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Are 7(a) Small Business Loans better than Personal Loans?

Posted April 14th, 2010
by Staff

One of the most common ways for a person to get their small business up and running is with a personal loan. This might be a secured loan from your bank, such as with a home equity loan. Or, it might be an unsecured personal loan, also sometimes referred to as a “signature loan.” What many people don’t know, however, is that the Small Business Administration offers a number of loans for small businesses. These are known as “7(a) loans” because they come from section 7(a) of the Small Business Act.

How Personal Loans Work

A personal loan is a loan you get from your bank or other lender. They’ll run a credit check, and offer you a specific loan amount and a specific rate of interest, based on your credit score and whether or not you’re securing the loan with some type of collateral.

If the personal loan is secured, the bank has the right to repossess the property that secures the loan if you should default. If the loan is unsecured, the bank does not have that right, and therefore unsecured personal loans carry greater risk. This means that the interest rate on an unsecured personal loan will almost always be higher than the interest rate on a secured personal loan.

How 7(a) Small Business Loans Work

The 7(a) loan is the most basic and commonly used SBA loan. The loans are provided with lenders who choose to participate in the SBA program. Most banks in the United States participate. There are also lenders who aren’t banks that offer 7(a) loans.

To get a 7(a) loan, you have to meet certain eligibility requirements. You have to be a for-profit business that meets the SBA’s size standards, and you must not already have the internal resources to provide financing for the business. On top of all of that, you need to be able to demonstrate that you can repay the loan (usually via your credit report and a business plan).

A 7(a) loan may go for 7 years for working capital and up to 25 years for real estate.  The maximum amount available for a 7(a) small business loan is $2 million.

Which is Better?

Typically, a 7(a) loan will provide you with a better interest rate than a personal loan. Make sure, however, to compare offers to make sure that you’re getting a better deal than you would otherwise get.

Categories: Advice



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