SBA 7(a) Loans: Your Complete Guide To Terms, Rates, And Eligibility
The SBA 7(a) Loan Program provides some of the most popular and most elementary loans a small business owner can procure. 7(a) loans are backed by the Small Business Administration in amounts up to 85%, mitigating much of the risk a lender would typically take on and thereby giving many small businesses an opportunity to receive funds for which they would traditionally be ineligible. With nine types of 7(a) loans to choose from, most small businesses will qualify for at least one.
Businesses in need of long-term loans, favorable rates, and flexibility should consider applying for an SBA 7(a) loan. Here’s everything you need to know about the SBA 7(a) Loan Program.
Table of Contents
What Is An SBA 7(a) Loan?
An SBA 7(a) Loan is a finance option offered to small businesses, backed (or guaranteed) by the Small Business Administration to reduce the risk involved on the part of the lender. 7(a) products are intended for businesses that may be unable to procure other, more traditional, loans. The loan guarantee provided by the SBA gives business owners a chance to fund their small business needs.
These small business loans can be used for business start-ups, cash flow for an existing business, and countless other purposes. So whether you’re just starting out or keeping your existing business running, there’s probably a 7(a) loan that can help.
 | |
|---|---|
Streamlines SBA loan process for:
| Highlights:
|
Types Of SBA 7(a) Loans
As the SBA program’s primary form for providing funding for small businesses, there are many variations of the 7(a) loan. The following are the nine types of SBA 7(a) Loans, as well as their individual borrowing amounts, turnaround times, SBA guarantees, and term lengths:
7(a) Standard Loan
This is the most common and straightforward of the available 7(a) options. It’s the standard option for the majority of businesses.
- Turnaround: 5—10 days
- Loan Amount: Up to $5 million
- Maximum SBA Guarantee: 75—85%
7(a) Small Loan
The 7(a) Small Loan is similar to the Standard Loan, but used for smaller loans amounts.
- Turnaround: 5—10 days
- Loan Amount: Up to $350,000
- Maximum SBA Guarantee: 85% for loans smaller than $150,000, 75% for greater
7(a) Express Loan
If you have a more urgent need for capital, this 7(a) loan provides an accelerated response time from the SBA.
- Turnaround: Within 36 hours
- Loan Amount: Less than $350,000
- Maximum SBA Guarantee: 50%
7(a) CAPLines Loan
Allows borrowers to procure funds for short-term loans or cyclical needs, including:
- Seasonal: Intended for borrowers that need financing during a
seasonal increase in accounts receivable, inventory, or labor costs. - Contract: Intended for financing labor and material cost for assignable
contracts. - Builder: Intended for small general contractors and builders. Financing
available for those working on a project, which serves as collateral. - Working: Intended for businesses unable to qualify for long-term credit. (Asset-based financing.)
Export Working Capital
For businesses that need cash flow to support export sales.
- Turnaround: 5—10 days
- Loan Amount: Up to $5 million
Export Express
Financing offered for exporters that require loans to operate.
- Turnaround: SBA will respond to application within 24 hours.
- Loan Amount: Up to $500,000
International Trade
For growing businesses with long-term financing needs. Intended for businesses that have foreign competition. Can be used for fixed assets, construction, real estate equipment, and working capital for exports.
- Turnaround: 5—10 days
- Loan Amount: Up to $5 million
- Maximum SBA Guarantee: 90%
Preferred Lender
Allows SBA lenders more autonomy to process, close, service, and liquidate loans.
Veterans Advantage
Loans specifically for establishments that are 51% owned by veterans. Offers lower rates.
SBA 7(a) Loan Pros & Cons
There are, of course, advantages and disadvantages to taking out a 7(a) loan. For some borrowers, the positives outweigh any negatives. See if the advantages are worth the process for your business:
Pros
Borrowers that procure 7(a) loans often enjoy more flexibility, personalized guidance, and lower down payments. Loan interest rates for 7(a) vary, depending on the loan maturity and amount loaned, but are usually much lower than their traditional commercial counterparts. 7(a) loans rates typically vary from 2.25%–4.75%.
As for fees, the SBA prohibits financial institutions from tacking on certain unnecessary fees, such as fees for services, add-on interest, fees for legal services, commissions, bonuses, and broker fees. With a 7(a) loan, you can receive financing for projects (sometimes without collateral), avoid balloon payments, and cover soft costs. You can use a 7(a) loan for your business’s versatile needs and keep them for longer terms.
Cons
Although the list of “pros” is quite long, there are a few disadvantages to receiving a 7(a) loan. You must meet the SBA size guidelines to qualify for a loan, which vary depending on what type of business you own. Basically, your business must qualify as “small.” There is no 7(a) funding available for mid-sized businesses that do not meet the size guidelines.
The application process can also be long and detailed, requiring extensive documentation. 7(a) loans require personal guarantees from owners who have an interest of 20 percent or more in the business entity.
If you’re still interested in the process, it’s time to start working. Since the application can be time-consuming and response times from lenders can vary, the sooner you start, the better.
SBA 504 Loans VS 7(a) Loans
If you’ve been doing your research on SBA loans, you know that 7(a) loans, like 504 loans, can be used to purchase real estate and equipment, construct, and renovate. So, what is the difference between a 504 loan and a 7(a) loan?
| CDC / 504 Loans | SBA 7(a) Loans | |
|---|---|---|
Loan Size | The CDC portion of the loan has a size limit, but the overall loan can be used to finance larger projects. | Offers flexibility for size projects, but are generally used for smaller sized projects. |
Interest Rates | 504 loans offer fixed-rate financing, which locks in low rates for the full length of the loan. | Usually has lower fees, but are variable, not fixed, and are adjusted quarterly. Rates typically rise over time. |
Prepayment Penalty | High prepayment penalties | Prepayment penalties vary depending on loan |
Loan Structure |
| Varies depending on risk. Minimum 10% down payment for the borrower. |
Loan Fees | Fees are negotiated per the 50% bank loan. Can be financed within the 504 loan. | Fees are based on the size of the loan. Can be financed within the 7(a) loan. An extra .25% of fees can be charged on portions of a 7(a) loan exceeding $1 million. |
What Is Needed To Qualify For An SBA 7(a) Loan?
There are a few SBA 7(a) loan requirements that determine the suitability of a potential borrower. While not all of these qualifiers are necessary for all loans, they will instill confidence in potential lenders and increase your likelihood of receiving funds.
Most lenders will require a business plan to show that you have specific financial goals and are a reliable borrower. For this same reason, you will need to provide an exact plan of how you intend to use potential funds, as well as financial projections.
You will need also need a good credit history. The SBA will use your credit score to evaluate risk and determine interest rates. Don’t worry if your history isn’t outstanding; the SBA does help guarantee some loans that you may not qualify for otherwise. If you want to check your score, you can use one of Merchant Maverick’s preferred free credit score services to do so. In general, to obtain an SBA loan, you’ll need a credit score of 660 or higher.
Some SBA 7(a) loans may require you to put up collateral such as property, inventory, or even your personal home or car. Industry experience is also preferred by many lenders. SBA lenders like to know that you have personal experience and knowledge in your industry.
While not all the above qualifications are necessary for every type of 7(a) loan, meeting these guidelines will increase your credibility as a borrower and increase the likelihood that you will receive a guaranteed loan.
SBA 7(a) Loan Terms: Rates, Fees, and Collateral Requirements
Rates, fees, and collateral for the 7(a) loan program vary depending on the lender and type of loan. You can check out our SBA Loan Calculator if you want to more fully understand the rates and fees of your specific loan. To gather specific information on collateral requirements, speak with any potential lenders.
Current SBA 7(a) Loan Rates
We keep track of current SBA loan rates here. This page is regularly updated with current interest rates for most SBA 7(a) business loans and other important information about SBA financing.
SBA 7(a) Loan Fees
The SBA prohibits partner lenders from charging fees for services, add-on interest, fees for legal services, commissions, bonuses, and broker fees. However, the SBA does allow lenders to charge reasonable and necessary fees that vary depending on the loan type, amount, etc.
The SBA also collects loan guarantee fees from borrowers. These fees are due within 90 days of loan approval and can be financed with the proceeds of the loan received. For example, the following are approximate SBA up-front guarantee fees for a 7(a) Standard Loan with loan terms less than twelve months:
- Up to $125,000: No Fee
- $125,001 to $150,000: 2.0%
- $150,001 to $700,000: 3.0%
These fees, however, are much lower for a 7(a) Veterans Loan, also for terms of less than twelve months:
- Up to $125,000: No Fee
- $125,001 to $350,000: 0.125% of the gty amt.
- $350,001 to $5 M: 0.25%: of the gty amt.
These amounts are indicative of the vast differences in fees depending on the type of loan, amount, length, and lender. When matched with potential lenders, you can discuss rates and fees to find out which loan is best for your business.
SBA 7(a) Loan Collateral Requirements
Depending on your lender, you may be asked to provide collateral. This ensures that the lender has a second resource for repayment.
Collateral can include commercial real estate, inventory, machinery, equipment, accounts receivable, or personal assets of the business owner. When applying for an SBA 7(a) loan, everything your business owns will be considered collateral. Any assets purchased with financing will be considered “primary” collateral.
What To Expect From the Application Process
So, how do SBA 7(a) loans work? The process can be lengthy, but is mostly straightforward. First, you must fill out an online form describing your business’s needs. The SBA will then match you with lenders that can help. From there, you can speak with lenders to find the right fit and formally apply for their specific loan.
What Documents are Needed for an SBA Loan?
Necessary documents may vary depending on what your needs are. It’s a good idea to go through the SBA Lender Match site and follow their instructions to get matched.
Having these documents available when applying for a 7(a) loan will make you more credible in the eyes of potential lenders:
- Borrower Information Form
- Statement of Personal History
- Personal Financial Statement
- Business Financial Statements:
- Profit and Loss Statement: Current within 180 days of application
- Projected Financial Statements: One-year projection of income and finances
- Ownership and Affiliations
- Business Certificate/License
- Loan Application History
- Income Tax Returns
- Résumé
- Business Overview and History
- Business Lease
Final Thoughts
7(a) loans can be great options for small businesses that need versatility and longevity, but they aren’t always the cure-all for every business’s capital needs. If you meet the qualifications outlined above, you can begin the application process on the SBA website. That said, we recommend applying to SmartBiz, an online lender that can expedite the SBA loan process, which is traditionally slow. Before you get started, make sure to check out the current SBA loan rates.
If you don’t qualify for an SBA loan, or just want to compare business loans, visit this handy comparison chart to learn about more choices available to you. Receiving a small business loan is a tremendous responsibility, but can also be a necessary step toward success. Consider what’s right for your individual business and happy borrowing!
Still wondering whether a small business loan is right for you? Read our article “Can I Afford a Small Business Loan?”
| |
|---|---|
Streamlines SBA loan process for:
| Highlights:
|
No Comments
Responses are not provided or commissioned by the vendor or bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the vendor or bank advertiser. It is not the vendor or bank advertiser's responsibility to ensure all posts and/or questions are answered.