The Small Business Administration (SBA) designed an 7(a) loan as a financial tool to help small business owners access capital. The SBA facilitates the acquisition of loans for small business owners by guarantying a portion of the borrowed funds, capping interest rates, and imposing fee restrictions.
Read on to find out more about SBA 7(a) loans, including what they are, the numerous types that are accessible to small businesses, and how to apply.
What is a SBA 7(a) Loan ?
The 7(a) Loan Program is Small Business Administration’s (SBA) most common loan program, provides financial help for small businesses with special requirements. SBA 7(a) loans can be used to purchase inventory, working capital, real estate, and other necessary business assets. Since they address various requirements and businesses, 7(a) loan vary in their SBA guarantees, loan amounts, and other term details.
You collaborate with a lender to apply for an SBA 7(a) loan, and the SBA takes part by guaranteeing a percentage of the loan amount. This guarantee from a government agency assistance businesses acquire funds, even if they might not have otherwise qualified for a business loan.
SBA 7(a) loan is the ideal option when real estate is involved of a business purchase, but it can also be used for refinance current business debt, short and long term working capital, Purchase furniture, fixtures, and supplies. A 7(a) loan may only be for a maximum of $5 million. Important eligibility criteria are based on the business's source of income, credit history, and operating environment. Which loan kind is most appropriate for your needs will be determined by your lender.
Key Facts of 7(a) Loan
- The term "7(a) loan" comes from Small Business Act of 1953's Section 7(a), which first authorized the SBA to both provide and guarantee loans to small businesses in the United States.
- 7(a) loans can be used for a variety of purposes, including business expansions, working capital, or purchasing supplies and equipment.
- A 7(a) loan is for eligible small enterprises in the US that is partially insured by the Small Business Administration.
- SBA 7(a) loans come in a variety of forms that are created to address particular requirements in particular industries.
- Companies that operate as small businesses for profit in the United States typically qualify for an SBA 7(a) loan.
- The loans' conditions vary, but most Standard 7(a) loans permit borrowing up to $5 million over a period of ten years.
How Does the SBA 7(a) Loan Work ?
A small business loan issued by a private lender and partially backed by the U.S. Small Business Administration is known as an 7(a) loan. SBA 7(a) loans' goal is to persuade financial institutions to offer fair loans to businesses that might not otherwise be able to get finance on reasonable terms. 7(a) loans might be challenging to qualify for, but because of their long repayment terms and low interest rates, they make an excellent choice for business financing.
A business owner can start the process of receiving an SBA loan as soon as they identify a lender who has been approved by the SBA. Businesses may borrow up to $5 million through the majority of SBA 7(a) loans. 85% of loans up to $150,000 and 75% of loans over that amount will be guaranteed by the SBA.
The maximum interest rate set by the SBA is negotiable between you and your lender. The prime rate, the size of the loan, and the loan's maturity all affect interest rates. With SBA loans, firms are also shielded from some costs in addition to interest rate limitations. However, prepayment penalties which apply to the first three years of the loan, are also included with SBA loans.
Who is Eligible for SBA 7(a) Loan ?
You must satisfy a basic set of SBA requirements as well as any lender-specific requirements, regardless of the type of 7(a) loan, in order to be approved for funding. To be qualify for 7(a) loan loan, businesses must :
- Operate for profit.
- Be regarded as a small business, as defined by SBA.
- Having reasonable invested equity.
- Being involved in or propose to engage in business in the U.S. or any of its territories.
- Prior to requesting financial aid, use other financial options, including your own assets.
- Put the funds for a sound business purpose .
- Be able to prove that you need a loan.
- Not be delinquent on any existing debt obligations to the United States government.
Some companies might not be eligible for 7(a) loans. Read more about the eligibility requirements and terms.
How to Use the 7(a) Loan ?
Basic uses of the SBA 7(a) loan include :
- Working capital for both the long and short term.
- Based on the value of the current inventory and receivables, revolving funds.
- The purchase of machinery, equipment, fixtures, furniture, materials or supplies.
- The purchase of land and building that are part of real estate.
- Building a new structure or renovation an old structure.
- Launching a new business or providing support for a current business's purchase, operation, or growth.
- Refinancing existing business debt, under certain circumstances.
Types of SBA 7(a) Loans
On its website, the SBA describes eight different types of 7(a) loans. Businesses in some industries may discover that one 7(a) loan is more suited for them than others because they are all designed to satisfy distinct demands.
1) Standard 7(a) :
The majority of small firms are eligible for this type of 7(a) financing.
- The maximum loan standard 7(a) available is $5 million.
- 85% of loans up to $150,000 and 75% of loans over that amount will be guaranteed by the SBA.
- The interest rate is negotiable between lenders and borrowers, but it cannot be higher than the SBA maximum.
- Delegated authority (PLP) to make eligibility determinations without SBA scrutiny may be granted to qualified lenders.
- For up to ten years, it can be utilized as a revolving line of credit.
- SBA turnaround time is 5-10 business days.
- Every loan must include SBA Form 1919 and SBA Form 1920. (other SBA Forms may be required).
- For loans up to $25,000, lenders are not required to accept any collateral. The SBA mandates that lenders collateralize loans above $350,000 to the fullest degree feasible up to the loan amount. Trading assets and any accessible equity in the principals' personal real estate must be used as security if the business' fixed assets do not "fully secure" the loan.
2) 7(a) Small Loan :
The features of a 7(a) small loan are same to those of a 7(a) Standard Loan.
- The maximum loan 7(a) small loan is $350,000.
- For loans up to $150,000 and loans over $150,000, the maximum SBA guarantee is 85% and 75%, respectively.
- The interest rate is negotiable between lenders and borrowers, but it cannot be higher than the SBA maximum.
- SBA turnaround time is 5-10 business days
- Every loan must include SBA Form 1919 and SBA Form 1920. (other SBA Forms may be required).
3) SBA Express :
The SBA review process is expedited under the SBA Express program. Within 36 hours, the SBA will respond to your application.
- $350,000 is the maximum loan amount.
- Only up to 50% of the loan will be guaranteed by the SBA.
- For up to ten years, it can be utilized as a revolving line of credit.
- The interest rate is negotiable between lenders and borrowers, but it cannot be higher than the SBA maximum.
- Lender mainly use its own forms and procedures in addition to SBA Form 1919.
- For loans up to $25,000, lenders are not required to accept any collateral. For loans beyond $25,000 and up to $350,000, they are permitted to use their current collateral policy.
- In cases where liquidation may be postponed or for modest loans, the lender may ask for an expedited SBA purchase.
4) Export Express :
Exporters and lenders can quickly get SBA-backed financing for loans and lines of credit up to $500,000 under the Export Express program. Lenders have their own procedures for evaluating credit and loan documents.
- For exporters who want loans and lines of credit up to $500,000, this program is available.
- Up to 90% of loans under $350,000 and 75% of loans over that sum will be guaranteed by the SBA.
- The interest rate is negotiable between lenders and borrowers, but it cannot be higher than the SBA maximum.
- The revolving credit lines are available for up to 7 years.
- Lender additionally employs SBA Form 1919, Borrower Information, in addition to its own forms and procedures.
- Within 24 hours, the SBA will react to your application.
- For its non-SBA-guaranteed loans, lenders adhere to the collateral policies and processes that they have set.
5) Export Working Capital :
Businesses who want additional working capital to support their export sales are eligible for this loan.
- With the Export Help Center, loans up to $5 million are offered.
- No matter the loan's size, the SBA can guarantee up to 90% of it.
- Revolving credit lines are available for one year or less.
- There is no SBA maximum interest rate ceiling, instead lenders and borrowers negotiate the interest rate.
- The SBA requires 5–10 business days for turnaround.
- SBA Form 1920 is generally used by lenders.
- Export sales-related inventories and receivables that were paid for with EWCP money. Owners with 20% or more ownership must also provide a personal guarantee, according to the SBA.
6) International Trade :
Long-term financing is offered by international trade loans to companies that are expanding due to increasing export sales or those have been negatively impacted by imports and need to modernize to compete internationally. Foreign trade loans can be used by businesses for working capital for export operations as well as fixed assets for building, construction, and real estate equipment.
The maximum loan amount for international trade is $5 million. Up to 90% of the loan may be guaranteed by the SBA. While these loans are comparable to those for export working capital, they have substantially longer terms, 10 years for permanent working capital, up to 10 years for machinery and equipment or the equipment's useful life (not to exceed 15 years), and up to 25 years for real estate.
7) Preferred Lenders :
Certain lenders receive more authority from the SBA to handle, close, service, and liquidate SBA guaranteed loans under the Preferred Lenders program. A lender may be nominated for preferred status by an SBA field office covering the region where the lender has an office, or a lender may request that a field office do so.
Before making its choice, the SBA takes into account the lender's :
- Has the ability to analyze and develop complete loan packages.
- Has the ability to process, service, close, and liquidate loans.
- Has satisfactory Small Business Administration performance.
8) CAPLines :
A umbrella program called CAPLines assists small firms with their cyclical and short-term working capital needs. The maximum maturity for a CAPLine loan, with the exception of the Builders CAPLine, is 10 years. Loan terms for builders shall not exceed five years. The loan must be guaranteed by the owners of at least 20% of the application business. This program covers four credit lines in total.
a) Seasonal CAPLine :
The loan proceeds must only be used by borrowers to pay for seasonal increases in accounts receivable, inventories, and, in some situations, related higher labour costs. You can get one that revolves or doesn't.
b) Builders CAPLine :
A small general contractor or builder who is constructing or repairing commercial or residential buildings might use this line of credit to fund direct labour and material costs. The construction project is used as collateral, and there are both revolving and non-revolving loan options.
c) Contract CAPLine :
The direct labour and material costs related to carrying out assignable contracts are covered by this line of credit. You can get one that revolves or doesn't.
d) Working CAPline :
For companies unable to meet the credit requirements for long-term lending, this is an asset-based revolving line of credit. It provides funding for requirements that are cyclical, ongoing, or transient. Short-term assets are converted into cash for repayment and then sent to the lender. Based on existing assets, businesses can draw from this line of credit as needed and repay it according to their cash flow cycle. Businesses that extend loans to other firms typically use this line. The lender may impose additional fees because these loans necessitate ongoing servicing and collateral monitoring.
Interest Rates of SBA 7(a) Loan
However, there are SBA maximum interest rates that are tethered to the prime rate, the LIBOR rate, or an optional peg rate and are subject to negotiation between the borrower and the lender. Both fixed and variable interest rates are possible. The following interest rates apply to variable rate loans :
|
SBA loan amount |
Max. rate
if maturity is less than 7 years |
Max. rate if maturity is more than 7 years |
|
$25,000 or
less |
Base rate + 4.25% |
Base rate + 4.75% |
|
$25,000 to
$50,000 |
Base rate + 3.25% |
Base rate + 3.75% |
|
More than
$50,000 |
Base rate + 2.25% |
Base rate + 2.75% |
Different standards for interest rates apply to SBA Express and Export Express loans. In exchange for these loans, lenders may charge :
- For loans over $50,000, the prime rate plus 4.5%.
- For loans of $50,000 or less, the prime rate plus 6.5%.
Fees for SBA 7(a) Loans
For all loans granted within a fiscal year, the SBA determines the amount of certain fees.
|
Gross loan
size |
Fees |
Maturity |
|
Loans
of $150,000 or less |
2%
of guaranteed portion |
Maturities
that exceed 12 months |
|
SBA
Express Loans to qualified Veterans & Spouses up to $500,000 |
Zero
(When program is zero subsidy) |
Maturities
that exceed 12 months |
|
$150,001
to $700,000 |
3%
of guaranteed portion |
Maturities
that exceed 12 months |
|
$701,001
to $5,000,000 |
3.5%
of guaranteed portion up to $1,000,000 |
Maturities
that exceed 12 months |
|
Short
term loans |
0.25%
of the guaranteed portion. |
Maturities
of 12 months or less |
|
SBA
On-Going Guaranty Fee |
A
% of the outstanding balance of the guaranteed portion. The
fee is set at time of approval. |
Paid
by lender and cannot be passed on to the borrower |
How to Get an SBA 7(a) Loan ?
You must submit an application for a 7(a) loan through an local SBA lending partner, such as a bank or credit union. You will work with the lender to complete the documents needed by the SBA and be asked to submit an application for a 7(a) loan. Here are the steps to get an SBA 7(a) loan :
1) Gather the necessary documentation :
The SBA requires detailed financial information and other documentation to process your loan application. You will need to provide financial statements, tax returns, a business plan, and other information to support your application.
2) Find a lender :
The SBA does not provide loans directly, but instead guarantees a portion of the loan provided by participating lenders. You will need to find an SBA-approved lender to apply for an SBA 7(a) loan. The SBA provides a Lender Match tool to help you find lenders in your area.
3) Complete the loan application :
You will need to complete the SBA loan application and provide the required documentation to your lender. The lender will review your application and determine if you meet their lending criteria.
4) Wait for approval :
If your loan is approved, the lender will work with the SBA to finalize the loan terms and provide you with the funds.
Note :
Companies that engage in unlawful activity, loan packaging (or any other type of lending), speculating (or any other type of investment), multi-sales distribution, rare coins and stamps, or gambling are not eligible for SBA 7(a) loans. All nonprofits, including all charities and religious organizations, are likewise ineligible.
What do I Need to Apply for 7(a) Loan ?
Once your 7(a) loan package is complete, lender will submit it to SBA :
- Fill out SBA Form 1919 and deliver it to a lender who works with the SBA.
- Fill out SBA Form 413. (personal financial statement). This aids SBA and other interested parties in determining your eligibility.
- To demonstrate your capacity to repay a loan, submit the profit and loss statement and forecasted financial statements.
- Include all subsidiaries and affiliates, including businesses, in which you have a controlling interest or that are somehow connected to you, along with their names and contact information.
- A copy of the original business license or certificate of registration should be provided. Include your corporate seal on the SBA loan application if your small business is a corporation.
- Add any documentation related to previous loan applications you may have made.
- Add the last three years' worth of principals of your company's signed personal and corporate federal income tax filings.
- Add each principal's personal resumes.
- Provide a brief history of the company and its difficulties. Provide a justification for your need for the SBA loan and how it will benefit your company.
- With the conditions of the proposed lease, provide a copy of your business lease or a letter from your landlord.
Get the following data if you are purchasing an existing business :
- Profit and loss statement and current balance sheet.
- The last three years' worth of federal income tax returns.
- Proposed bill of sale with the details of the transaction.
- Asking price including a schedule of the available products, hardware, and furnishings.
- Licenses, jobber agreements, or franchises.
- Evidence of equity injection.
Frequently Asked Questions
How long does it take to get an 7(a) loan?
Most 7(a) loans are processed within five to ten business days, although each situation is different. The SBA Express loan has an expedited turnaround time of 36 hours for people in a rush.
How long are 7(a) loans?
Depending on how you plan to use the money, SBA 7(a) loan repayment terms change. For real estate purchases, the maximum 7(a) repayment term is 25 years. The maximum repayment period for working capital, inventory loans, and equipment purchases is ten years.
What percentage of a down payment is required for an SBA 7(a) loan?
An SBA 7(a) loan typically requires a 10% down payment of the total lending amount. But, down payment requirements differ depending on your SBA lender and your company's criteria.
What is the percentage of guaranty for SBA 7(a) loan?
The SBA can guarantee up to 85% of loans under $150,000 and up to 75% of loans above $150,000 under the majority of 7(a) loan programs. The maximum guarantee for SBA Express loans is 50%, while the maximum guarantee for Export Express loans is 90%. Up to a guaranteed value of $4.5 million, the Export Working Capital Loan Program and International Trade Loans are guaranteed up to a maximum of 90%.
What can SBA 7(a) loan be used for?
The loan can be used as operating capital or to buy and/or improve real estate, equipment, and inventories. The money can also be used to pay off partners and purchase existing small businesses or franchises, in addition to refinancing corporate debt.
What is the minimum loan amount for SBA 7(a)?
An SBA 7(a) loan for your company is available for any sum up to $5 million. It's good news for small enterprises that the loan has no minimum requirement.
How should I repay my 7(a) loan?
Loan repayment terms can change depending on a number of factors. Such as :
- The majority of 7(a) term loans are repaid with principal and interest payments made each month.
- Because the interest rate is fixed for fixed-rate loans, payments remain the same.
- As the interest rate changes on variable rate loans, the lender may demand a different payment amount.
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