There have been many lending programs and grants put into place to help small business owners weather the financial storm caused by the coronavirus pandemic. As the economy slowly improves, the emergency relief of PPP, EIDL, and other programs might not be enough for you to rebuild your business. A traditional low-cost SBA 7(a) loan can help you transition back into full operation by providing working capital or debt refinance.
Here’s what you need to know about this popular loan program known as the “gold standard” in small business lending.
Special SBA 7(a) deferment guidelines related to the coronavirus pandemic
As part of coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a) loans disbursed prior to September 27, 2020. Borrowers do not need to apply for this assistance. It will be automatically provided as follows:
- For loans not on deferment, SBA will begin making payments with the next payment due on the loan and will make six monthly payments.
- For loans currently on deferment, SBA will begin making payments with the next payment due after the deferment period has ended, and will make six monthly payments.
- For loans made after March 27, 2020 and fully disbursed prior to September 27, 2020, SBA will begin making payments with the first payment due on the loan and will make six monthly payments.
Lenders have been instructed to refrain from collecting loan payments from borrowers. If a borrower's payment was collected after March 27, 2020, lenders were instructed to inform the borrower that they have the option of having the loan payment returned by the lender or applying the loan payment to further reduce the loan balance after SBA's payment. Borrowers should contact their lender if they have any questions regarding this payment relief.
What is an SBA 7(a) loan?
SBA loans have low rates, long terms and very low monthly payments. It’s a government-guaranteed small business loan with a long-term and a low-interest rate.
The most common misunderstanding about these loans is that the SBA government organization lends money directly to small businesses. However, the agency typically does not make direct loans. The SBA provides a guarantee on the loan, promising to reimburse the bank for a certain percentage of your loan if you default on that loan. This guarantee lowers the risks to banks and other lenders, encouraging them to offer these loans to more American small businesses. Many banks and other financial institutions offer SBA loans, but their process, requirements, and fees can vary. For in-depth information about the popular SBA 7(a) loan program, visit the SmartBiz Small Business blog and review our comprehensive article: What is an SBA Loan?
Advantages of SBA 7(a) loans
An SBA 7(a) loan has several advantages compared to other options including:
- Low interest rates
- Long terms
- Very low monthly payments
- Available for many uses
- Can help build business credit
- No prepayment penalty
- Available nationwide
Requirements to apply for an SBA 7(a) loan in California
Lenders and loan programs have unique eligibility requirements for an SBA loan. For example, some lenders may require a business plan while others do not. (SmartBiz Loans does not require a business plan). Requirements for an SBA loan facilitated by SmartBiz include:
- Time in business must be above 2 years
- Business owner’s personal credit score must be above 650
- The business must be U.S. based and owned by US citizen or Lawful Permanent Resident who is at least 21-years old
- No outstanding tax liens
- No bankruptcies or foreclosures in the past 3 years
- No recent charge-offs or settlements
- Current on government-related loans
How to apply for an SBA 7(a) loan in California
Step 1: Check your eligibility. Before you even begin your application, make sure your business is eligible. Visit the SBA website for a list of eligible businesses. You must also meet the requirements listed above.
To determine if your business is SBA loan ready, sign up for SmartBiz Advisor, a free tool that helps you learn how banks typically evaluate your business and recommends ways to increase your likelihood of approval when applying low-cost funding.
Step 2: Review requirements and gather paperwork. The more organized you are, the swifter the application process will move. For a list of documents required for an SBA loan, visit the SmartBiz Blog: How to Get an SBA Loan: Documents You Need.
Step 3: Choose a lender. Although SmartBiz Loans is not a lender, we work with multiple banks to match you with the lender most likely to fund. You won’t waste valuable time going from bank to bank.
How can proceeds from an SBA 7(a) loan be used?
An SBA 7(a) loan can be used for a variety of purposes.
- Working Capital – Purchase equipment, increase inventory, add marketing programs, use for operating expenses or to hire additional staff.
- Debt Consolidation Loans – Refinance merchant cash advances, short-term business loans, high interest business loans, daily or weekly payment loans, or business credit cards.
- Commercial Real Estate – Refinance an existing commercial real estate mortgage, buy an office building or other owner-occupied commercial space.
Additional ways to rebuild your business after the pandemic
Additional funds are just one way to shore up your business to move forward. Here are other strategies to consider.
Assess your finances
To create a rebuilding plan for COVID-19, you need to know where you stand. Start by updating your financial statements—such as profit and loss or cash flow statements. Compare them to last year’s numbers to assess how much business may be down. Look at your employee count, marketing costs, and inventory reserves.
Review and update your business plan
You might be entering a new normal. Look back at your business plan to discover how you can pivot to continue operations and rebuild your business. If you never put a business plan in place, here is an article to help you tackle the job: How to Write a Business Plan Without Going to Business School. In addition to helping you move forward, lenders might want to review an updated plan when you seek funding. (SmartBiz Loans does not require business plans)
Calculate the amount of funding you will need
Unless you had a large amount of cash on hand going into the pandemic, it’s likely that you may need some working capital to jump-start your business operations coming out of it. In addition to a traditional SBA 7(a) loan, consider the following. A dedicated financial professional at SmartBiz Loans can review your finances and help you choose what’s right for you at this time:
- Business lines of credit
- Business credit cards
- Accounts receivable financing
- Merchant cash advances
- Equipment financing
Adjust your budget
Here are some short-term, actionable budgeting tips to help business owners stay afloat, and ideas on how to set a small business up for long-term financial success: Small Business Budgeting Tips for a Crisis.
Develop a rebuilding timeline
Trying to do everything at once is probably realistic. A time line that prioritizes important actions first can help keep you on track.
Is your immediate goal to secure funding? Once you’ve done that, look at other ways to rebuild and set a timeline for rehiring employees, restocking inventory, and opening your doors.