What are the Pros and Cons of SBA 7(A) Loans?

Got a small business that you’re looking to take to new heights? If you want to upscale your business but lack the necessary funding to do so, then one way that you could acquire the financial support needed to support your small business is by obtaining an SBA loan.

In recent years, SBA loans have gone from strength to strength, and are one of the leading sources of funding for small businesses in need of a boost. So much so, that SBA loans can allow borrowers to receive up to 5 million dollars. Not too shabby, right?

Besides offering a variety of loan options, one of the most popular types are the SBA 7(A) loans, which we’re going to be covering today. Below, we’re going to be talking about what it actually is, as well as the pros and cons of taking one out. Whenever you’re ready - let’s jump straight in!

What Are SBA 7(A) Loans?

In a nutshell, an SBA 7(a) loan is a financial tool that was specifically designed by SBA (the Small Business Administration) in order to help increase the amount of money that small business owners could utilize and grow their businesses with.

So, with all of that being said, the SBA 7(A) loans are loans that do not directly come from SBA, but instead come from a panel of lenders. 

When it comes to SBA 7(A) loans, the Small Business Administration simply serves as a middle man between the borrower and the lender, and helps to secure loans for the borrower by guaranteeing a certain amount from the total borrowed amount, while also limiting fees and capping interest rates.

As the most common type of loan, the 7(A) loan program is the Small Business Association’s primary means of securing loans for small business owners in the USA. This means that, when you apply to take out an SBA 7(A) loan, you will need to communicate with both the chosen lender and the SBA team in order to successfully guarantee a portion of the loan amount.

Unlike other types of loans out there, this guarantee between the lender, borrower and government agency (the SBA) helps to bolster the likelihood of the loan being accepted, and in turn helps to ensure a higher chance of the borrower acquiring the funds applied for, so that they can then use it to help grow and scale their business.

This method of obtaining a loan is so effective, in fact, that many borrowers who are unable to obtain or qualify for a business loan are often able to successfully do so via the SBA 7(A) loan program.

To continue, as we’re sure you’ve likely already guessed by now, the SBA 7(A) loan program is essentially an umbrella term that refers to a variety of different loans that all fall within the SBA 7(A) category.

For this reason, each loan that is labeled as being a 7(A) has been specifically designed in order to meet a variety of needs, depending on what it is the borrower requires, as well as what the business itself is in need of.

So, seeing as SBA 7(A) loans vary depending on business needs and personal circumstances, it means that all 7(A) loans tend to vary in overall loan amounts, how much the SBA has guaranteed, as well as additional term agreements.

Pros of SBA 7(A) Loans

1. High acceptance rate:

One of the biggest advantages of the SBA 7(A) loans is that they come with a high acceptance rate, as thanks to the guarantee from the SBA, it means that there is less risk involved for the lender. Thanks to this, it means that regardless of who has applied (and their current financial situation) there is a very high probability that the loan will be accepted.

2. Low-interest rates:

Another huge plus point of taking out an SBA 7(A) loan is that they have relatively low-interest rates. This means that the loans will remain affordable to small businesses and their owners.

3. Flexible down payment options:

Unlike other types of loans out there, an SBA 7(A) loan is unique in the fact that they do not often require a large down payment in order to open the loan.

Instead, when it comes to SBA 7(A) loans, you will usually only ever be required to pay a down payment of just 10 percent of the overall amount that you wish to borrow, which means that you won’t have to worry about parting ways with a huge chunk of your personal savings, which will help to relieve the stress of taking out a loan, while also ensuring that you still have your personal money in the bank.

Cons of SBA 7(A) Loans

1. Lenders have their own terms and conditions:

Even though the loan goes directly through SBA, lenders are still allowed to set their own terms and conditions, and they are given a lot of freedom when it comes to this.

For this reason, all of the pros that we have mentioned above are dependent on whether or not the lender wishes to go with the SBA’s set terms. As they are given plenty of leeway to make changes, it means that some lenders may choose to stick the interest rate higher than you might like, while others may require a large down payment.

2. Personal assets are often required as collateral

One of the biggest downsides to opening up an SBA 7(A) loan is that most lenders will require you to agree to personal collateral. This means that, in the event that your loan defaulted and you were unable to pay it off, the lenders would be able to then come and take your personal possessions to make up for the remaining amount of the money borrowed.

It’s very important to consider your personal financial situation to determine whether or not taking out an SBA 7(A) loan is within your means, as in the event of hard times, the SBA could take your property.

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