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Peter Spoleti / Vertex Markets Inc.

How SBA 7(a) Loans Help Small Businesses During a Recession

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If you’re like most small business owners, you’re probably keeping a close eye on expert predictions about whether a recession is coming.

 Maybe you’re worried about how it will impact sales, or maybe you’re already looking for sources of capital to get you through uncertain times.  

The majority of small businesses are aware of the PPP (Paycheck Protection Program) loans that were offered during the COVID-19 crisis. However, businesses may not be aware of the 7(a) SBA loans: another SBA loan program designed to help small businesses access financial assistance.  

 During this article, we’ll walk through the historical context for SBA 7(a) loans during recessions and 4 ways the program can help small businesses during difficult economic times & high inflation cost hitting your business.

How a 7(a) Loan can Benefit Your Business During A Recession!

Let’s discuss how 7a SBA loans can benefit small business owners specifically during an economic downturn and higher inflation costs to their business.  

First, 7(a) loans are proven to be helpful and impactful during a recession and economically challenging times. A paper in the Oxford Academic Journal Review of Finance titled Small Business Lending in Financial Crises: The Role of Government-Guaranteed Loans found that during the 2007-2009 financial crisis, areas with more SBA 7(a) lenders experienced: 

  • 2.2% increase in small business loan volume 
  • 3.7% increase in small firm employment 
  • 3.5% increase in establishments 
  • Lower loan default rates 

The conclusion of the paper was that “targeted government support can play a beneficial role in the presence of private credit market frictions, especially when bank capital is limited and small business financial constraints are severe.” 

If another recession should come, or if one is already underway, we have solid evidence that 7(a) loans are helpful to small businesses, communities, and the economy at large. 

For small & medium business owners specifically, we would like to discuss these 4 key benefits of the SBA 7(a) loans:

     1.  SBA loan guaranty percentages.  

Currently, there is a guaranteed percentage of 85% by the SBA for working capital loans up to $25,000. This means that the federal government backs the 7(a) loan, creating less risk for the lender. With this additional protection, an SBA loan application is more likely to be approved than a private bank loan.

Guaranty percentages have also been raised in previous years and recessions, so we could see this rate increase if a downturn should accelerate. 

     2. Favorable terms.

The 7(a) SBA loan program is the most popular choice and the US government’s primary offering for business financing. This isn’t surprising, as the program offers very favorable terms for businesses that may have had difficulty obtaining funding from other sources. 

At Vertex our lending partners offer loans up to $350,000, or less for working capital loans the 7(a) loan terms are as follows:  

  • Term: 10 years 
  • Interest Rate: WSJ Prime + 2.75% 
  • Approximate Monthly Payment: $300 for $25,000 
  • No SBA Guaranty Fee 
  • Allowable Uses: Working Capital 

     3. SBA fee waivers 

The SBA generally charges a guarantee fee of 2% to 3.75% of the guaranteed amount of the loan. However, as we saw during the COVID-19 crisis, the SBA fees can be subsidized (i.e. borrowers receive a “fee waiver”) when Congress decides to provide for it through legislation like the CARES Act of March 2020 

In these cases, the cost of securing SBA loans is reduced, making the option even more attractive to small business owners. (For $25k or less working capital loans, there is currently no SBA guarantee fee).     

     4.  Steady supply despite fluctuations in demand. 

During a downturn, there is typically a lower supply of business loans available for small businesses by traditional banks as they tighten their credit and underwriting standards. 

At the same time, there can be low demand for business loans among small businesses because they worry about their ability to repay. 

During uncertain times as we are currently experiencing, SBA 7(a) loans stay consistent because the eligibility and documentation requirements remain the same. That continuity is a lifesaver when things get volatile. Even when small businesses feel the effects of a recession, they can obtain financing through an SBA lender vs. traditional banks as long as they meet those eligibility criteria.  

At Vertex we can easily start the application process for a 7(a) loan today. Even during a recession, the SBA and Vertex are here to help you navigate the complicated lending process and connect you with the correct SBA lender to meet your needs. 

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