Opinion: Is an SBA 7(a) loan the best option for a small business?

Travis Beazley

When it comes to financing a small business, few programs are as well-known – or as misunderstood – as the SBA 7(a) loan. It’s the U.S. Small Business Administration’s most popular lending program, used by thousands of businesses each year for everything from working capital to business acquisitions. But whether it’s the right fit depends on your goals, your stage of business and your appetite for the SBA’s unique requirements. 

The 7(a) program is designed to be flexible. Loan amounts can go up to $5 million and funds can be used for almost any legitimate business purpose, including bBing equipment, refinancing debt, expanding to a new location or even purchasing another company. Repayment terms can be generous, stretching as long as 25 years for real estate and up to 10 years for working capital and equipment. This longer runway can make monthly payments more manageable, which is often a lifeline for younger companies still building steady cash flow.

Certain businesses tend to be especially good candidates. A startup that’s already operating and showing early profitability might turn to the program for growth capital it can’t secure from traditional lenders. A fast-growing business might use it to purchase inventory or open a second location. Owners planning to buy out a partner or acquire another business often rely on the 7(a) program because it allows for ownership changes – something many conventional loans won’t finance.

The structure of the program is part of its appeal. The SBA guarantees a portion of the loan – up to 85% on loans under $150,000 and up to 75% on larger ones – which reduces risk for the lender and can open doors for borrowers who might not otherwise qualify. Interest rates are capped by the SBA, typically tied to the prime rate plus a limited spread, so they often come in lower than many unsecured or short-term business loans. 

However, this is not easy money. The application process is thorough, and borrowers should expect to produce detailed financial statements, tax returns and even a solid business plan at times. Personal guarantees are required from owners with a 20% or greater stake and collateral is often part of the deal, though the SBA is more flexible on collateral than most conventional lenders, especially for smaller loans. Approval and closing for a standard 7(a) loan can take between 30 or more days, which makes it less suitable for businesses needing funds on short notice.

The program’s strengths – long repayment terms, capped rates and flexibility of use – have to be weighed against its drawbacks: Government red tape, considerable paperwork and the requirement for strong credit and potential personal guarantees. It’s also important to note that not every business is eligible. Real estate investment firms, speculative ventures and certain other types of enterprises are excluded from SBA financing.

For some, there may be better options. Businesses needing smaller amounts quickly might consider an SBA Express loan or microloan. Companies financing large fixed-asset purchases could compare the SBA 504 loan program, which offers long-term, fixed-rate financing for real estate and major equipment.

For the right borrower, though, a 7(a) loan can be a powerful tool. It offers the kind of capital and repayment structure that can position a business for steady, sustainable growth – provided you can meet the program’s requirements and are prepared for the process. Before you decide, talk to a knowledgeable SBA lender who can walk you through the options and help determine if the 7(a) is the right fit for your business.

For more information on this and other SBA loan programs, you can visit the SBA’s website at SBA.gov.

Travis Beazley is a senior vice president and director of SBA lending for OMB Bank in Springfield. He can be reached at t.beazley@ombbank.com.