SBA 7(a) Term Loan vs. Asset-Based Revolver: Weighted Cost of Capital Comparison

## Cost of Capital Optimization for Mid-Market Enterprises

Choosing between an SBA 7(a) guaranteed facility and a commercial asset-based lending (ABL) line of credit fundamentally dictates an enterprise's liquidity cushion and covenants.

### Empirical Cost Comparison Framework

Consider a mid-market manufacturing company borrowing $3,000,000 for plant expansion and working capital:

```
Weighted Effective APR = Base Rate + Spread + Amortized Upfront Fees + Servicing Burden
```

| Parameter | SBA 7(a) Facility (10-Yr Term) | Commercial ABL Revolver (3-Yr Facility) |
|:--------------------------------|:------------------------------:|:---------------------------------------:|
| Stated Interest Rate | Prime + 2.75% (11.25%) | SOFR + 2.25% (7.45%) |
| Upfront Guarantee / Facility Fee| 3.50% ($105,000) | 0.50% ($15,000) |
| Annual Maintenance / Field Audit| $0 | $18,000 / year |
| Effective Annualized Cost | 11.82% | 7.95% |
| Personal Guarantee Required | Mandatory (>20% owners) | Typically waived for qualifying EBITDA |
| Principal Amortization | Fully amortizing | Interest-only with bullet maturity |

### Covenant Structure and Operational Flexibility

While the ABL revolver yields a lower nominal rate, it imposes strict borrowing base formulas tied to eligible accounts receivable (typically 80% under 90 days) and raw materials inventory (50%). A drop in monthly receivables directly contracts credit availability.