(This post originally appeared on The Guardian)
When Congress passed the Cares coronavirus recovery act in late March, most of the attention was given to the billions in funding made available to small businesses for the paycheck protection program and economic injury disaster loans provided by the Small Business Administration. Those loan programs were designed specifically for firms affected by the coronavirus pandemic and since then millions of small businesses have taken advantage of the relief.
But there’s another part of the Cares Act that also provides a big benefit to small businesses that some see as an “opportunity of a lifetime” and yet it hasn’t received as much attention. That part is related to the SBA’s Section 7(a) loans.
What’s a Section 7(a) loan? It’s a Small Business Administration program that’s been around for a long time. Under the program, small businesses (generally those with fewer than 500 employees) who are unable to get traditional financing through banks can apply for funds which can then be used for anything from buying a business and real estate to working capital. The loans, like the paycheck protection program loans, are received through an approved lender. But unlike the PPP, the Section 7(a) loans are not forgivable. When you borrow under this program, your interest rate is the prime rate (which is now 3.25%) plus anywhere from 2.25% to 4.75% (depending on the loan) and your payback can range from five to seven years for working capital to 25 years for real estate.
The loans have been popular in the past because the SBA guarantees them, so banks are able to get the money into the hands of small businesses that don’t have collateral or financial history. But now, thanks to the Cares Act, these loans have become even more attractive.
That’s because, for Section 7(a) financings closed before 27 September, a borrower will have the first six months of principal, interest and any fees forgiven. Just to put that in context, if you were to borrow say $500,000 you would not have to pay $33,000. To make things even more attractive, existing loan balances will also be reduced as if the payments were made.
For some looking to buy a business, it’s big deal. “This is the opportunity of a lifetime for a well-positioned buyer,” Tony Calvacca, managing partner of the NYBB Group, a New York business brokerage told the business marketplace researchers at BizBuySell. “And if you already operate a solid, sustainable business, there is never going to be a better opportunity to grow your volume exponentially.”
The paycheck protection program and economic injury disaster loans are providing much-needed relief. Tax incentives – from deferrals to the employee retention tax credit – are also helping. But these are programs designed to provide respite to small businesses who need the aid to survive the current economic downturn. The short-term tweaks to the Section 7(a) program have another purpose: help small businesses grow beyond the pandemic.
That’s because economic downturns cause disruption. But now that most signs are pointing to recovery, many of the smart business owners I know are looking to take advantage of opportunities. They see the potential to hire key people, buy real estate, snap up inventory and equipment and even acquire other businesses. The ones with capital right now are the ones who will benefit. The incentives for getting a Section 7(a), thanks to the Cares Act, can help provide that much-needed capital – not for survival, but for future growth.
“In all my years in M&A, I’ve never seen anything like this,” Max Friar, a founding partner of Michigan based Calder Capital, says. “While this is a challenging time for small business owners, this unparalleled action provides quantifiable relief to small business owners and a great opportunity for those interested in purchasing a small business.”