, including legal guidance that ensures your bank and your borrowers are in compliance with SBA guidelines
• Servicing throughout the life of every loan, so that your team’s SBA deals always remain in compliance and your guarantees are secure

If you need help with COVID-19-related SBA 7(a) deferrals

You can find answers to everything you need in this lenders’ resource guide to COVID-19 SBA loan deferrals. Here, you’ll find the information you need to process deferrals efficiently and correctly. And, as always, your Prudent Lenders team is here to help with every step.