Using the SBA 7(a) Loan to Repair Capital
You can use the SBA 7(a) loan for fixes and repairs on existing capital.
Roofs can suffer damage during storms, or wear over time and leak. Equipment will always break down, and machinery — from food service to manufacturing equipment — needs regular maintenance. Required repairs drive up operating costs, which can sometimes drive a business to go under.
If you’re struggling to find the funding you need to repair your existing capital, an SBA 7(a) loan might be your best option.
Repairing or Improving Capital
To use SBA 7(a) loans to repair existing capital, such use must be for repairs — and not for improvement. Here’s a breakdown of each category to help you determine what kind of project you have:
Repairing existing capital includes costs used to maintain assets in working order. Some examples include real estate maintenance like roofing, painting, and electrical. Equipment maintenance costs are also considered capital repair.
Improving existing capital is going beyond normal maintenance. If an asset is modified beyond its normal working condition, or replaced with something newer or better, these costs are considered capital improvement.
About the SBA 7(a) Loan
To get an SBA 7(a) loan:
Your business must operate for profit.
It must operate in the U.S. or one of its territories.
The business owner must not be on parole.
You must have reasonable equity to invest, like a profitable business or your own personal equity.
Any alternative financial resources — like a savings account or the ability to get a personal loan — must have been sought out and exhausted before you qualify for an SBA 7(a) loan.
Financial institutions will require 10% or more down based on a credit score of 600 or more.
The loan term can be no more than 25 years, and the loan amount cannot exceed $5 million.
There’s no loan minimum.
The government guarantees 85% of loans up to $150,000, and 75% for larger loans.
Interest rates also depend on the amount of the loan, with rates based on the Wall Street Journal Prime. The typical interest rates for loans can be found here, though rates vary based on whether or not the loan involves real estate.
Comparing the SBA 7(a) Loan to the SBA 504 Loan
The SBA 504 loan is a government-guaranteed loan that’s usually used for real estate improvement or remodeling, and for purchasing equipment instead of capital repair. Larger than the SBA 7(a) loan, the SBA 504 loan has a shorter term and different rates.
Borrowers often pair the SBA 504 loan with a loan from a traditional financial institution, which allows for a low 10% down payment. Compared to the SBA 7(a) loan, the SBA 504 loan:
is a larger loan, with a minimum of $125,000 and a maximum of $20 million
has a fixed interest rate
has a 20-year maturity rate for real estate and land
requires a 10% borrower down payment
Additionally, you must obtain an SBA 504 loan from a Certified Development Company (CDC) rather than from a bank or traditional lending institution.
Case Study: Repairing 2 Assisted Living Facilities
Sandeep, a passionate entrepreneur, owned two small assisted living facilities in Montgomery, Alabama. These facilities provided a comfortable and nurturing environment for seniors, and Sandeep was dedicated to ensuring their well-being. However, over the years, the buildings housing these facilities had begun to show signs of wear and tear, and maintenance had become increasingly necessary.
The roofs of both facilities needed repairs, and the electrical systems were outdated and in dire need of an upgrade. Sandeep knew that these repairs were essential to continue providing a safe and comfortable environment for his residents, but the costs were significant.
After doing some research, Sandeep came across the SBA 7(a) loan program and realized that it could be the perfect solution to his financial dilemma. Since the loan could be used for repairing capital, he decided to apply for it, focusing on the necessary repairs rather than improvements.
Sandeep approached a local bank familiar with the SBA 7(a) loan process and presented his case. The bank reviewed his application and financials and eventually approved his loan request for $250,000. With the funds in hand, Sandeep was able to fix the roofs and upgrade the electrical systems in both facilities. These repairs not only ensured the continued safety and comfort of his residents but also helped improve the facilities' overall efficiency and lowered their operating costs.
This case study demonstrates the value of SBA 7(a) loans for small business owners like Sandeep who need financing for repairing capital. By utilizing this financial resource, Sandeep was able to maintain the quality of his assisted living facilities and continue providing excellent care to his residents.
This is a fictional case study provided for illustrative purposes.
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We live and breathe the SBA 7(a) loan process at SBA 7(a) Loans. Every day, we match business owners like you with the best lender and loan for your situation, even if it means that we have to look outside of the SBA 7(a) loan platform.