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What is an SBA 7(a) Loan?
The SBA 7(a) loan is the Small Business Administration’s (SBA’s) most popular form of business financing. SBA 7(a) loans , which were issued in excess of $25 billion in 2017, can be used for both working capital and commercial real estate , making them an excellent choice for entrepreneurs with a
The SBA 7(a) loan is the Small Business Administration’s (SBA’s) most popular form of business financing. SBA 7(a) loans, which were issued in excess of $25 billion in 2017, can be used for both working capital and commercial real estate, making them an excellent choice for entrepreneurs with a variety of different needs.
SBA 7(a) Loans Are Issued By Private Lenders, Not The SBA
With the exception of SBA disaster loans, all SBA loans, including SBA 7(a) loans, are not actually issued by the Small Business Administration. Instead, the SBA simply guarantees a large portion of the loan in order to reduce risk for the lender. Depending on the loan, the SBA will guarantee between 75% and 85% of the loan amount, a small percentage of which will be passed onto the borrower in the form of an SBA guarantee fee (guarantee fees only apply to loans of more than $150,000.)
SBA 7(a) Loans Come In A Variety of Flavors
While the Standard SBA 7(a) loan may be the most popular, it’s not the only option available to small business borrowers. Other SBA 7(a) loan types include:
SBA 7(a) Small Loans: Small 7(a) loans, which defined as any loans up to $350,000, often have slightly better terms than larger loans. For example, loans up to $25,000 don’t need collateral (according to the SBA, though an individual lender may require it.) Plus, loans of $150,000 and less don’t require any SBA guarantee fees.
SBA Express Loans: Also part of the 7(a) program, SBA Express Loans are issued in amounts of $350,000 and less, and can be approved in a much shorter time period than a standard 7(a) loan.
Loan Term:
Commercial Real Estate: Up to 25 years
Equipment: Up to 10 years
Working Capital: Up to 10 years
Loan Size: Up to $5 Million
Interest Rate: Maximum rates are between 7.25% and 9.75%
For-profit businesses (no non-profits allowed)
Operating in an SBA-approved industry. Non-approved industries include:
Speculation
Real estate investing
Lending
Gambling
Within the SBA’s business size limits
In possession of a good credit score (640 is typically the minimum, but 680+ is ideal)
What are the requirements for an SBA 7(a) loan?
The SBA 7(a) loan has the following requirements:
- Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
- You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
- If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
- The business owner cannot be on parole.
- You must be doing business in the U.S. or its territories.
- A maximum loan amount of $5 million with no minimum loan amount (most loans, however, are $30,000 or more).
- The business must meet the SBA's size standards for its particular industry.
- The business must have fewer than 500 employees and less than $7.5 million in revenue each year for the previous three years.
- The business must physically be based in the U.S. and operate within the U.S. and its territories.
- Business owners must first have used other sources of financing, including personal funds, in order to qualify.
- Businesses must not be involved in lending, real estate, or speculation.
What are the benefits of an SBA 7(a) loan?
The SBA 7(a) loan program offers several benefits to small businesses, including:
- Flexibility in underwriting
- Often has lower interest rates than other comparable financing options
- Long loan terms, up to 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory
- Flexible collateral requirements
- Lenders are prohibited from charging certain fees, including:
- Insurance service fees
- Add-on interest charges
- Legal service fees (with some exceptions)
- Broker referral fees
In addition, SBA 7(a) loans can be used for various business purposes, including renovations, capital purchase, seasonal lines of credit, or refinancing of existing debt. There is no prepayment penalty for loans that mature within 15 years, and no balloon payment.
What are the different types of SBA 7(a) loans?
The SBA 7(a) loan program offers several types of loans to qualified small business owners. These include the SBA 7(a) Standard Loan, SBA Express Loan, SBA Export Express Loan, SBA Export Working Capital Loan, SBA CAPLines, SBA International Trade Loan, SBA Military Reservist Economic Injury Disaster Loan (MREIDL), and SBA Community Advantage Loan.
The SBA 7(a) Standard Loan is offered through banks and other traditional lending institutions. The SBA guarantees the funds up to 85% in some cases. The funds from the 7(a) can be used for nearly any legitimate business purpose, such as purchasing equipment, land and real estate, or for working capital. The maximum loan amount for the SBA 7(a) is $5 million, and there is no minimum.
The SBA Express Loan is a simplified version of the SBA 7(a) loan. It offers a quicker turnaround time and a streamlined application process. The maximum loan amount is $350,000, and the SBA guarantees 50% of the loan.
The SBA Export Express Loan is designed to help small businesses expand their export activities. The maximum loan amount is $500,000, and the SBA guarantees 90% of the loan.
The SBA Export Working Capital Loan is designed to help small businesses finance their export activities. The maximum loan amount is $5 million, and the SBA guarantees 90% of the loan.
The SBA CAPLines program offers four types of loans to help small businesses finance their short-term and cyclical working capital needs. The maximum loan amount is $5 million, and the SBA guarantees up to 85% of the loan.
The SBA International Trade Loan is designed to help small businesses finance their international trade activities. The maximum loan amount is $5 million, and the SBA guarantees up to 85% of the loan.
The SBA Military Reservist Economic Injury Disaster Loan (MREIDL) is designed to help small businesses that have suffered economic injury due to the deployment of a military reservist. The maximum loan amount is $2 million, and the SBA guarantees up to 90% of the loan.
The SBA Community Advantage Loan is designed to help small businesses in underserved communities access capital. The maximum loan amount is $250,000, and the SBA guarantees up to 85% of the loan.
How long does it take to get an SBA 7(a) loan?
The approval time for an SBA 7(a) loan will depend on how much experience your lender has with processing this type of financing. By choosing your lender carefully, you may be able to have your loan application processed more quickly. Here are a few different ways the SBA 7(a) loan is processed:
SBA 7(a) Loan Processing Type Approval Time Standard 7(a) Loan Processing 7-10 business days Certified Lenders Program (CLP) Processing 3 business days Preferred Lenders Program (PLP) Processing 24 hours or less Keep in mind that these SBA 7(a) approval time frames do not include time required for any appraisals or reports needed in support of your loan application. These could significantly lengthen the amount of time it takes to get approved.
What documents are needed to apply for an SBA 7(a) loan?
To apply for an SBA 7(a) loan, you will need to provide the following documents:
- Agreement to purchase the business
- Letter of intent to buy the business
- Business tax returns for the past three years
- Any outstanding business debt
- Long-term business contracts
- Documentation of business assets
- Business lease agreement
- Incorporation documents and/or business license
- Business plan
- SBA Form 1919 (borrower information form)
- SBA Form 912 (statement of personal history)
- SBA Form 413 (personal financial statement)
- Financial statements, including a balance sheet, profit and loss, and income projection
In addition, the SBA will usually order an independent business appraisal to give lenders an idea of what the true value of the business is.
The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.
SBA 7(a) Loan Terms
While terms can vary, in general, terms for SBA 7(a) loans include:
SBA 7(a) Loan Eligibility
While SBA 7(a) loans are a great financing option for many small businesses, they aren’t available for everyone. In particular, SBA 7(a) borrowers must be:
Even if you do qualify for an SBA 7(a) loan, it may not be the best choice for your business. For example, businesses that only need funds to purchase commercial real estate for their business may want to consider an SBA 504 loan. SBA 504 loans have a slightly larger maximum loan amount than 7(a) loans (at $5.5 million), and offer slightly lower interest rates. However, SBA 504 loans cannot be used for working capital, and they typically require even better credit than an SBA 7(a) loan.