Recent changes to the SBA 7(a) loan program increased the maximum loan amount for fast-tracked small loans’ from $350,000 to $500,000. With West Town Bank’s streamlined technology solution for SBA Small Loan processing, this change means streamlined access to more capital than ever before.
This article explains what the increased SBA 7(a) Small Loan amount means for small business owners and the future of affordable small business financing. We’ll cover the basics of what entrepreneurs need to know to access SBA small loan financing, improve their cash flows, and ultimately grow their businesses.
About SBA Small Loans: The Faster Way to Finance with SBA Loans
The SBA ‘Small Loan’ guidelines are a subset of the SBA 7(a) program. Small Loans are loans of $500,000 or less that can be approved with less documentation and an expedited process compared to the standard 7(a) loan program.
SBA loans were created to offer affordable financing options to more small business owners, even if they don’t qualify for conventional business loans. The SBA 7(a) loan program is the most widely utilized loan program, with loan amounts ranging up to $5 million. However, the Small Loan program offers a streamlined process for accessing these 7(a) funds. Even more so now, since the SBA introduced changes making it easier for a wider pool of applicants to apply and qualify for financing.
Increasing the maximum Small Loan amount from $350,000 to $500,000 is a step towards making more funding more accessible for entrepreneurs across the United States.
How SBA Loans Work
The SBA created its loan programs to provide alternative options for business financing outside of conventional business loans. They accomplish this by offering a ‘government guarantee’ to lenders that fund loans through the SBA’s programs.
A ‘government guarantee’ is a promise from the SBA to absorb some risk of a loan in the case of a default. Your lender can rely on this guarantee to offer their borrowers more flexible overhead requirements, competitive terms, and extended repayment periods. This makes it easier for more entrepreneurs to access reasonably priced capital.
The bank or credit union will be the institution that processes and funds your loan. However, it’s the support of the SBA that makes the loan program possible.
Using SBA Small Loans to Grow a Business
There are three common ways we see entrepreneurs utilize Small Loans:
- Access working capital at an affordable rate.
- Refinance current debt to improve monthly cash flows.
- Purchase an existing business or provide startup capital to a new business.
SBA Small Loans for Working Capital
SBA Small Loans are most often used for working capital. ‘Working capital’ refers to money that is available to use for day-to-day operations. The Program allows entrepreneurs to put funds toward whatever is most needed to grow their business.
Using an SBA Small Loan for working capital is particularly good for entrepreneurs that need more cash on hand from month to month. It allows a business to pay for daily expenses with funds borrowed at a competitive interest rate and paid back over a longer term than conventional loans offer (meaning, lower monthly loan payments).
Extra capital on hand gives your business the ability to move quickly on growth opportunities. The SBA loan’s flexibility gives you the freedom to make those judgment calls as you see fit.
SBA Small Loans for Scaling a Business
In some cases, established business owners may use an SBA Small Loan to buy a second book of business, refinance debt, or purchase expensive equipment. These uses were rarer before the loan cap was increased. Now that the maximum amount is $500,000, entrepreneurs have more flexibility to use streamlined SBA financing to participate in these types of activities while preserving their liquidity.
Refinancing Debt with an SBA Loan
The Company: May Global Business Group is a consulting and trading company in the specialty metals industry. The Company offers consulting services related to the silicon metal industry, while also buying and selling metal materials to customers around the world.
The Problem: Before engaging West Town Bank & Trust, May Global Business Group had two outstanding loans, both with interest rates exceeding 20%.
The Solution: To consolidate this debt and secure a lower monthly rate, May Global Business Group received an SBA 7(a) loan that offered them a substantially lower interest rate.
The Results: Reducing their loan interest expense allowed them to improve cash flow and increase their bottom line.
SBA Small Loan Terms
SBA Small Loans come with many of the same general requirements as SBA 7(a) Loans. The loan amount is just capped at $500,000.
- Maximum Loan Size: $500,000
- Maximum Repayment Terms: 25 Years for Real Estate, 15 Years for Equipment & 10 Years for All Other Uses
- Down Payment: Typically, 10% of the Total Project Costs for Startup businesses and Changes in Ownership.
- Interest Rate: Variable, Fixed, or Multi-Year Adjustable
- Prepayment Penalties: 5% in Year One, 3% in Year Two & 1% in Year Three for Loans Greater Than 15 Years
Small loans allow you to access SBA benefits with an expedited process compared to standard SBA loans, even if you don’t need to max out the available 7(a) funding amount. You could still leverage the benefits of financing your business growth through an SBA program without the full weight of paperwork, collateral requirements, and application timeline that is typically required to secure a 7(a) loan. As long as you need less than $500,000, it can be a good option to consider.
Already approved for Small Loan before the program change?
Next Steps to Get an SBA Small Loan
You’ll secure an SBA Small Loan by following the same general process as any other government-guaranteed loan. The initial process at West Town Bank & Trust can be broken down into a few steps:
- Apply to Pre-Qualify
Submit your general information to a participating bank or credit union. The lender will look at your high-level qualifications to determine your baseline eligibility. This quick check at the beginning helps determine if you’re a good fit for the loan program before you get too deep into the application process. The more general information you can provide upfront, the smoother the loan application process goes. At a minimum, provide:
- Executive summary of the business operations & parties involved.
- Summary of the loan request amount and breakdown of what the funds are to be used for.
- Historic and/or projected financials for the applicant business.
Ready to get started? Check Your Eligibility for an SBA Small Loan at West Town Bank & Trust.
2. Speak with a Lender
After we receive your information, we’ll schedule a time to review and speak one on one. We’ll verify your information, get to know your business and goals better, review information about the loan program, and answer any financing questions you may have.
3. Submit a Formal Application
If the program seems like a good fit, complete your official SBA loan application. Set aside a dedicated hour to complete it. We’ll send you a checklist of documents and information to keep on hand throughout the application based on your business and goals.
4. Complete the Loan Application Process
Once your application is approved, you’ll move into loan Packaging and Closing. This is where you’ll submit your SBA application documents, address any third-party items (e.g., business valuations, appraisals, and title work), provide closing documentation, and work to schedule a close with the parties involved.
Whether a Small Loan or another financing source is best for your goals, we hope to connect you with a solution that works for your business. Because we believe there’s big opportunity in supporting America’s small businesses with the resources they need to succeed.
Check My Eligibility for SBA 7(a) Small Loan Financing
About West Town Bank & Trust: A financing partner should reciprocate the level of trust you’ve built around your practice. With a 100-year+ community banking history, West Town Bank & Trust works with entrepreneurs across the US to grow their businesses with proven financial solutions.
Whether you’re interested in purchasing another book of business, facilitating growth without restricting cash flow, or getting a better interest rate on your existing loan, our team of industry experts is here to help you seize the opportunity.