SBA 7(a) Loans vs. SBA Microloans: How to Decide
Though the mission of the SBA is clear, the specific workings of the organization can sometimes be complex. Most notably, a common misconception is that the SBA is the sole provider of their loans. However, the SBA guarantees a portion of their loan amounts, with an approved SBA lender being the primary provider.
In addition, it’s important to note that SBA approvals are only given to business owners that can’t secure traditional funding options. Therefore, prior to applying for any SBA loan program, you’ll need to prove that you’ve applied and been turned down by traditional lenders.
There are numerous types of SBA small business loans, but in this post we’re going to focus on 7(a) Loans and Microloans. The SBA loan that’ll make the most sense for your business will depend on your business’ size, goals, and current financial situation.
In this blog post, we’ll compare SBA 7(a) Loans and Microloans, so that you can decide if either funding option is right for your small business.
What is the Difference Between SBA 7(a) Loans and SBA Microloans?
SBA 7(a) Loans
In general, 7(a) Loans are the most “standard” type of loan that the SBA offers.
Use of Funds: These loans can be used for numerous purposes including,
- Purchasing new real estate properties
- Restructuring Debt
- Having additional working capital on-hand
Loan Amounts: The maximum amount for the SBA 7(a) program is $5 million.
Term Lengths: The maturity for the loan will depend on what it’s being used for and your ability to repay. For example, loans that are used for purchasing real estate will typically have a longer term than loans that are used for working capital.
Interest Rates: The maximum interest rate for the loan is determined by the prime lending rate, the size of the loan, the length of the loan, and an added premium. Also, loans that’ll be paid back in less than 7 years have a maximum interest rate of 4.25 percent above the prime rate.
Qualifying Process: To qualify for an SBA 7(a) Loan, you’ll need to have a for-profit business that can demonstrate a reasonable ability to repay the loan on-time. SBA Loans are often easier to qualify for than traditional bank loans. Although the approval process is quite fast, approval isn’t guaranteed. If you qualify, you’ll be able to enjoy the benefits of long-term financing and an improved cash flow.
As the name might imply, SBA Microloans are typically used for much smaller purposes than their 7(a) counterparts. These loans are administered through various nonprofit lending organizations.
Use of Funds: Microloans cannot be used to pay off existing debt, but they can be utilized for other purposes such as,
- Purchasing new equipment
- Expanding your business’ operations
- Accessing needed additional working capital
Loan Amounts: The SBA microloan program has a maximum loan amount of $50,000, because as the name suggests, it is a microloan.
Term Lengths: When compared to other SBA Loans, the SBA microloan program has a relatively short-term limit of six years.
Interest Rates: The interest rates will vary depending on the administrating partner, but they typically have an added premium up to 8.5 percent.
Qualifying Process: The qualifications for an SBA Microloan are the same as those for a 7(a) Loan.
Are There Other Business Financing Options to Consider?
Now that we’ve compared the SBA 7(a) and SBA Microloan options, you should be able to determine if either option fits your funding needs. However, don’t be discouraged if neither option is the right funding program for your business.
Although the SBA 7(a) loan and microloan programs can benefit a variety of business owners, they aren’t right for everyone. Due to this, you should also research other funding options prior to committing to a loan offer. Below, you’ll find an expansive list of other popular loan programs, both from the SBA and alternative lenders.
- SBA 504 Loan: To qualify for this SBA loan program, your business must use the loan amount to create jobs or work to improve SBA-approved areas such as energy efficiency and public policy.
- SBA Disaster Loan: If your business is in a declared disaster area, you may qualify for an SBA disaster loan.
- SBA Express Loan: This loan program is meant for business owners in need of fast financing. Once approved, borrowers can receive funds in as little as 36 hours.
- Small Business Loans from Alternative Lenders: Small business loans from alternative lenders typically come with flexible loan amounts and terms, and there aren’t any restrictions on how you can use the funds.
- Merchant Cash Advances: If your business frequently accepts credit card sales, you could be approved for this lump sum financing option. You’ll remit the advance based on your credit card sales at the time, so there are no set terms.
- Bank Loans: As you probably know, banks provide business loans, but it can be challenging and time consuming to get approved.
- Business Lines of Credit: When you receive a revolving line of credit, you’ll receive a set amount of funds that you can use and pay back as needed. If you take out a non-revolving line of credit, you’ll need to reapply to get approved for additional funding.
- Business Credit Cards: Having access to a business credit card gives business owners the ability to charge expenses to their card when necessary. However, it’s crucial to follow a budget, avoid overspending, and pay your credit card bill on-time.
- Invoice Financing: If you’re waiting on customers to pay their invoices, you can pursue invoice financing to ensure you have cash flow in the meantime.
- Bridge Loans: Many businesses, such as construction firms, need funds to bridge the gap between payments. If your business is paid at the beginning and end of a project, having access to bridge financing can be beneficial.
- Equipment Financing: If you need funding specifically for equipment costs, an equipment loan or lease can be the perfect funding option.
- Inventory Loans: Like equipment loans, inventory loans are meant to be used solely on inventory expenses.
As you can see, there are a wide range of business financing options. We encourage you to spend time researching available loan options prior to deciding!
Conclusion: Compare Your Business Financing Options
Before you start the loan application process, you should consider different kinds of SBA Loans, in addition to other business funding products. Remember, each of these loan options was designed with a specific purpose in mind. Examine your business plan, consider your use of funds, and compare loan amounts and terms to ensure you’re selecting the right option.
To review, SBA 7(a) loans have a maximum limit of $5 million and are typically most useful for larger operations. Due to this, SBA 7(a) loan terms are longer than microloan terms, which is something to keep in mind. In comparison, SBA Microloans are used for much smaller expenses, but may make more sense for a sole proprietorship or other businesses operating on a smaller scale.
If you’re interested in either of these options, or want to hear about their other financing programs, contact your local SBA office or reputable alternative lenders. By taking the time to understand the dynamics of your business and the different loans available, you should be able to make the correct decision.
Editor’s Note: This post was updated for accuracy and comprehensiveness in October 2021.
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.