Are you a small business owner who needs funding for your next project? If so, you might want to consider SBA 7(a) loans. These are loans backed by the Small Business Administration (SBA) that you can use for a variety of purposes, such as buying a business, acquiring assets, expanding operations, refinancing debt, and more.
But SBA 7(a) loans are not just another debt that drains your cash. They are actually a smart way to invest in your business and boost your growth and returns. In this article, I will show you how SBA 7(a) loans work, how they can benefit you, and how you can overcome some of the common obstacles and fears that come with them.
How SBA 7(a) Loans Work
SBA 7(a) loans are loans offered by lenders, such as banks, credit unions, or online platforms, that are partially guaranteed by the SBA. This means that if you fail to repay the loan, the SBA will cover a part of the loss for the lender, lowering their risk and making them more willing to lend to you.
SBA 7(a) loans have some great features, such as:
- Low down payment: You can get an SBA 7(a) loan with as little as 2.5%, or in some cases 0%, down payment, depending on the type and size of the project. This means you can keep your cash for other uses, such as working capital, inventory, or marketing.
- Long repayment term: You can get an SBA 7(a) loan with a repayment term of up to 25 years, depending on the use of funds. This means you can spread out your payments over a longer period, lowering your monthly debt service and improving your cash flow. For non-real estate-based transactions, the term is up to 10 years.
- Competitive interest rate: SBA 7(a) loans have interest rates that are based on the prime rate plus a margin, which can vary depending on the lender, the loan amount, and the loan term. Currently, the rates average range from 10% to 11.5%, which are lower than many alternative financing options, such as credit cards, merchant cash advances, or hard money loans.
- Flexible use of funds: You can use an SBA 7(a) loan for almost any legitimate business purpose, such as buying a business, acquiring assets, expanding operations, refinancing debt, and more. This gives you the freedom to pursue the opportunities that match your business goals and needs.
How SBA 7(a) Loans Benefit You
SBA 7(a) loans can benefit you in many ways, such as:
- Leveraging your growth: With an SBA 7(a) loan, you can leverage your growth by acquiring more assets, customers, revenue, and profits with less upfront cash. For example, you can use an SBA 7(a) loan to buy a business that is already profitable and has a loyal customer base, rather than starting from scratch. This way, you can increase your market share, diversify your income streams, and scale your operations faster and easier.
- Increasing your returns: With an SBA 7(a) loan, you can increase your returns by using the borrowed money to generate more income than the cost of the loan. For example, you can use an SBA 7(a) loan to buy a piece of equipment that can improve your productivity, efficiency, and quality, leading to more sales and higher margins. This way, you can increase your cash-on-cash return, which is the ratio of annual cash flow to the amount of cash invested. The higher the cash on cash return, the better the investment.
To illustrate this point, let me give you an example of how SBA 7(a) loans can help you buy a business with cooperation from a seller and 2.5%, or in some cases 0% down.
Let’s say you want to buy a business that is worth $1 million and has a net income of $300,000 per year. The seller is willing to carry a 7.5% note, which is 7.5% of the total project, or $75,000. The note requires interest only payments or full standby for 2 years, followed by a full amortization of that loan (no balloon allowed) over a 5-year term. The interest rate on the note is assumed to be 8%. You can get an SBA 7(a) loan for 90% of the purchase price, or $900,000, with an 11.25% quarterly adjustable interest rate and a 10-year term. Your down payment would be 2.5% of the purchase price, or $25,000, which would be your cash to the table.
Your monthly payment for the SBA 7(a) loan would be $12,525.21, or $150,302.46 per year. Your annual interest payment for the seller note would be $6,000 for the first two years, and then $18,000 for the remaining 5 years. Your total annual debt service would be $156,302.46 for the first two years, and $168,302.46 for the remaining 5 years.
Your annual cash flow after debt service would be $143,697.54 for the first two years, and $131,697.54 for the remaining 5 years. Your cash-on-cash return would be 574.8% for the first two years, and 526.8% for the remaining 5 years. This is a much higher return than if you had invested your $25,000 in a savings account, a stock market index fund, or even a real estate property.
As you can see, SBA 7(a) loans can help you buy a business with a low down payment, a long repayment term, a competitive interest rate, and a flexible use of funds. This can help you leverage your growth and increase your returns, while preserving your cash for other purposes.
How to Get Started with an SBA 7(a) Loan
If you are interested in getting an SBA 7(a) loan, you might have some questions or concerns, such as:
- How do I qualify for an SBA 7(a) loan?
- How do I find a lender who offers SBA 7(a) loans?
- How do I prepare a business plan and financial projections for an SBA 7(a) loan?
- How do I negotiate with the seller and the lender for an SBA 7(a) loan?
- How do I close the deal and get the funds for an SBA 7(a) loan?
These are all valid questions, and they can be answered by our SBA Lending team at Grasshopper Bank. We are experts in SBA 7(a) loans, and we can help you with every step of the process from finding the right opportunity and securing the best terms to closing the deal and getting the funds.
We have helped hundreds of small business owners like you grow their businesses with SBA 7(a) loans, and we can help you too. We’re here to make your SBA 7(a) loan experience as smooth and successful as possible. We are not just another bank or lender. We’re your partner and advocate. We care about your business and your success, and we will work hard to help you achieve your dreams!
So, what are you waiting for? Contact us today and let us help you grow your business with SBA 7(a) loans. You will be glad you did.
By Shane Pierson in SBA Lending