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Since the 1950s, the SBA has had two primary business loan programs, the 7(a) and the 504 loan program. However, at the most recent National Association of Government Guaranteed Lenders (NAGGL) conference, the SBA announced that effective November 1, 2016, the names of the 7(a) and 504 SBA Loans will be changed.
The 7(a) loan program will now be referred to as the SBA Advantage Loan Program. This program is designed to assist in financing for start-ups and small businesses. The funding available for this type of loan is $50 thousand to $5 million.
The 504 Loan will be referred to as the SBA Grow Loan Program. This program is only available for real-estate or heavy equipment, and offers long-term financing to acquire fixed assets. The SBA Grow Loan Program is only available for real-estate or equipment, offering long-term financing, and used to acquire fixed assets.
The SBA expects to roll out the name change over time beginning with a transition period, during which time the website, regulations, standard operating procedures, forms, and vendor software will be updated. Due to the gradual introduction of the new names, some documents may continue to use the terms 7(a) and 504 during this transition period. Although neither loan program is expected to undergo any “substantive changes”, all policies, procedures and forms are still in effect.

Why the Name Change?

The U.S. Small Business Administration intent for the name change is to re-brand its flagship programs. The reasoning for the change is to better reflect their purposes and improve borrower’s understanding of SBA’s programs. However, with so much success of their previously named programs and no significant changes to the programs, why mess with a good thing? A recent Coleman survey revealed that 88% of surveyors disapprove of the SBA’s decision to rename the programs citing the name changes are confusing and serves no real purpose.

Is There Anything Changing Besides the Name?

The short answer is no, there are no changes to the eligibility, loan amounts, fees or interest rates for either the Advantage Loan Program nor the SBA Grow Loan Program. It still stands that if you’re looking for a small business loan to purchase commercial real estate or heavy machinery/equipment, the SBA Grow Loan is the best choice. If purchasing a business or getting working capital is the goal, the SBA Advantage Loan is likely the better tool.

More explicitly, with a SBA Grow Loan, proceeds can be used to buy a building, finance ground-up construction or building improvements, or purchase heavy machinery and equipment. Advantage Loan proceeds can be used for short-term or long-term working capital and to purchase an existing business, refinance existing business debt, or purchase furniture, fixtures and supplies.

However there is a new loan type under the Advantage Loan Program – the Community Advantage (CA) Loan, which was introduced in December.

Community Advantage Loans

Community Advantage is a pilot loan program introduced by the U.S. SBA to meet the credit, management, and technical assistance needs of small businesses in under-served markets. CA provides mission-oriented lenders, primarily nonprofit financial intermediaries focused on economic development, access to 7(a) loan guaranties for loans of $250,000 or less.

The SBA’s goals for CA are to:

  • Increase access to credit for small businesses located in under-served areas.
  • Expand points of access to the SBA 7(a) loan program by allowing non-traditional, mission-oriented lenders to participate.
  • Provide Management and Technical Assistance (M&TA) to small businesses as needed.
  • Manage portfolio risk.

Community Advantage is scheduled to operate through March 31, 2020 unless extended or made a permanent part of SBA’s financial assistance programs. There is a Community Advantage Participant Guide to provide the information mission-oriented lenders need to participate in the CA pilot program.

Why Community Advantage?

There are two main reasons why the Community Advantage loan is a great option for small businesses in under-served markets:

  1. Access to management and technical assistance – This service is provided to ensure that a business can start, grow and achieve long-term success. Services include business plan preparation, market research, accounting services, payroll, etc.
  2. Access to affordable credit – For businesses that might not qualify for traditional financing, Community Advantage can provide an alternative path to help build your business. Unlike traditional lending, qualification for this program is not limited by the size of the borrower’s balance sheet, or the amount of collateral.

Besides the name change and the addition of a new loan pilot program, there are no significant changes to the purpose and qualifications of either loan programs. Do the name changes improve the borrower’s understanding of the programs? It’s hard to tell. Regardless, the changes are here to stay, and if the Community Advantage Program is proven to work and help businesses in under-served markets, it will also be a permanent fixture in the SBA’s wheelhouse.