Quick comparison

  • Purpose: SBA 7(a) — long‑term, capital-intensive projects; Business line of credit — short‑term working capital and seasonal needs.
  • Structure: SBA 7(a) — term loan with fixed or variable payments; Line of credit — revolving facility, borrow/repay repeatedly.
  • Typical size & term: SBA 7(a) — up to $5 million, repayment up to 25 years for real estate and shorter for equipment/working capital; Line limits vary (often up to several hundred thousand), terms are revolving and shorter (annual renewals common).
  • Speed: SBA 7(a) — longer approval and underwriting (weeks to months); Line of credit — can be as fast as days to a couple of weeks.
  • Costs: SBA 7(a) — lender interest + SBA guarantee/packaging fees; Line — interest on outstanding balance, possible origination/maintenance fees.

Background and context

The SBA 7(a) program dates to the 1950s and exists to reduce lender risk by guaranteeing a portion of qualified loans (see SBA.gov). Lines of credit evolved in commercial banking to give businesses flexible liquidity without converting every cash need into a term loan. In my practice advising small businesses, I see owners use SBA 7(a) for property or major equipment purchases and lines of credit to bridge payroll or inventory cycles.

How each product works

SBA 7(a) loans

  • Use: real estate acquisition, major expansions, equipment, working capital tied to a significant business need.
  • Terms & amounts: up to $5 million; repayment terms depend on use (longer for real estate, shorter for equipment/working capital). Lenders set rates within SBA guidelines and borrowers pay guarantee and packaging fees (SBA.gov).
  • Process: requires a full application package (business plan, financials, personal guarantees, collateral). Underwriting can take weeks.

Business lines of credit

  • Use: seasonal inventory, payroll gaps, short‑term supplier financing, smoothing irregular receivables.
  • Structure: lender sets a credit limit; you draw up to that limit and pay interest only on the outstanding balance. Revolving accounts often renew annually but can be called if covenants aren’t met.
  • Speed & qualification: many banks and online lenders offer lines with faster decisions; underwriting focuses on cash flow, revenue, and business credit.

Costs and fees — what to watch for

  • SBA 7(a): interest rate depends on lender and base rate; expect additional SBA guarantee fees and packaging fees. Ask lenders for an APR example for your loan size. (Source: SBA.gov)
  • Lines of credit: rates can be variable and typically higher than secured term loans; fees may include origination, maintenance, or non‑usage fees. Compare APR and fee structure across offers.

Eligibility and documentation

  • SBA 7(a): must be a for‑profit small business that meets SBA size standards, demonstrate need, and have reasonable owner equity and ability to repay. Lenders also require personal guarantees and often collateral. (SBA guidance)
  • Line of credit: lender criteria vary widely — some require strong annual revenue and positive cash flow; online lenders may accept newer businesses but at higher cost.

When to choose which (decision guide)

Choose an SBA 7(a) if:

  • You need a large, one‑time sum for real estate, major equipment, or an acquisition.
  • You want longer, predictable repayment terms and potentially lower interest than unsecured financing.
  • You can tolerate a longer approval timeline and the documentation requirements.

Choose a business line of credit if:

  • Your primary need is short‑term working capital or to cover seasonal cash‑flow swings.
  • You want flexible access to funds with interest only on amounts drawn.
  • You need funds quickly and can accept potentially higher rates.

Real‑world examples

  • SBA 7(a): A manufacturer uses a $350,000 SBA 7(a) to buy production equipment and spread payments over several years, preserving cash flow for operations.
  • Line of credit: A retailer draws on a $75,000 line each holiday season to buy inventory and repays as sales convert to cash.

Professional tips

  1. Run pro forma cash flows showing when borrowing is needed, how quickly you can repay, and the effect on profit margins.
  2. Ask lenders for sample amortization and APR examples reflecting all fees.
  3. Consider a hybrid approach: use an SBA 7(a) for the long‑term asset and keep a small line of credit for day‑to‑day liquidity.
  4. Negotiate covenants and understand renewal triggers on lines of credit — failure to meet them can mean a sudden call of the line.

Common mistakes

  • Choosing a line of credit for a long‑term asset purchase — this can become expensive if balances remain long term.
  • Underestimating total cost of SBA 7(a) fees and closing costs — get a complete fee worksheet.
  • Failing to stress‑test cash flow projections for slow seasons.

Further reading

FAQs

1) Can I have both an SBA 7(a) loan and a line of credit? Yes — many firms use an SBA loan for a fixed asset and a separate line for working capital.

2) Will an SBA 7(a) improve my chances to get a line of credit later? Having an SBA loan in good standing can strengthen lender relationships and demonstrate repayment history, but lines are underwritten on current cash flow and collateral.

Regulatory & source notes

Information here is based on SBA program guidance and typical lender practice; see the SBA for program details (https://www.sba.gov) and compare product terms carefully with any prospective lender.

Professional disclaimer

This content is educational and not personalized financial advice. For decisions that affect your business, consult a qualified lender or financial advisor who can review your full financial picture.