A Business Owner’s Guide to SBA 7(a) Loans
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When your business needs funding to grow or expand, you’ll likely consider taking out a small business loan. Among your options is an SBA 7a loan, which happens to be the most popular SBA loan. To help you understand more about your funding options, this article explains how these loans work and how they might impact your small business.
What Is an SBA 7(a) Loan?
An SBA 7(a) loan is a loan issued by a private lender, though it’s backed by the U.S. Small Business Administration. The SBA 7(a) loan program is known for being hard to qualify for, but business owners appreciate the long repayment terms and relatively low-interest rates.
How Do SBA 7(a) Loans Work?
To receive an SBA 7(a) loan, you’ll first need to contact a certified lending partner. These lenders usually consist of banks and credit unions, and the loans they provide are at least partially backed by the SBA. The SBA may guarantee 50% to 90% of the total loan, depending on:
- The type of SBA 7(a) loan
- The size of the loan
- The borrower’s qualifications
Banks benefit from this arrangement since the SBA’s guarantee makes it easier to offer small business loans without a lot of risks.
FURTHER READING: A Business Owner's Guide to Business Loans
Am I Eligible?
SBA 7(a) loans are known for being hard to obtain. At a minimum, you’ll need to answer the following general eligibility questions to apply for an SBA 7(a) loan:
- Is my business officially registered as a for-profit business?
- Does my company meet the SBA’s definition of a small business?
- Is my business operating in the United States?
- Have I invested my own time and/or money in my business?
As long as you answered “yes” to these questions, you’ve met the general eligibility requirements for an SBA 7(a) loan, though there will be some other SBA 7(a) loan requirements that vary by the lender.
SBA 7(a) Loan Requirements
Your lender will likely expect you to meet additional eligibility requirements, including:
- A personal credit score of 690 or above
- Business revenue of at least $100,000 per year
- A debt service coverage ratio of at least 1.15
- A written business plan
- Three to five years of financial projections
- Assets to put down as collateral
- At least two years of business experience
Some lenders may make exceptions to these standards, especially for new businesses that have little to no established credit. However, the most favorable loans will go to companies with a solid history and plan for the future.
Types of SBA 7(a) Loans
There are multiple types of SBA 7(a) loans, including:
- Standard 7(a) loans
- 7(a) Small loans
- SBA Express loans
- Export Express loans
- Export Working Capital loans
- International Trade loans
- SBA CAPLines of credit
These different loan programs differ based on the maximum loan amount, the amount of guarantee provided by the SBA, the application turnaround time, and the intended use of the funds.
How Do You Use a 7(a) Loan?
When you apply for an SBA 7(a) loan, your lender will ask you some questions about how you intend to use the funds. What is an SBA 7(a) used for? The following represent common uses for an SBA 7(a) loan:
- Obtaining working capital
- Purchasing equipment, supplies, or materials
- Purchasing real estate
- Constructing new buildings
- Renovating existing buildings
- Establishing a new business
- Revolving funds based on existing inventory and receivables
- Refinancing business debt
In other words, there is an SBA 7(a) loan out there that can help you start your business, manage your business, or grow your business, depending on your needs.
What Are the SBA 7(a) Loan Rates?
The actual interest rates of your SBA 7(a) loan will depend on your lender, the size of your loan, and your company’s qualifications. However, the actual loan rates are based on the Market Prime Rate (MPR) and therefore will not exceed the following maximum rates:
- Loan amount of $25,000: Prime rate + 4.25%
- Loan amount of $25,001 to $50,000: Prime rate + 3.25%
- Loan amount over $50,000: Prime rate + 2.25%
However, these rates will increase by 0.50% if your total loan term is over seven years.
How Long Are SBA 7(a) Loans?
SBA 7(a) term lengths can be as long as 25 years, though the term will be set by the lender, based in part on the intended use of your funds. The following represent maximum term lengths based on the use of the loan and the type of loan:
- Real estate: 25 years
- Equipment: 10 years
- Working capital/inventory: 10 years
- CAPLines of credit: 10 years
- Builders line of credit: 5 years
Beyond these maximum terms, the exact length of your loan will be set by your lender and will be based on your needs and qualifications.
Fees Associated with SBA 7(a) Loans
In addition to the interest rates of SBA 7(a) loans, borrowers can expect the following fees, depending on their loan type:
- Credit check fees
- Packaging fees
- Closing costs
- Appraisal fees (for real estate)
- Late payment fees
- Prepayment fees
While every lender will have different fees, all borrowers can expect to pay a guarantee fee, usually between 0.25% and 3.75% depending on the size of your loan.
The SBA 7(a) Loan Application Process
How do you apply for an SBA 7(a) loan? Here are some common steps you’ll take to obtain funding through a certified lender.
What Do I Need to Apply?
In addition to the application from your lender, you’ll need to submit the following SBA forms:
- SBA Form 1919 (borrower information form)
- SBA Form 912 (statement of personal history)
- SBA Form 413 (personal financial statement)
- Form 148 or 148L (unlimited/limited personal guarantee)
Your lender may ask for additional documentation, including:
- Financial statements
- Business certificate or related documents
- Personal and business tax returns
- Bank statements
- Resumes for owners
- Business leases
- Collateral information
Your lender should provide guidance about what specific documents they need, which you’ll submit with your application.
How Do I Apply?
Your first step will be finding a certified lender, at which point you’ll follow their application procedures and supply the requested documentation.
Where to Find an SBA 7(a) Lender
The SBA maintains a list of the 100 most active SBA 7(a) lenders, which might help you get started on finding a lender who can help you obtain funding.
How Hard Is It to Get an SBA 7(a) Loan?
Compared to other types of funding, an SBA 7(a) loan has rigorous eligibility requirements, though borrowers often prefer the term periods and high loan amounts of this type of loan.
Other Frequently-Asked Questions
Here are some additional questions we hear about SBA 7(a) loans.
How Do You Pay Back a 7(a) Loan?
You’ll repay the loan directly to your original lender. If for any reason you default on the loan, the SBA guarantees the loan based on their original percentage.
Can You Refinance an SBA 7(a) Loan?
While the SBA permits borrowers to refinance their SBA 7(a) loans, this is ultimately at the discretion of the certified lender.
Does an SBA 7(a) Loan Require Collateral?
Some lenders will request that you offer collateral to obtain your loan, especially if you have a less-than-stellar credit history or if you’re seeking a larger business loan.
Find Another Path Toward Funding
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