If you search for “myths about SBA loans,” you’ll find dozens of articles outlining misconceptions about Small Business Administration loans – including the application process, what institution is lending the money, who’s eligible and approved uses of the funds. However, one thing’s certain: the SBA 7(a) loan guarantee is among the government’s most popular loan guarantee programs, in part because of its relatively low interest rates, longer terms and potentially lower down payments. This post will look to set the record straight regarding the most common myths and, in doing so, provide an overview of the 7(a) and how small businesses can (and can’t) utilize this program.
Myth #1: It’s only for startups
An SBA 7(a) can, with some restrictions, be used to start a company, but it’s not exclusive to those initiating a new venture. While often a practical option for startups, businesses in any lifestage can take advantage of a 7(a), assuming they meet its eligibility requirements. Loans are made for up to $5 million and can be used, among other things, to:
- Purchase machinery, furniture, fixtures, supplies or materials
- Purchase or expand an existing business
- Buy land or purchase, build or renovate an existing building
- Refinance existing debt
- Provide long-term working capital for operational expenses
- Provide short-term working capital, including seasonal financing and exporting
Myth #2: It can’t be combined with any other financing vehicle
Some business owners believe that an SBA 7(a) cannot be combined with other financing in order to reach their funding goals, but this is incorrect. Many who secure a loan guaranteed by the SBA combine it with conventional loans to meet their needs. However, the SBA will not guarantee a loan if the business applying for is able to obtain “reasonable, non-federal” financing, including using liquid assets of the principals of the applicant.
Myth #3: It’s only for businesses of a certain size or type
Some owners are under the impression that SBA loans are only for a specific type or size of business, but while there are restrictions, the vast majority of small businesses are eligible. To qualify for 7(a), a business must demonstrate its eligibility based on:
- Business and owner requirements: A business must be defined as a "small business" by the SBA, and the business must be operating for profit within the U.S. or its possessions. Additionally, the business owner must have the resources to invest his or her own personal assets in the business. Finally, the loan must be for a sound business purpose.
- Business size requirements: To be considered eligible for the SBA 7(a) loan program, a business must meet the SBA’s size standards. A determination of eligible size is based primarily on a business’s average annual receipts or its average employment. To understand how each of these is calculated by the SBA, review the guidelines here.
- Eligible types of businesses: Most types of businesses are eligible for a 7(a) loan, except for real estate and other speculative businesses, lending companies, pyramid sales companies, companies that engage in illegal activities and those categorized as non-profits. The complete list of ineligible business types is here.
These are just a few of the myths associated with the SBA 7(a) loan guarantee program; others include the notion that SBA loans in general are difficult to secure, require cumbersome paperwork, and involve delays and complex processes. The basis for this belief, though, has much more to do with some businesses’ experiences with the bank with which they worked to secure the loan. It’s important to partner with a bank that has experience navigating the SBA loan process. Find a bank with a proven SBA track record and get them involved early in the process – before making a decision about what type of loan is best for you – so that you’re fully aware of all your options and the application requirements of each financing avenue. An experienced business banker with additional expertise in SBA loan programs can streamline the process and help you choose the loan that’s best for your short- and long-term needs.