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PPP Loans vs. SBA 7(a) Loans: Weighing Your Options
May 18, 2021
SBA 7(a) Loans vs. PPP Loans - Weighing Your Options

PPP Loans vs. SBA 7(a) Loans: Weighing Your Options

While they’re both administered by the SBA, the 7(a) and the Paycheck Protection Program (PPP) loan programs are vastly different. Like with any loan, it’s a commitment to apply to either one. Due to this, you should ensure that it’s worth your time to fill out an application.

Plus, depending on your goals, the structure of a 7(a) loan may be a better fit compared to a PPP loan or vice versa.

To help you weigh your options, this article will compare 7(a) and PPP loans in the following areas:

  1. Funding amount and repayment terms
  2. Eligible use of funds
  3. Application process and deadlines
  4. Eligibility requirements

Funding Amount

Loan Type Maximum Funding Amount Determining Factor
SBA 7(a) Loan $5 million Lender’s decision
PPP Loan $10 million 2019 and 2020 payroll

As you can see, the maximum loan amount for an SBA 7(a) loan is $5 million and $10 million for PPP loans. However, that doesn’t mean you will qualify for that amount of financing with either type of loan.

Individual PPP loan amounts are calculated based on your payroll, whereas your 7(a) loan amount is determined by your SBA lender.

Therefore, the larger your payroll, the larger your PPP loan amount, up to a limit of $10 million. Also, the better your credit, financial health, and business case, the larger your 7(a) loan amount, up to a limit of $5 million.

Repayment Terms 

Loan Type Repayment Terms
SBA 7(a) Loan Regular fixed or variable rate payments
PPP Loan If not forgiven, fixed one percent interest rate paid over two years

The biggest material difference between 7(a) and PPP loans is that the latter is forgivable. However, you have to follow the rules of how you spend your PPP loan to ensure it stays forgivable. You can read more about how to apply for PPP loan forgiveness in our comprehensive guide, PPP Loan Forgiveness: What You Should Know.

If all or a portion of your PPP loan isn’t forgiven, you must pay it back over two years at a one percent interest rate.

On the other hand, you repay SBA 7(a) loans through regular monthly payments based on a fixed or variable rate. For loan terms less than 7 years, the rate is currently 2.25 percent plus the prime rate. For loan terms greater than 7 years, it’s currently the prime rate plus 2.75 percent.

Other Key Loan Conditions

Most types of SBA loans, including 7(a) loans, require that you and anyone with more than 20 percent ownership in your company sign a personal guarantee. This guarantee legally entitles the lender to pursue your personal assets (such as your bank account, home, or other real estate) to recoup their losses if you default on your loan.

Depending on your situation, the personal guarantee you sign may be limited or unlimited. With a PPP loan, there is no such condition, so you won’t have to worry about this component.

Use of Funds

According to the SBA, you may use the funds of a 7(a) loan for a “sound business purpose.” A few examples of what 7(a) loan proceeds are commonly used for include:

  • Equipment, machinery, furniture, supplies, or real estate
  • New building or renovation construction
  • Opening a new business or expanding or acquiring an existing business
  • Refinancing existing business debt
  • Short and long-term working capital

Technically, you can use PPP loans on whatever you like. However, to be eligible for forgiveness, you must spend at least 60 percent of your loan on payroll and the rest on qualified expenses. Qualified expenses include:

  • Rent or prepaid mortgage interest
  • Utilities
  • Operational expenses like software or accounting fees
  • Property damages that were not covered by insurance and the result of 2020 public disturbances
  • Supplier expenses such as  supplier contract fees and purchase orders
  • Worker protection costs like personal protective equipment that helped you meet COVID-19 safety guidelines

At Fora Financial, we provide business funding to small business owners without usage restrictions. To get your complimentary free quote, click the image below:

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Loan Application Process and Deadlines

As of this writing, the SBA is only distributing PPP loans through SBA-approved CFIs in underserved areas. The deadline to apply for a PPP Loan with a CFI is May 31st, 2021.

To apply, you’ll need to find a CFI near you, which you can do using this resource from the SBA. Keep in mind that you’ll be applying through the CFI, not directly through the SBA. To see which documents you’ll need to prepare, take a look at this PPP loan application form.

The application process for an SBA 7(a) loan is considerably more complex than for a PPP loan. That said, there’s no deadline for 7(a) loan applications, so you do have more time to prepare. To apply for a 7(a) loan, you’ll need to find an SBA partner lender and submit the loan application.

Along with your application, you’ll be asked to submit your business’s financial statements and tax documents. Also, depending on your situation, you may need to provide additional forms during the application process. For more information about the SBA loan forms you might need, read our full post on The Ultimate Guide to SBA Loan Forms.

Loan Eligibility Requirements

Eligibility for a first draw PPP loan is lenient compared to 7(a) loan eligibility. Essentially, if your company is a small business or a non-profit of any size, you’re eligible to apply. Also, if your business has an NAICS code that begins with 72, you’re eligible.

That said, your company must have been in business before February 15th, 2020. In addition, if you’re pursuing a second draw PPP loan, there are additional eligibility requirements.

On the other hand, to qualify for a 7(a) loan your company must:

  1. Be a small business, as defined by SBA
  2. Operate (or propose to operate) for profit in the United States
  3. Have reasonable equity invested
  4. Seek alternative financial resources before seeking financial assistance
  5. Be able to demonstrate a need for the loan proceeds
  6. Be current on any existing debt obligations to the U.S. government

SBA 7(a) vs. PPP Loans: Next Steps

Money is running out for PPP loans, though there is talk of replenishing the funds. Of course, it’s never a good idea to pin your hopes of financing on what Congress might do. SBA 7(a) loans are much more of a known quantity but far more time-consuming to qualify for.

If you’re considering a PPP loan, we’d recommend contacting a CDFI near you and asking about their PPP loans. If an SBA 7(a) loan sounds like the best fit, you should review the SBA’s 7(a) loan application checklist.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].