SBA 7(a) Loans vs. SBA Microloans | Fora Financial Blog
SBA 7(a) Loans vs. SBA Microloans
April 29, 2019

SBA 7(a) Loans vs. SBA Microloans

Since 1953, the Small Business Administration (SBA) has helped countless small business owners receive necessary financing. The SBA’s primary mission is to assist business owners and strengthen the U.S.’s economy, which is why they offer various loan options. If you’re a business owner that requires financing, but hasn’t been approved for traditional options, you should consider applying for an SBA loan.

Though the mission of the SBA is clear, the specific workings of the organization can sometimes be complex. There’s 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. Let’s find out if 7(a) Loans or Microloans are right for your operations!

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. These loans can be used for numerous purposes including purchasing new property, equipment, or inventory. In addition, they can be used for restructuring debt or for simply having working capital on-hand.

The maximum amount for 7(a) Loans is $5 million. 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.

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.

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.

SBA Microloans

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 and have a maximum loan amount of $50,000.

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, or accessing needed working capital.

When compared to other SBA Loans, the SBA microloan program has a relatively short-term limit of six years. The interest rates will vary depending on the administrating partner, but they typically have an added premium up to 8.5 percent. The qualifications for an SBA Microloan are the same as those for a 7(a) Loan. Once your application is approved, you’ll be able to enjoy the benefits of using a nonprofit lender, receiving fixed-rate financing, and having access to technical assistance when needed.

Conclusion: Compare Your Financing Options

Before applying, you should consider different kinds of SBA Loans. However, each of these loans was designed with a specific purpose in mind.

SBA 7(a) loans have a maximum limit of $5 million and are typically most useful for larger operations, while 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. 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 April 2019.

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.

Andrew Paniello
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Andrew is an experienced writer with a degree in Finance from the University of Colorado. His primary interests are investing, entrepreneurship, and economics.