SBA 7(a) Loans Offer Entrepreneurs Flexibility in Helping Their Small Businesses Reach the Next Level

In a Nutshell: SBA 7(a) loans provide small businesses with the funding they need to grow. The loans are issued by private lenders with partial backing from the U.S. Small Business Administration. SBA 7(a) loans can be used for a wide range of expenses, with most businesses using the funds to buy equipment, expand to more locations, or purchase supplies. With low interest rates and long repayment terms, SBA 7(a) loans are one of the most popular ways to grow a business.

Small businesses are increasingly turning to SBA loans to raise capital. In 2021, the Small Business Administration delivered a record number of loans to businesses across the country. Last year, the SBA gave out more than 61,000 loans — including 52,000 SBA 7(a) loans totaling $36.5 billion.

SBA 7(a) loans are a popular option for growing businesses because of their low interest rates and long repayment terms. Businesses can borrow up to $5 million, with flexibility on what the funds are used for, and choose to repay in 10, 20, or 25 years.

Choosing the right lender to write the loan is time-consuming and leads to lost hours from applications and interviews just for an application to be denied. The process often discourages small business owners from seeking the capital to expand and really grow. While one bank may deny a loan, another may approve it. But after receiving one denial, a small business owner may think they do not qualify.

“There really is some nuance to it,” Janover Ventures’ Director of Small Business Finance Joe Nolan said. “First, you have to understand what is eligible and what isn’t, and then you have to make sure you are working with the right lender who can provide you with that type of financing.”

Janover Ventures created a tool to match borrowers with lenders that will write the loan. By using the lending network SBA7a.Loans, owners can fill out one application, and the Janover Ventures team looks it over and sends it to several lenders. The website then sends the results to the borrower so they can select the loan that best suits their needs.

The SBA 7(a) loans help businesses reach new heights. Borrowers often need the extra capital to continue expanding. The loans help pay for products that will generate more income.

Common uses for the loan include the purchase of furniture, fixtures, and equipment for the company. Lenders are more willing to approve a loan if it is easy to quantify how the debt will help grow the business. The purchase of more furniture, fixtures and equipment signals that a business is expanding and will be primed to bring in more revenue. 

Unproductive debt is more difficult to obtain. Use cases for unproductive debt include buying out a partner or catching up with payroll. This is why it’s difficult for true startups to receive SBA lending. 

“What you usually see from these traditional lenders is they want to see you put your equity in, either with friends and family supporting you or using your own savings in the initial startup period,” Nolan said. “Once you have some established cash flow, you’re able to leverage that into working capital loans.”

The Small Business Administration’s standard operating procedure governs eligibility for loans, but ultimately it is up to individual lenders to provide the funds and make credit decisions.

For those who qualify, the repayment terms are generous and interest rates are low. SBA loans are given out with options to be repaid in 10, 20, or 25 years. Interest rates can be fixed or floating (also known as variable rates), and are based on the prime rate plus anywhere between 1.5% to 6.75% tacked on top. The prime rate is the interest rate banks charge their most creditworthy customers. The target federal funds rate, which is set by the Federal Reserve Board, serves as the basis for the prime rate.

Many businesses have a business credit card for in the moment purchases, but they should not be used to grow a business. Loans generally have lower interest rates and have more flexible repayment terms. Loans offer long-term financing which is cheaper than putting debt on a credit card over the long run.

Many businesses are eligible for loans but don’t even know it. Many lenders will accept future revenue estimates to justify a loan. And if the business is growing and more space or equipment is needed, Janover Ventures said borrowers can even get 100% financing at a low interest rate and open doors to additional profits.

“If you’re a growing company, and you’re dumping everything back into the business, we can look into what your projections look like for the next 24 months,” Nolan said. “As long as that makes sense and meets industry standards, then you’re going to have a great opportunity to expand.”

This does not mean a business should throw away the business credit card. Credit cards serve an important purpose to a business, and have their place for making short-term debt purchases.

Business credit cards also offer additional perks such as earning points on purchases, effective purchase tracking and management, and overall convenience. The credit card is always available, and it’s an easy way to pay for purchases.

For a list of the best Business Credit Cards, check out our top choices.

SBA lending is an important resource for business owners, but the process is daunting and can deny some borrowers loans they need to succeed. The process usually includes filling out paperwork and then receiving a term sheet. But there’s never an understanding of why or what happened in between those steps.

“People used to be able to go into their bank and talk to them and work through a loan,” Nolan said. “Those days are long gone. People don’t go to the bank, they don’t have relationships with their local bank.”

Borrowers are shifting how they search for financing, and lenders are shifting how they interact with borrowers. Janover Ventures told us many big banks don’t even have loan officers in local branches and several loans are written online through Zoom.

Janover Ventures created a three-step process for receiving a loan. Education materials on SBA7a.Loans help borrowers understand different loans and explain how they can self-qualify through a branching decision tree.

If the loan is considered eligible, SBA7a.Loans works with lenders to make credit decisions and offer terms. After the loan is issued, borrowers come to Janover Ventures for guidance.

While SBA7a.Loans is not a direct lender, it works like a marketplace to connect borrowers to lenders, ultimately saving business owners time and money.

“There’s a ton of opportunities to bring technology and forward looking marketing practices that provide a great experience for everyone,” Nolan said. “That’s really what we’re looking to provide – a platform that provides value every step of the way to the borrowers and lenders.”