The National Sea Grant Law Center


  • Does A Better Loan Program Already Exist For Small Businesses?

  • July 21st, 2020 — by Ashley Pruitt — Category: COVID-19 PPP

  • According to the Small Business Administration, there were nearly 30 million small businesses supporting more than 56 million jobs in the United States before the current public health crises. But since the COVID-19 pandemic hit the US, it is estimated that more than 100,000 small businesses have permanently closed. The government created grants and loans in the CARES Act specifically targeted for the small-business community, yet those programs suffered a rocky start and are subject to significant usage restrictions. For small businesses that need access to money that can be used more generally, fear the forgiveness stipulations, or are not comfortable with the short repayment timeline, the SBA has retained its 7(a) Loan Programs. 7(a) loans may be exactly what some small-business owners need to weather the COVID disruptions.

    The 7(a) Loan Program is an umbrella term for several types of loans meant to reach a variety of small businesses. For example, 7(a) Standard and 7(a) Small Loans are designed for the average small-business owner that needs access to general working capital. With maximums of $5 million or $350,000, respectively, these two loans offer maximum interest rates and 5-10 day decision turnaround from the SBA. The SBA also offers an Express version of these loans with a 36-hour decision turnaround. Moreover, 7(a) Standard and 7(a) Small Loans do not require any collateral for amounts up to $25,000.

    The next group of 7(a) loans are targeted for those small businesses working with exporting and international trade. The Export Working Capital Loan offers a maximum of $5 million, but there is no SBA-mandated interest maximum. The Export Express can provide up to $500,000 with an SBA decision within 24-hours. On the other hand, an International Trade Loan has a $5 million ceiling, an SBA-mandated interest cap, and a 5-10 day decision turnaround.

    The last group of 7(a) loans includes Veterans Advantage and CAPLines. The Veterans Advantage loans are available only to disabled or honorably discharged veterans, active duty service members, reservists, and their spouses or widows. This loan type offers reduced fees for businesses that are least 51% owned by qualifying individuals. Separately, CAPLines are short-term lines of credit for several different needs- seasonal, contract, builders, and working. While Seasonal CAPLines are intended for businesses experiencing seasonal increases in accounts receivable and inventory, Contract CAPLines assist with financing labor and materials necessary to perform assignable contracts. Small general contractors and builders can also access the Builders CAPLine to fund construction or renovation projects. Finally, the Working CAPLine is an asset-based revolving line of credit that is often used by small businesses which provide credit to other businesses. The maximum maturity on CAPLines is 10 years, except for the Builders with a 5-year maturity.

    Small business owners are dealing with a very onerous situation of uncertainty, constantly changing regulations, and a lack of excess capital. With $130 billion of the earmarked PPP funds untapped as of June, there is an obvious hesitation for small business owners. A lack of confidence in their ability to repay, a fear of the requirements for forgiveness, or a mistrust due to the rocky kick-off could each be at play. A little-known change made to the 7(a) Loan Program by the CARES Act is 6 months of payments made by the SBA for any loans disbursed by September 27, 2020. These 6 months of SBA payments are not a loan or a deferment; they are payments made by the SBA in the name of the borrower. This potentially saves borrowers tens of thousands of dollars. The 6-month window also offers the small-business owner more time to find solid ground in their new normal.

    While the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) are getting the most press and can potentially be forgiven, business owners should fully review the options available through the SBA. The 7(a) Loan Programs, along with 6 months of SBA-made payments mandated by the CARES Act, may be the right answer for some small business owners, even in a time of unprecedented challenges and uncertainty.

  • Ashley Pruitt
    NSGLC COVID-19 Rapid Response Research Associate

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