SBA 7(a) loans have been growing in popularity in recent years, and with it, many facts and fantasies have emerged about what they can and can’t do.
Let’s examine, and bust, five commonly held myths about SBA 7(a) loans.
1. Myth: SBA 7(a) loans are only available to startups
Rating: False ❌
It's a common belief that SBA 7(a) loans are exclusive to startups. While it's true that these loans can provide crucial funding to get a new business off the ground, they are by no means restricted to this category of businesses.
In reality, SBA 7(a) loans are available to businesses of all sizes and in various stages of their lifecycle. This includes not only startups but also established businesses looking to expand, refinance existing debt, or even cover working capital expenses. It's this versatility that makes SBA 7(a) loans such a popular choice among business owners.
2. Myth: SBA 7(a) loans are fully guaranteed by the government
Rating: False ❌
Many people mistakenly believe that SBA 7(a) loans are fully guaranteed by the government, implying that the borrower isn't responsible for the loan repayment. This misconception can lead to a potentially risky financial situation.
In truth, while the SBA does guarantee a portion of the 7(a) loan, up to 85% for SBA 7(a) loans, and 50% for SBA Express loans, the borrower is fundamentally responsible for repaying the full amount.
The SBA's guarantee serves to mitigate the lender's risk, making them more willing to extend loans to businesses that might not meet traditional lending criteria. Just remember: The obligation to repay the loan in full rests with the borrower.
3. Myth: SBA 7(a) loans are easy to get
Rating: Mixed 🤔
There's a prevailing myth that obtaining an SBA 7(a) loan is a simple, straightforward process. However, this is certainly not always the case.
In reality, while SBA 7(a) loans can be an excellent financing option, the eligibility criteria are quite stringent. The application process can also be complex and time consuming.
Prospective borrowers must meet specific requirements related to business size, nature of operations, and use of proceeds, among others. Plus, the detailed documentation necessary for the application can make the process seem daunting.
Of course, our team will assist you with the process and outline everything you need so you don’t get lost along the way.
4. Myth: SBA 7(a) loans have low interest rates
Rating: Mixed 🤔
Another myth that often circulates is that SBA 7(a) loans offer the lowest interest rates. While it's true that these loans often have rather competitive rates, they aren't always the lowest.
The interest rate on an SBA 7(a) loan varies based on several factors, including the borrower's credit score, the loan amount, and the term of the loan. While the rates can be favorable, especially compared to some other financing options, they can also sometimes be higher than conventional bank loans.
It's essential to shop around and compare rates before making a decision. That’s one way we set ourselves apart, we will find the best financing option for you, even if it’s outside the SBA 7(a) program.
Current SBA Loan Interest Rates
Here are the current interest rate ranges for SBA financing.
5. Myth: SBA 7(a) loans don’t require a down payment
Rating: Mixed 🤔
It sounds too good to be true, doesn’t it?
Let's tackle SBA 7(a) loan down payment requirements. That is, how much equity you need to bring to a deal. This is a slightly more complicated myth to break down, because for some uses, SBA 7(a) loans can technically cover the full amount. Business expansions, and, now, even some business acquisitions, may not require any additional equity put in from the borrower.
That said, most SBA 7(a) lenders require a down payment, which can range from 10% to 30% of the loan amount.
While this may seem like a significant upfront cost, it's important to remember that these loans can be for substantial amounts, up to $5 million. The down payment ensures that the borrower has some skin in the game, which can encourage more responsible use of the loan funds. Furthermore, the loan proceeds can be used for a variety of business needs, including inventory, working capital, machinery, and real estate purchases, making SBA 7(a) loans a versatile financing option.
Conclusion
There you have it, a comprehensive guide debunking some common and less common myths surrounding SBA 7(a) loans.
Naturally, it’s not possible to cover every aspect of SBA financing in this one article. Complete the form on our get financing page, and we’ll be in touch to get you loan quotes and, yes, answer any lingering questions you may have.