SBA 7(a) Loans Explained

rsz_computerwithphone by Tim Parker on August 6, 2014
corner of the stamp printed on complete loan applications was approved

Looking loan for your small business? The U.S. Small Business Administration has programs for qualifying small-business owners that might make securing a loan a lot easier.

The most common of these SBA loan programs is the 7(a). Here’s what you need to know about them.

What is a 7(a) Loan?

A 7(a) loan doesn’t come directly from the SBA. Instead, an authorized SBA lender makes the loan and the SBA guarantees a portion of it, mitigating much of the risk for the lender.

With the SBA guaranteeing a large portion of the loan, the lender can lower its lending standards, allowing small-business owners with less established credit histories or less cash flow to qualify.

Along with a traditional SBA 7(a) loan, there is an SBAExpress program that allows for fast loan approval and CAPLines to provide short-term working capital.

How Do I Know if I Am Eligible?

Since these loans originate from private financial institutions, the SBA doesn’t determine lendee eligibility, but, according to the agency, you must meet these guidelines:

1) Operate as a for-profit entity.

2) Meet the SBA’s definition of a small business.

3) Conduct business in the United States.

4) Have personally invested equity in the company.

5) Be able to demonstrate a need for the loan.

6) Use the loan for sound business purposes.

7) Not be delinquent on any debt obligations to the U.S. government.

What are the Terms of a 7(a) Loan?

7(a) loans can be as large as $5 million with no set minimum. The SBA will guarantee a maximum of 85 percent of loans up to $150,000 and 75 percent on loans higher than $150,000. It will not guarantee more than $3.75 million.

The SBA assesses a guarantee fee that is charged to the lender. The lender may choose to pass those fees on to the applicant at closing. On loans of less than $150,000 made after October 1, 2013, there is no guarantee fee unless the maturity is less than one year, in which case the fee is 0.25 percent of the guaranteed portion of the loan.

For loans of $150,000 to $700,000, the fee is 3 percent. For loans of $700,000 and above, it is 3.5 percent. For loans of more than $1 million, there is an additional 0.25 percent fee.

Interest rates are negotiated between the applicant and the lender but cannot exceed SBA maximums.

Payments are made monthly and include a combination of principal and interest just like a traditional loan.

How Do Lenders Judge My Eligibility?

Lenders apply the same criteria they would with a traditional loan, but thanks to the SBA guarantee, standards might be more relaxed. According to the SBA, the lender will judge you based on these standards:

1) Equity Investment. The more “skin in the game” you have, the better your chances.

2) Earnings. do you have enough cash flow to meet all of your debt obligations? You’ll probably have to provide a report detailing your current and future cash flow.

3) Working Capital. What is left over after you subtract liabilities from assets?

4) Collateral. What do you have of monetary value that the lender can use as collateral if you default on the loan? (This includes personal collateral.)

5) Resource Management. The SBA defines this as how you manage your day-to-day affairs. This may take into account all of the above criteria as the lender makes a judgment of your character.

How Do I Apply?

Most major banks have SBA 7(a) loan programs. If you’re happy with your current bank, ask them if they’re an SBA approved lender. If they aren’t, the SBA has a search tool.

In most cases, allowing the lender to walk you through the application is best, but if you want a more detailed explanation of the application procedures before contacting a lender, the SBA explains the process on its website.

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