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

When a small business client needs a commercial loan, but they don’t meet the qualifications for conventional financing, introduce them to a smart alternative: The U.S. Small Business Administration (SBA) 7(a) loan program. In many cases it’s the optimal solution for you and your small business clients. 

Unparalleled benefits for small business borrowers

While all SBA loan programs are specifically developed to help borrowers that have difficulty securing conventional loans, there are clear reasons why the SBA’s 7(a) loan program is the agency’s most popular product.

In fact, the SBA 7(a) loan program is a tailor-made loan option for borrowers with unconventional credit histories. This includes low owner-equity requirements (i.e. down payments), flexible use of loan proceeds, affordable rates and extended repayment terms.

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.  First, lenders can present their clients with a viable loan option even when conventional financing is off the table. Second, lenders are privy to a credit enhancement—in the form of a loan guarantee—for up to 85% of the credit request.

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. How? With competitive fixed or variable 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. This means it’s far easier for borrowers to qualify for and repay loans. And as for the lenders, these benefits help them increase their 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. SBA 7(a) loans offer guarantees up to 85% for loans under $150,000, and up to 75% for loans above $150,000. As added incentive, there’s a secondary market whereby lenders may sell the guaranteed portion of their loans. This can increase their institution’s liquidity, so they are able to issue more loans. 

Prudent Lenders is here to help

Prudent Lenders ensures you and your team are benefitting your small business clients through the SBA’s 7(a) program. We guide our lenders through the SBA loan process from initial inquiries to closings, and in servicing each loan until maturity. At each step along the way, we’ll provide you with the tools and training you’ll need to successfully manage and grow your SBA portfolio. Not a Prudent Lenders partner yet? Contact us today to learn how we can help your institution build your small business lending portfolio with SBA loan programs.