Insights
Tap into New SBA Debt Relief for 7(a) and 504 Lending Programs
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The Economic Aid Act extends some additional assistance to small businesses seeking SBA 7(a) and 504 loans
On December 27, 2020, the $325 billion Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act) was signed into law. The Act is intended to provide relief funds to the small businesses that were most impacted by the COVID-19 pandemic. Along with reviving the Paycheck Protection Program, the Economic Aid Act also enhances and extends provisions under Section 1112 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for certain Small Business Administration lending programs, such as the popular 7(a) and 504 programs. The Act specifically allocates $3.5 billion to the SBA to provide support to small businesses through its loan programs, which will continue to run until funds run out.
“This is the best time to get an SBA loan because in my whole career—almost 27 years working in SBA—I've never seen such a thing,” states Wai-Chun Li, senior vice president of small business lending at East West Bank.
Two East West Bank SBA experts speak about what small business owners should know about the new modifications.
Enhancements to 7(a) and 504 loan debt relief
As of February 16, 2021, the SBA released new guidance for the Economic Aid Act provisions, due to concerns that the allocated funds will be insufficient for the demand. The new terms state that the SBA will now cover three months of payments on 7(a) and 504 loans approved on or before September 27, 2020, and fully disbursed on or after September 28, 2020, says Li. However, the SBA will still cover six months’ worth of payments on loans approved and fully disbursed before September 27, 2020, as written in the CARES Act. For new 7(a) and 504 loans approved between February 1, 2021, and September 30, 2021, the SBA will follow the same three-month period, subject to availability of funds.
“So that means that once they book the loan, then the SBA will help them to make…payment of up to $9,000 a month,” explains Li.
For 7(a) and 504 loans that were made before March 27, 2020, the SBA will cover payments for two months. Certain businesses are also eligible for additional monthly payments, provided they fall under specific categories, says Derek Lee, first vice president and SBA operations manager at East West Bank. Businesses that are classified by the North American Industry Classification System (NAICS) codes 61, 71, 72, 213, 315, 448, 451, 481, 485, 487, 511, 512, 515, 532, or 812 are eligible for an additional three months of payments following the two-month period, for a total of five months covered.
Another thing to note, says Li, is that the SBA is also waiving the guarantee fee for 7(a) loans, which business owners used to have to pay and ranged from 1.7-2.7% of the total loan amount. “So that person will no longer need to pay if the loan gets approved before September 30 this year,” Li adds.
7(a) or 504? Choosing the right small business loan
Li emphasizes that business owners should take advantage of the funding incentives the SBA has provided. Along with enhancements that directly impact borrowers, the SBA is also providing incentives to encourage lenders to make new loans, such as by guaranteeing up to 90% of some small business loans.
Even without the additional enhancements, SBA loans are generally designed to be favorable for small businesses that need that extra boost to take their business to the next level.
“[The number one benefit] is that the SBA program provides credits, with a longer term high loan-to-value ratio,” says Li. “If a customer wants to get a working capital loan, usually they only get a three-year term or five-year term from conventional lenders. The SBA can offer a 10-year term, which means smaller monthly payments, and it is easier to qualify.”
The 7(a) program is the SBA’s flagship lending program and can be considered a general purpose loan. Businesses can use the loan proceeds for purposes such as starting, expanding, or acquiring a business, to providing working capital, to purchasing inventory and equipment.
There are six types of 7(a) loans that all qualify for the new terms under the Economic Aid Act:
- Standard 7(a) Loan
- 7(a) Small Loan
- SBA Express
- Export Express
- Export Working Capital
- International Trade
The Standard 7(a), Export Working Capital and International Trade loans all have maximum loan sizes of $5 million. The 7(a) Small and SBA Express have maximum loan sizes of $350,000, and the Export Express has a maximum of $500,000.
The 504 loan, which also has a max loan size of $5 million, is geared toward commercial real estate and has more limited use, says Lee. It can be used for the purchase of existing buildings or land, new facilities and/or long-term machinery and equipment, or the improvement of existing facilities. However, 504 loans cannot be used for working capital, purchasing inventory, refinancing, or investment in rental real estate.
“This is the best time to get an SBA loan because in my whole career—almost 27 years working in SBA—I've never seen such a thing,” Li states.