As a small business owner, you quickly realize how vital capital is. Not only do you need it to start your business, but you also need it to grow your business. While there are many different business financing options, one of the most common is a small business loan.
When comparing loan options, you may want to focus your attention on the U.S. Small Business Administration (SBA). The SBA has programs for qualifying small-business owners that might make securing a loan easier.
The most common of these SBA loan programs is the 7(a). In this article, you’ll find everything you need to know about an SBA 7(a) loan so you can determine whether they’re right for your small business.
What is a 7(a) loan?
Although the name is “SBA 7(a) loan” the SBA doesn’t provide them directly. Instead, an authorized SBA lender makes the loan, and the SBA guarantees a portion of it, mitigating much of the risk for the lender. The SBA guarantees 50%-90% of the loan, depending on the loan size and other factors, such as the applicant’s credit score.
7(a) loans have a maximum loan amount of $5 million. Of the numerous SBA loan guaranty programs, the 7(a) is the most popular among owners because they can apply it to various aspects of their business plan, including things like a down payment for a commercial real estate purchase or working capital.
The loan is also attractive to new company owners who only have personal credit and not business credit. It’s also appealing to existing business owners who have poor credit and would not otherwise be able to secure funding for their company.
Lenders also find it attractive because they’re less risky for the lending institution because of the SBA guarantee. If the business were to, hypothetically, default on day one of the loan, the lender would receive anywhere from 50%-90% of the principal back.
Furthermore, because the SBA guarantees a large portion of the loan, the lender can lower its lending standards, allowing small-business owners with less established credit histories or lower cash flow to qualify. Additionally, 7(a) loans come with favorable terms. This type of loan has terms that can extend as long as 25 years and maximum interest rates of 2.25%.
If a guaranteed loan with favorable terms sounds like a dream come true, find out what you need to do to apply.
SBA 7(a) loan eligibility requirements and application process
Lenders have some flexibility for setting eligibility requirements since the loans originate from private financial institutions. Again, they are technically bank loans, even though the SBA provides a personal guarantee. Although banks have a say in the app requirements, the following are essential requirements for 7(a) loan applications:
- Operate as a for-profit entity.
- Meet the SBA’s definition of a small business.
- Conduct business in the United States and have your business located in the U.S.
- You, as the business owner, have personally invested equity or time in the company.
- Be in business for a “sufficient amount of time.”
- Be able to demonstrate a need for the loan.
- Use the loan for sound business purposes.
- Not be delinquent on any debt obligations to the U.S. government.
If you’re wondering whether a 7(a) loan can meet your business needs, you’ll be pleased to find out that there’s more than one type of 7(a) loan available. So, you can find the type of loan that best meets your needs.
Types of 7(a) loans
There are seven different 7(a) loan types. Finding the one that best suits your business will increase the likelihood that you’re approved.
1. Standard loans
The standard 7(a) loan is considered a “traditional” loan. These are the loans that will go as high as $5 million and that you can use for anything. After applying, you’ll receive an initial decision from your lender within 10 business days.
You can work with your lender to negotiate the loan rates. However, the lender cannot exceed the repayment terms and limitations set forth by the SBA, such as the 2.25% maximum rate.
Lenders are not required to take collateral for any standard loan below $25,000. If the loan amount exceeds $25,000, lenders are required to use the same collateral policies that they would for non-SBA loans.
2. Small loans
Small loans are very similar to standard loans, except that the maximum amount is $350,000. Additionally, there are some differences in the screening process. The small loan has specific criteria about what they use to prescreen. Criteria include:
- Business credit
- Personal credit
- Business financials
If you pass this screening process, you’ll be subject to a more rigorous secondary screen.
3. Express loans
SBA Express loans are for those who need working capital quickly. Whereas other SBA loans take up to 10 days to pre-screen, you’ll know the results of your Express application within 36 hours. However, the quick turnaround will impact your loan terms. You’ll have access to variable rates, but the SBA will only guarantee up to 50% of the loan.
4. Export Express loans
If you specialize in exporting and international trade, you’ll want to consider an Export Express loan. These loan amounts run up to $500,000, and you’ll find out your pre-screen decision within 36 hours, just like a standard Express loan.
However, one of the significant differences between this and a standard Express loan is how much the SBA will guarantee. Depending on how much you borrow, the SBA will guarantee up to 90% of the loan.
5. Export Working Capital (EWCP) loans
Another option for exporters is the Export Working Capital loan. Under this loan program, business owners can receive up to $5 million in funding. The SBA will guarantee up to 90% of the loan. However, you won’t receive rapid decisions under this application. Instead, you’ll need to wait the full 10 business days to receive a decision.
Another stipulation that comes with this loan program is that the SBA mandates lenders take all export-related inventory as collateral. Lenders must also consider any receivables associated with export sales.
6. International trade loans
Another choice for those participating overseas is an international trade loan. The SBA allocates these funds specifically to those who compete with foreign entities. Like other loans, the guarantee amount is up to 90%, and the turnaround time is 10 business days.
7. CAPLines lines of credit
One of the last lending options for businesses under the 7(a) program is the CAPLines lines of credit program. These credit lines extend as high as $5 million. They are designed to help a select few types of businesses, including:
- Seasonal businesses
- Commercial builders
- Companies with cyclical gaps in cash flow
- Government contractors
The length of time for these lines of credit can run from 5-10 years. The SBA will guarantee up to 85% of the credit line.
Other terms to consider with 7(a) loans
There are a couple of different loan terms to consider when it comes to your 7(a) options. For one, the SBA will not guarantee more than $3.75 million.
Second, the SBA assesses a guarantee fee, 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% of the guaranteed portion of the loan.
For loans of $150,000 to $700,000, the fee is 3%. For loans of $700,000 and above, it is 3.5%. For loans of more than $1 million, the fee is 3.75%.
Interest rates are negotiated between the applicant and the lender but cannot exceed SBA maximums, which, as we mentioned before, is 2.25%.
Lastly, just like a traditional loan, borrowers are required to make monthly payments. The payments include a combination of principal and interest.
How do lenders judge eligibility for 7(a) loans?
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:
- Equity Investment: The more “skin you have in the game,” the better your chances.
- 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. The SBA will want to see revenues of at least $100,000 per year.
- Working Capital: What is left over after you subtract liabilities from assets?
- Collateral: What do you have of monetary value that the lender can use as collateral if you default on the loan? (This collateral can include personal assets).
- 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.
Additionally, the SBA will require you to submit a business plan that includes at least three years of financial projections. Your plan should demonstrate that you have a clear understanding of your industry and its competitors. You may need to supply tax returns from previous years as well. Make sure you have your finances in order before applying.
Most major banks have SBA 7(a) loan programs. If you’re happy with your current bank, ask them if they’re an SBA preferred lender. If they aren’t, the SBA has a search tool that allows you to find a bank that is.
In most cases, allowing the lender to walk you through the application process is best. Still, if you want a more detailed explanation of application procedures before contacting a lender, the SBA explains the standard process on its website.
Is an SBA 7(a) loan right for your business?
If you’re looking for access to working capital, an SBA 7(a) loan is worth considering. You’ll have access to favorable loan terms, and you can use the funds however you please. There’s no harm in applying. If you’re thorough with your application materials, you stand an excellent chance of securing the capital you need to grow your business.