Should You Get an SBA 7(a) Loan After Your PPP Loan?

Update 1/8/2021: As part of a larger relief bill, Congress has approved more than $284 billion in new Paycheck Protection Program funding. The types of businesses and industries that are eligible for PPP loans have been expanded under the new bill. Additionally, businesses that can demonstrate at least 25% reduction in gross receipts year over year and meet other requirements may be eligible for a second PPP loan.

The new PPP round opens on Jan. 11, with exclusive access for first-draw loans issued by community financial institutions (CFIs) focused on underserved communities. On Jan. 13, CFIs will start offering second-draw PPP loans to qualified applicants. All other lenders will be able to submit applications later in the week.

Best Options After Getting a PPP Loan

For many of America’s small businesses operating in the wake of the coronavirus pandemic, long-term strategizing has taken a backseat to short-term survival.

Millions of small business owners have taken out Paycheck Protection Program loans in order to keep their staff on payroll, pay pressing expenses, and stay afloat. For some, this low-cost, stopgap funding may be enough to get them through until they can operate normally. For others, the PPP won’t offset the drop in demand they’ve experienced. And others still may emerge from the pandemic in a strong position, ready to grow further.

The question that many small business owners across all those groups may be asking is: After the PPP, what is my next move? If taking out a PPP loan was the first time you considered government-backed financing, you may be interested in seeing what other SBA loans are available going forward.

In the months and years to come, small businesses may need to explore financing options that they wouldn’t have considered before the pandemic. While a litany of options exist—from credit cards to a variety of products from online lenders—the most sought-after loan will likely be the SBA’s 7(a) loan.

Let’s review the specifics of the SBA 7(a) loan program, and why it might be your best financing option in the post-PPP era.

What Is the SBA 7(a) Loan Program?

The SBA, or Small Business Administration, has a number of loan programs geared toward making affordable financing more widely available to small businesses. The most popular program in its catalog is the 7(a) program.

Why? Because the 7(a) program offers low-interest loans that can be used in a variety of ways. While some SBA loans are geared more toward purchasing large assets like real estate, or focus on underserved entrepreneur populations like women and minorities, the 7(a) program is open to nearly any for-profit business, and eligible uses include working capital, expanding or renovating your business, refinancing debt, and more.

Similar to the PPP, 7(a) loans are disbursed by national and community lenders, and (partially) guaranteed by the SBA. Unlike the PPP, 7(a) loans have terms that vary by lender, business, and other factors. For a rundown of the various repayment terms and requirements related to applying for and receiving an SBA 7(a) loan, read our SBA 7(a) loan guide.

What Are the Differences Between the PPP and the 7(a)? 

The PPP is an emergency response to the coronavirus pandemic. It was created through the CARES Act (which was signed into law on March 27, 2020), as a way to keep those employed by small businesses on the payroll, and help those same businesses survive through shelter-in-place restrictions and decreased demand.

As a result, PPP loans are designed to be converted into grants—the SBA will forgive them entirely if the borrower uses them according to the program’s guidelines. Any portion of the loan that isn’t forgiven is subject to an interest rate of 1%. No other borrower’s fees will apply, either.

In addition, the goal of the PPP was to get funding to business owners quickly and with as little red tape as possible. Therefore, there are few minimum requirements that business owners need to meet when applying. If your business was in operation before February 15, 2020 and you’ve been impacted by the pandemic, it’s likely that you qualify for a PPP loan.

In comparison to these terms and requirements, the 7(a) loan won’t seem quite as generous. As mentioned above, the exact terms depend on your specific situation, but 7(a) loans do come with a variety of fees and closing costs, and their interest rates will be—at minimum—the Prime Rate plus additional percentage points depending on loan type and size.

That being said, the 7(a) loan is one of the most generous small business financing options on the market. SBA loans give small businesses the chance to obtain funding at interest rates and repayment terms that banks typically offer only to larger, less risky businesses. In some ways, the terms on these loans are even better than for the PPP—repayment terms can last up to 25 years for real estate uses; 10 years for equipment; and 7 years for working capital.

Because these loans are so sought-after and affordable, the application process is more rigorous and is often measured in weeks, rather than days or hours (some small business loans, such as those from online lenders, can be approved that day).

Can You Take Out a 7(a) Loan After PPP?

In normal times, a business owner might take out a 7(a) loan if they are looking to expand, grow, or otherwise pivot their business for the better after years of sustained success.

It may be harder for a business owner to make the argument that their business is on sound financial footing if they recently required emergency financing to make it through the last few months.

That being said, if the PPP helps you survive a low point in the life of your business, and you are able to emerge intact despite the hardship, that bodes well for your chances of convincing a 7(a) lender to approve your application. Your time in business, the aptitude you’ve shown for adapting and pivoting in times of crisis, and your proven model that survived even a traumatic financial event are further proof of your resiliency.

Essentially, your need for a PPP loan at a certain point should not affect your ability to successfully obtain a 7(a) loan. If anything, it may bolster your case. You will, however, need to show that your business is in a good position to succeed over the life of your loan repayment term—even, potentially, despite continued economic uncertainty.

How to Apply for an SBA 7(a) Loan

Businesses seeking a 7(a) loan need to apply through an SBA participating lender. While the SBA reviews and partially guarantees these loans, the loan itself is disbursed through your chosen lender.

If you’ve decided to apply for an SBA 7(a) loan, here’s a quick rundown of the steps you need to take:

Review the SBA’s 7(a) Application Checklist

The SBA provides a checklist of the documents and information you’ll need to provide when applying for a 7(a) loan. You can review that checklist here. The list includes:

  • The official 7(a) loan application form
  • Personal background and financial statement
  • Business financial statements:
    • Profit and loss (P&L) statement
    • Projected financial statements
  • Ownership and affiliations
  • Business certificate/license
  • Loan application history
  • Income tax returns
  • Resumes
  • Business overview and history
  • Business lease
  • Additional documentation for if you are purchasing an existing business

Keep in mind that the lender you apply through may have additional paperwork requirements, so be prepared to produce more information if necessary.

Find an SBA-Approved Lender

If you’ve taken out a PPP loan, you are likely already connected to an SBA-approved lender. Many existing SBA lenders have been processing PPP loans, and can also review and approve your 7(a) loan as well.

On the off chance that your newly approved SBA lender (the federal government approved more lenders to process PPP loans to help deal with demand for the loan) does not process 7(a) loans, find another lender—either national or local—that can help.

An existing relationship with an SBA lender, even if it’s just through the PPP process, may help build your case for 7(a) loan approval. The lender will already be familiar with your business, and your recent history of taking out and repaying a loan will reflect positively on your credit report, as well.

Keep in mind that regardless of whether you took out a PPP loan or not, you’ll need to make a strong case for why your business is a good bet to successfully use the 7(a) loan to grow, and that you will repay your loan on time.

Apply for a 7(a) Loan Now

What Are Your Other Financing Options?

Perhaps you don’t have the personal or business financials to obtain an SBA 7(a) loan just yet. Or you aren’t ready to take out a multi-year government-backed loan. Or, maybe the 7(a) isn’t enough to meet your projected financial needs. What are your other options at this point?

    Other SBA Loan Products

    The 7(a) is the most popular SBA loan product, but it’s not the only one. The CDC/504 loan allows for even larger loan amounts, as much as $20 million in some cases. Conversely, the Microloan program—great for new businesses as well as businesses owned by traditionally underserved populations such as women and minorities—is great for businesses with smaller needs, ranging in amounts from $500 to $50,000.

    Online Lenders

    For years, online lenders have increasingly stepped into the gap left by banks unwilling to lend to newer, smaller businesses. Though their loans often have higher interest rates and shorter repayment terms, these lenders have less stringent requirements and can provide a powerful financial boost in a pinch.

The Bottom Line

The SBA 7(a) program is the next logical step for many businesses that are emerging from the PPP-era in a strong position to grow and prosper. If using a PPP loan has piqued your interest in exploring more government-backed funding, the 7(a) program is a great place to start.

Eric Goldschein

Eric Goldschein is the partnerships editor at Fundera.

Eric has nearly a decade of experience in digital media, writing and reporting on entrepreneurship, finance, business lending, marketing, and small business trends. 

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