Small business owners have shown incredible resilience in the face of rising costs, a tight labor market and the highest inflation in decades. As the Federal Reserve raises interest rates to fight inflation, small businesses face another challenge: getting the right tools for financing in a rising interest rate environment.
On June 15, the Federal Reserve raised interest rates by three-quarters of a percentage point and signaled its intention to raise them going forward this year. Higher interest rates make borrowing more expensive, which can have a ripple effect on your entire business.
That’s why it’s important to identify the right type of financing to help you maintain your cash flow and meet the growing needs of your business. In a rising interest rate environment, every entrepreneur should know the valuable benefits of US Small Business Administration 7(a) loans.
Overview of SBA Loans
SBA 7(a) loans are backed by the US Small Business Administration, a government agency that supports American small businesses. Because the SBA guarantee helps banks mitigate some of the lending risk, more businesses are eligible for financing. Although the SBA offers many types of loan programs, the 7(a) loan is among the most popular due to its versatility.
The maximum amount of an SBA 7(a) loan is $5 million and it is typically used for acquisitions, expansions, and business start-ups. It can also be used to finance a purchase, construction or improvements to owner-occupied real estate, as well as inventory, leasehold/tenancy improvements, debt refinancing or to provide working capital.
In most cases, the SBA does not lend directly to entrepreneurs, so it provides guidelines for banks, community development organizations, and microcredit institutions. Financial institutions must be designated as an Approved Lender or Preferred Lending Partner by the SBA. PLPs have the power to make final credit decisions, saving you time and simplifying the application process. SBA loans are subject to credit and SBA approval – so being creditworthy makes your loan approval more likely.
SBA 7(a) loans have many benefits, but there are three reasons why they are especially valuable for small business owners in a rising interest rate environment.
Reasonable interest rates
Because the SBA wants the loans to be viable for small business owners, it sets a reasonable maximum interest rate. These rates can be fixed or variable, but are considered affordable for a business loan. Rates vary by lender and are influenced by prime rate, loan size, term and situational factors such as borrower’s industry and personal credit.
Low down payments
For most traditional financing, lenders require a 20% down payment. In contrast, some SBA 7(a) loan programs may allow down payments as low as 10%. By putting down a small down payment, you can conserve cash that can be reinvested in your business.
Long payment terms
SBA 7(a) loans have longer terms than traditional financing – up to 25 years for real estate, up to 10 years for equipment, and seven years for working capital. Thanks to the longer terms, the monthly loan payments are more affordable.
Anticipate rising interest rates
With more interest rate hikes likely, now is the time to get your finances in order. Assessing your business’ financial needs, with the help of an experienced banker, can help position your business for future success.
Brad Brockbank is the Idaho Community Banking Sales Manager for Zions Bank.