SBA loans: The basics of 7(a) and 504 loans

SBA PPP loans have been getting all the press.  However small businesses looking for an unforgiven traditional loan have two other potentially favorable SBA loan options available at the moment, courtesy of the Small Business Administration – an SBA 7(a) loan and an SBA 504 loan.

The basics of the 7(a) loan are that it can be used to, purchase equipment, acquire or start a business or obtain working capital. They have a maximum loan amount of $5 million, and have lower fees than 504 loans, which have payouts ranging from $125,000 to $20 million but require a 10% down payment by the business owner. The intention of 504 loans is for businesses to finance owner occupied commercial real estate or large equipment purchases. To qualify for these programs, a business must have fewer than 500 employees and generally less than $7.5 million in revenue.

What are the positives?

SBA loans usually involve significant fees and additional information/disclosure requests. However, as part of the CARES Act, the SBA is agreeing to waive those fees and pay several months of payments for loans approved through October 1, 2021. So, that is a nice benefit for small business owners.  Even if business owners don’t have all the equity conventional financing programs may require, they likely can qualify here, as long as they meet the basic requirements and have a good business plan.

The biggest positive with these loans, however, is that the SBA is authorized to pay three months of principal (was 6 months but changed as of February 16, 2021 and could change again), interest and any associated fees that borrowers owe for all 7(a), 504 and microloans reported in regular servicing status (excluding PPP loans). Borrowers need not apply for this assistance. Up to $9,000/month in payment for a potential total of $27,000 per loan can be covered, although the SBA reserves the right to decline requests due to a lack of funds. It’s also important to note that these are payments on the company’s behalf, not deferrals. That type of money savings obviously can be huge for a start-up company or any small business. Finally, there is a potential for longer amortizations resulting in additional operating cash flow and flexibility for owners during these uncertain times.

What are the negatives?

In terms of drawbacks, loan recipients are likely going to have to deal with a significant amount of red tape or additional requirements and disclosures that will require a personal guarantee by all owners. Additionally, there are loan maximums of $5 million. The loan limits may be a little less than what is available through conventional financing or for large businesses.

What can you do today?

For starters, we recommend that you get the process started. Awareness and proactive planning are critical parts of this process. You should be prepared to discuss your business plan and how your business will succeed and grow post-COVID-19.

If you’re potentially interested in refinancing, check on any prepayment matters that might be involved. If you need to involve additional decision-makers at your company, bring them into the loop as soon as possible. Be sure to discuss the loan opportunities with your banker. And of course feel free to reach out to members of the Baker Tilly Advantage team if you’re unsure if these opportunities are right for you. We can advise on the pros and cons of each loan type. We can analyze along with management your specific situation to help you make the best possible choice. Our Value Architects are here to help you maximize your opportunities today, for tomorrow.

To learn more on this topic or learn how Baker Tilly Advantage team can help, contact our team.