CARES Act Provides New Benefits to SBA Loans

As entrepreneurs manage their businesses through the COVID-19 pandemic, it’s critical to leverage the right tools and resources.

For instance, thousands of businesses received funding through the U.S. Small Business Administration’s Paycheck Protection Program, which was a valuable lifeline to continue operations and keep workers employed. However, if you still need additional capital or didn’t receive a PPP loan, there are other options to consider. 
 
The PPP loans were the most prominent resource for small businesses in the CARES Act — but other relief options also included new benefits for SBA 7(a) and SBA 504 loans. In Section 1112 of the CARES Act, it notes that for six months, the SBA will pay the principal, interest and any associated fees for 7(a) and 504 loans.

These payments are a new benefit rolled out to help small businesses stay resilient during a tough economy. They were automatically provided to existing loans and apply to new loans made after March 27 and fully disbursed prior to Sept. 27, 2020. 

Because of this attractive benefit, if you’re looking for capital, it’s helpful to examine these loans to identify the best fit for your business.

An SBA 504 loan may be used for purchasing equipment, machinery or real estate, or upgrading or remodeling owner-occupied facilities. The maximum loan amount is between 5 million to $5.5 million. A borrower usually provides 10% equity, with 50% provided through a bank and 40% through a Certified Development Company backed by an SBA guarantee.

The SBA 7(a) loan is more versatile and up to $5 million may be borrowed for expansions, business acquisitions and startups. It’s also possible to use funds for debt refinance, inventory, working capital, construction or improvements, tenant/leasehold improvements or an owner-occupied real estate purchase.

Large projects are often efficiently funded through a 504 loan because the guarantee fees — as a percentage of the loan amount — stay flat even as the loan amount increases.

Additionally, an SBA 504 loan has an advantage if there are multiple borrowers with an uneven distribution in physical assets. This type of SBA loan does not require outside collateral or a lien on a home.

If you’re interested in the 504 loan, you’ll need to be grounded in the “5 C’s” of credit: Capacity to repay, capital (the owner's cash or equity contribution), character, collateral and conditions (terms of the loan). Since the bank’s portion of a 504 loan is conventional and lacks a government guarantee, lenders typically require borrowers to have established revenues and a solid business credit history. Both 504 and 7(a) loans are subject to credit approval.

If you’re operating a startup or a business considered higher risk by the SBA (such as a restaurant), the 7(a) loan might be the best fit. Because of the SBA guarantee for 7(a) loans, more early stage businesses may qualify.

If you need working capital and would like to purchase a business combined with real estate, the 7(a) loan might also be your best option. 504 loans may not be used to purchase a business or finance working capital. 

Regardless of the type of loan you pursue, it helps to work with an experienced banker who can help you efficiently move forward with the process. Leveraging capital wisely will give your business a key advantage as you navigate the current recession.

As the top 7(a) SBA lender[cite::8031::cite] for 26 years in Utah and for 18 years in Idaho, Zions Bank’s team of relationship managers can help you find the right SBA loan[cite::8030::cite] for your business. Apply for a business loan online anytime or visit a local Zions Bank branch to learn more.

Malcolm Hong is Public Relations officer for Zions Bank in Idaho.