5 Most Common Uses of SBA 7(a) Loans

Last Updated Jun 23, 2020 | Published on May 2, 2019 | Small Business

When business owners think about San Diego business loans, the first thing that comes to mind is obtaining a bank loan. However, most entrepreneurs know how difficult it is to qualify for a traditional bank loan. That’s why the Small Business Administration (SBA) designed a variety of loan programs to help small business owners obtain financing.

Among the various types of SBA loan programs, SBA 7(a) loans have become valuable to entrepreneurs. The SBA guarantees up to 85% of every SBA loan, which mitigates the risk for lenders. For this reason, banks and other financial institutions are more likely to supply funding to small business owners, as well as start-ups.

Loan Limits for SBA 7(a) Loans

For SBA 7(a) loans, strong borrowers can receive up to $5 million. The Small Business Administration guarantees 85% for loans not exceeding $150,000, while there’s a 75% guarantee for loans greater than $150,000.

Many business owners prefer SBA loans because of the high loan amounts, longer repayment terms, and flexibility of use. The repayment periods range from 10 years (equipment, working capital, or inventory) and 25 years (real estate).

The Small Business Administration sets a maximum interest rate, but you can talk to your lender and negotiate within the limit.

Interest Rates for 7(a) Loans

As mentioned, you can negotiate the interest rate (subject to minimum and caps) between you and potential lenders. The interest rates depend on the following base rates:

  • Prime rate by the daily national newspaper
  • The SBA peg rate
  • The London InterBank one month prime + 3%

Lenders can add a spread to the base rate, but it shouldn’t exceed more than 2.5% for loans with less than seven years and 2.75% for loans seven years or more.

Different Uses for SBA 7(a) Loans

There are different types of SBA loans, but the 7(a) ones are the most popular because of the flexibility of use. This loan program can be used for almost any type of business need with little restrictions.

However, you can’t use the funds from an SBA loan to invest or purchase buildings that will be leased to another company. In addition, you can’t use it to reimburse a business owner for the money you invested in their business.

If you’re looking to apply for an SBA 7(a) loan, here are five ways you can make use of the funds.

1. Acquire an Existing Business

If you’re looking to buy a business, you can use SBA 7(a) loans. But in order to secure financing, small business owners need to have good credit, valuable assets they can pledge, and healthy business history. Lenders only approve borrowers who can prove that the business they’re looking to purchase is potentially profitable. Before applying for an SBA loan, make sure you have a solid business plan and experience in your chosen industry.

2.  Working Capital

The need to bolster working capital is one of the main reasons small business owners apply for SBA 7(a) loans. Simply because without working capital, you can’t operate a viable business. You need capital to buy and move inventory, pay suppliers, make payroll, and generally, keep your business afloat. This is why SBA 7(a) loans are one of the best financing solutions if you need working capital.

3. Startup Costs

When starting your own business, you need to pay for startup costs, such as technology, rental expenses, and advertising expenses. However, most business owners cannot afford to fund their new business venture out of pocket. If your business is eligible for SBA 7(a) loan and you have good credit, applying for a 7(a) loan to fund your startup is an ideal source for you to tap into.

4. Land and Real Estate

If you want to rent office space or buy a building, you can use SBA 7(a) loans to purchase land or real estate that your business occupies. Additionally, 7(a) loans can also help fund landscaping projects and certain renovations. An SBA 7(a) loan can also be used for branching out to another location, business mortgages on owner-occupied real estate, along with acquiring land or a facility.

5. Equipment

Equipment purchases are a necessary part of running a business. There are times when you need to buy costly machinery, fixtures, furniture, and or vehicles. In order to operate your business effectively, you may need to also purchase supplies and raw materials on a regular basis. To fund these purchases with an SBA 7(a) loan, it’s important to demonstrate how the equipment or materials will contribute to the success and growth of your business.

San Diego Business Loans – Small Business Loans for You

Before applying for SBA loans, it’s important to remember that the underwriting process takes time. If you need funds quickly and you don’t have weeks or months to spare, it’s best to talk to a lending expert. They can help you find different San Diego business loans that fit your timeframe.

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