SBA 7(a) Loans vs. PPP Loans 2.0: Which Is Right For Your Business?

Last year, the government launched the Paycheck Protection Program (PPP) to save the US economy from the COVID-19 crisis. The program provided PPP loans to more than 5 million businesses, with loans averaging about $107,000.

With a new round of funding, PPP loans are back in 2021. However, while these loans have the potential for full forgiveness, they're not the best financing option for every small business.

The SBA's existing 7(a) loan program (the SBA's primary program) has always been a powerful funding tool for small businesses-and that's still the case in 2021. These loans have all the right terms, lending amounts, and approved uses to be the more appropriate financing tool in various scenarios.

But which is right for your business: a 7(a) loan or a PPP 2.0 loan?

Below, we'll compare and contrast the two financing options to help you discover which is the better loan for your business.

SBA 7(a) Loans vs. PPP 2.0 Loans

Eligible Expenses

SBA 7(a) and PPP loans are intended for different purposes. Businesses primarily use 7(a) loans for business expansion and working capital, while the government provides PPP loans to cover payroll expenses and rent.

SBA 7(a) Loan Eligible Expenses:

• Expansion
• Renovation
• Purchasing land
• Building purchases
• Equipment
• Supplies
• Working capital
• Inventory
• Refinancing debt

PPP 2.0 Loan Eligible Expenses:

• Payroll costs
• Utilities
• Rent
• Mortgage interest payments
• Operations expenditures
• Property damage costs
• Supplier costs
• Worker protection investments

SBA 7(a) loans have a lot more flexibility when it comes to eligible spending. PPP loans are a bit more limited, and they also have stricter requirements for full forgiveness. If you want to qualify for full loan forgiveness, then you'll need to spend at least 60% of your loan on payroll costs-anything less than that will reduce your eligible forgiveness proportionately. 

If you're looking to expand your business or finance working capital needs, a SBA 7(a) loan is going to be the better option. If you need funds to pay your employees or cover rent, then a PPP loan will be your better choice.

You'll also want to consider when you'll be spending your loan. With a SBA 7(a) loan, you can spend the funds on your own timeline. With a PPP loan, you'll have to use the entirety of your funds over the 8 or 24-week covered period-any money spent outside of that time frame won't qualify for forgiveness.

Qualification Requirements

SBA 7(a) loans are generally competitive and difficult to qualify for, while PPP loans are widely available to small businesses in need. However, certain eligibility requirements could prevent you from qualifying for a PPP loan-let's look at the basic criteria to see which options your business qualifies for.

SBA 7(a) Loan Qualification Requirements

• Business plan: You'll need to provide a plan showing your financial projects and how you intend to use the loan.
• Track record: You'll typically need to be in business for at least a couple of years.
• Credit score: You'll usually need a minimum 650 credit score.
• Collateral: For smaller loans, you won't need collateral, but the SBA usually requires your lender to ask for a substantial amount of collateral to mitigate the default risk.
• Revenue: Lender requirements vary, but you'll likely need at least $100K in annual income.
• Profitability: Most businesses will need to prove their profitable (exceptions can be made if you have stellar credit).

PPP 2.0 Loan Qualification Requirements

• Your business must be operational before February 15, 2020
• If you obtained a PPP loan last year, you'll need to have used it all up
• You must be able to show a 25% or greater reduction in revenue
• Your business needs to have less than 500 employees (less than 300 employees for second-draw loans)
  • If your business has multiple locations, then you must have less than 500 employees per location (less than 300 employees for second-draw loans)

There are no minimum credit score or annual income qualifications for obtaining a PPP loan, making it a fantastic financing tool for younger businesses. As long as you can prove a 25% reduction in gross revenue, your small business should have no problem qualifying for a PPP loan.

Funding Timeline

If time is of the essence, you'll want to choose the loan option with a faster application, approval, and disbursement time. Specific timing will vary depending on your lender, but here's the average wait you can expect for each loan:

SBA 7(a) Loan Timeline

• Application: SBA 7(a) loan applications are notoriously paperwork heavy, so you'll probably need a couple of hours to find all the necessary documents to submit your application.
• Approval: Your lender will do an initial review. Once they sign off, they hand it over to the SBA. This approval process can take 1 to 3 weeks.
• Disbursement: Disbursement can take 1 to 2 months.

All in all, you can expect to get your SBA 7(a) loan in about 2 months from when you submit your application.

PPP Loan Timeline

• Application: Applications typically take 15 to 60 minutes.
• Approval: Approvals usually take 1 to 2 days, but mass applications have caused longer delays at times.
• Disbursement: Disbursement usually takes 5 to 10 days, but lenders must send funds to approved PPP loan applicants within 10 days of approval.

All in all, you can expect to get your PPP loan in about two weeks from when you submit your application.

If you need immediate financing, then a PPP loan is going to be the better option. SBA 7(a) loans aren't typically for emergencies-they're for long-term investments.

And the Winner Is...

It depends. One isn't necessarily better than the other.

If the COVID-19 pandemic has impacted your business, you should strongly consider getting a PPP loan-especially since they can be completely forgiven. And if you need financing for a long-term investment (like equipment, a business acquisition, or land), then an SBA 7(a) loan will be a better option.

Both of these loans are fantastic financing options for small businesses, but they each serve a specific purpose. Depending on your situation, you may get a PPP loan now and an SBA 7(a) loan next year. It's up to you to use this information to figure out which loan is better for your business right now.