The Small Business Administration (SBA) 7(a) loan program is commonly considered to be the cheapest way a US business can get financing. This month, loan interest rates are hovering between 5.5% and 8%. Other perks include underwriting into the millions of dollars and up to 90% financing is available.
However, this program may be come to a screeching halt at the end of month. The agency is about to reach the maximum amount of loans it’s allowed to back. The SBA 7(a) program will reach its limit of $18.75 billion at about the end of this month or beginning of August. The government fiscal year ends in September. Unless adjustments can be made quickly, no new loans will be accepted before the new budget period begins. Congress goes on recess in August so time is ticking.
SBA Administrator Maria Contreras-Sweet has already tried to raise the budget. Rep. Nydia Velazquez of the Small House Business committee also sought a raise in funds. It’s unclear if anything will happen at this point.
A halt in new loans could be devastating to entrepreneurs as well as banks. SBA loans are business loans which are backed by the US government and serviced by banks. Banks can write these loans more easily than private loans because they are insured by the federal government. Banks can take more risk. However, if the SBA program takes a break, banks will have to cease the creation of many new loans. The entrepreneurship boom in America may stall.
What complicates this situation further is it may be too late for any entrepreneur reading this article. The biggest complaint about SBA loans is the pile of paperwork which accompany them. First, a borrower must complete an executive summary of the business. A business profile must also be created. Such a profile must include the type of business, location, product or service, number of employees, competition, customers, suppliers, and more. A document detailing the company’s management experience is also needed. A loan repayment statement must be completed as well. A personal financial statement must be written. A statement of projections is expected. And finally, a statement showing the loan’s collateral must be completed. Yes, it’s a lot of work and time to get one of these loans. However, they are popular for a reason.
History tends to repeat itself. This isn’t the first time the SBA has faced issues with funding. In 2009, loan stimulus money ran out in a hurry. What can be learned from this is that there was a massive surge in the final weeks before it ran out. Lenders tried to push as many loans through before the deadline. When that money ran out, there were 148 loans in process worth over $80 million.
The same story came in February of 2010. The SBA got another waive of funding that didn’t even last a month. The lesson learned is that lenders don’t stop pushing these loans even after the money has become mostly a memory. It’s important for any entrepreneurs to get their loans in fast and expect a major delay.
There are many alternative funding methods one can pursue. A person can use credit cards to fund a business (not highly recommended). They can also ask friends and family for money. They can try crowdfunding the cash. Finally, private loans issued by banks or other lending institutions may also be considered. None of these methods are as cheap as an SBA loan but they may work in a pinch.
The money for the SBA 7(a) loan program will run out within a month. It’s just a matter of whether or not Congress approves more before that happens.