SBA 7(a) Loan: What Is It?
The SBA 7(a) loan is a loan that the SBA partially guarantees to help small for-profit businesses acquire funds. The SBA 7(a) loan is especially favorable to small businesses that otherwise do not qualify for a business loan.
SBA 7(a) loans provide several benefits to small businesses:
- They have a low-interest rate: The interest rates of SBA 7(a) loans are determined by adding 2.25% to the market prime rate.
- They have a $5 million limit: With the SBA 7(a) loan, small businesses can borrow up to $5 million.
- They have a high approval rate: The SBA guarantees 85% of loans lower than $150,000, and 75% of loans higher than $150,000.
- They have lower fees: Besides providing interest rate caps, the SBA loans also protect borrowers from certain fees that are common in other types of loans.
- The SBA offers a partial guarantee of 50%-80% of the loan amount: If the small business loanee fails to pay, the SBA refunds 50%-80% of the loan to the lender. As a result, offering loans to small business loans and start-ups appears less risky to the lender.
How to Get an SBA 7(a) Small Business Loan
As a small business owner in need of an SBA 7(a) loan, you will need to locate an SBA-approved lender of your liking. You will then work with them to fill out the application for your SBA 7(a) small business loan according to the SBA’s requirements.
Since the SBA only guarantees a portion of your loan as opposed to lending you the money, you will include your personal financial statement, business financial information, and fill out a borrower information form together with the SBA loan application to convince them of your business’s eligibility.
To qualify for an SBA 7(a) small business loan, your business must:
- Align with the SBA’s definition of a small business within your industry
- Operate for profit
- Operate and be located within the US
- Have valuable assets to finance your business
- Prove the loan to be for solid business purposes
- Have utilized other financial resources before applying for the SBA 7(a) loan
Although most businesses qualify for an SBA 7(a) loan, some don’t. The SBA will not guarantee loans for businesses engaging in illegal activities, gambling, loan packaging, multi-sales distribution, or rare coins and stamps. Any nonprofit organizations, including charities and religious groups, also don’t qualify.
Types of SBA 7(a) Loans
The SBA 7(a) loan program has a variety of 7(a) loan types and credit lines. Each type of loan offers varying loan limits and different processing times, thus offering borrowers the flexibility to pick out loans that best align with their business needs.
The various types of SBA 7(a) loans are listed below.
- Standard 7(a) loans: These have a loan limit of $5 million and are best suited for business expansion purposes.
- 7(a) Small loans: They have a $350,000 loan limit and are mostly offered as working capital
- Express loans: Small businesses mostly take out the express loan to cater to their time-sensitive financial needs. They have a $350,000 limit.
- Export express loans: They are similar to the express loan, but they are meant for small export businesses. The loan limit is $500,000.
- Export working capital: They are suitable for small export businesses in need of working capital. They have a loan limit of up to $5 million.
- International trade loans: With a loan limit of up to $5 million, they help support businesses gain momentum and compete internationally.
- SBA CAPLines of Credit: With a limit of up to $5 million, these loans are suited for commercial builders, businesses whose cash flow experiences cyclical gaps, seasonal businesses, and those taking on government contracts.
Standard 7(a) Loan
This loan has a limit of $5 million, and as a borrower, you can use funds acquired for a variety of business needs, including expanding your business or for extra working capital. Note that if you are taking a loan greater than $25,000, the SBA necessitates that the lender takes collateral based on collateral policies used for non-SBA loans.
Once you apply for your loan, the SBA will review it and provide the initial feedback within 10 business days.
SBA 7(a) Small Loan
Once you apply for this loan, the SBA will prescreen you to assess your creditworthiness. They will use information from your personal and business credit, as well as your business financials. If you fail the prescreen, you will be subjected to the more severe standard 7(a) underwriting process. Upon passing, however, the lender will speed up your application.
SBA Express Loan
You can apply for this loan if you are experiencing a time-sensitive bind. Instead of the regular 10 business days, you will receive an initial approval decision within 36 hours. Due to the quick approval, the SBA will only guarantee 50% of your loan amount.
Export Express Loan
You can apply for this loan if you have a small export business, and you can expect the SBA’s initial approval decision within 36 hours. You can borrow up to $500,000, and the SBA can guarantee up to 90% depending on your loan amount.
Export Working Capital
You can access this loan through the Export Assistance Center and borrow up to $5 million to support your export sales or acquire extra working capital. You can expect the SBA to guarantee 90% of your loan amount, however much it may be. The lines of credit here will last up to a year.
International Trade Loans
If you need to expand your business and have a position on the international front, you can take out this long-term loan. They have a limit of $5 million, a 90% guarantee, and last for up to 10 years when taken for working capital, machinery, or equipment. When taken or real estate, however, they can last up to 25 years.
The CAPLines loan offers you a loan limit of $5 million, but rather than issuing a lump-sum amount, you will receive an extension on your existing line of credit. With this line of credit, you can meet the short -term goals of your business and any cyclical working needs.
You can access four different types of SBA lines of credit through the CAPLines program.
- Seasonal: It is especially suited for businesses that experience seasonal receding tides and flows. You can choose this line of credit if you run a retail store that needs to hire more labor over the holidays and shopping seasons.
- Contract: This line of credit is specially designed to offer flexibility to businesses that may need to increase resources and staff in anticipation of increased product demand.
- Builders: Builders is specially intended for small contractors and builders in need of finances for the business’ material and labor needs. While the other CAPLines last up to 10 years, Builders only last up to five years.
- Working: If your business experiences cyclical growth patterns or recurrent short-term needs, this is the perfect CAPLines for you. You can borrow money to acquire short-term assets and repay the amount once you convert the assets to cash.
How Long Will I Wait to Receive an SBA 7(a) Loan?
Most SBA 7(a) loans have a turnaround time of 5-10 business days, although each case varies. If you need the funds urgently and apply for the SBA Express, you should receive it within 36 hours.
SBA 7(a) Loan Terms: Maturity and Interest Rates
SBA 7(a) loans have some of the best terms. Check below to see just how good these terms are compared to other sources of business financing.
SBA loan programs aim to promote long-term small business financing. The maturity of these loans depends on the borrower’s refunding ability, The intended use of the loan proceeds, and the service life of the financed assets.
SBA loans have three possible maximum maturity durations.
- 25 years for real estate
- 10 years for equipment
- 10 years of inventory loan or working capital
If you intend to use your loan proceeds for several purposes, the loan’s maximum maturity can be calculated based on the various purposes of the loan plus the economic life of the financed assets.
The SBA sets a maximum interest rate for your loan based on factors such as LIBOR rate, prime rate, or an optimal peg rate. It is up to you and your lender to settle on the actual interest rate; the value should not exceed the SBA’s maximum.
Below are some interest rates for variable rate loans.
- Loan amounts below $25,000: Maximum rate should be 4.25% + base rate if maturity is under seven years, but 4.75% + base rate if maturity is greater than seven years.
- Loan amounts between $25,000-$50,000: Maximum rate should be 3.25% + base rate if maturity is under seven years, but 3.75% + base rate if maturity is greater than seven years.
- Loan amounts greater than $50,000: Maximum rate should be 2.25% + base rate if maturity is under seven years, but 2.75% + base rate if maturity is greater than seven years.
SBA 7(a) Loan Documentation Checklist
Before applying for an SBA 7(a) small business loan, you will need to gather the necessary and appropriate documentation to aid in the application process. Your documents are critical in supporting your eligibility for the loan. Although the requirements may vary from one lender to the next, general requirements apply across the board.
Check the list below to ascertain that you have all the documentation you need for your application ahead of time.
- SBA loan application: For starters, you will need to fill out the SBA loan application form with honesty and accuracy.
- Personal background and financial statement: The SBA will require you to fill out a statement of your personal history form and personal financial statement form. They will use them to evaluate your eligibility. You can find both forms on their website.
- Business financial statements: vouch for yourself by preparing and including a profit and loss statement and projected financial statements in your application. Use current financial statements (preferably for the six months preceding your application) to demonstrate your credibility and ability to repay the loan.
- Ownership and affiliations: list the names and addresses of your subsidiaries or affiliates, if any.
- Business certificate/license: include your original business license, certificate, or any other permits that allow the operation of your business. If you run a corporation, stamp your corporate seal on the application form.
- Loan application history: include records that reflect your loan application history.
- Income tax returns: include signed copies of your personal and business federal tax returns dating three years prior to your loan application.
- Business overview and history: Include a brief history of your business, including challenges faced. Provide an explanation of why you are applying for the loan and how you aim to use it.
Here are some additional requirements to help you get an SBA 7(a) small business loan.
- Good personal credit score: Although not standard, lenders expect to see a FICO score of 650 and above to give small business loans
- Revenue and profitability: You need to have a strong and reliable annual revenue, preferably $100,000. Your business also needs to be profitable. If your business is new, the SBA can make an exception for it, but you need to have strong credit.
- Collateral: Having valuable assets that can be used as collateral improves your chances for loan qualification.
- For-profit: Your business must be registered officially as a for-profit. It would be difficult to get approved for the loan otherwise.
- Small business: Go through the SBA’s website and ensure that your business aligns with their definition of a small business.
- Located in the US: Your business must be located and operating within America. SBA loans are solely meant for US businesses.