SBA 7(a) Loans – The Complete Guide for Small Business

Small businesses are making America what it is today, and the SBA 7(a) loan program helps fuel this success. Small business owners with little capital often turn to the SBA loan program to help start, grow, and keep their business running.

Here’s what you need to know about getting an SBA 7(a) loan.

What is an SBA 7a Loan?

The SBA 7a loan, or Small Business Administration Loan is a guaranteed business loan for small businesses. The SBA doesn’t underwrite or fund the loans, instead, they guarantee the funds for lenders who offer the loans. If a business defaults, the SBA pays the lender back up to 85 percent of the loan amount.

Small businesses may borrow up to $5 million (depending on qualifications) for up to 25 years. Interest rates vary but are usually prime rate plus a margin starting at 2.25%.

Businesses can use SBA 7a financing for startup costs, money to expand, debt consolidation, equipment purchase, and/or buying land.

How Does it Work?

Small businesses apply for the SBA 7a loan with a local (or online) bank. Any bank with SBA approval can help you get the loan.

The SBA guarantees the funds between 50 – 85 percent depending on the type of loan and amount borrowed. Lenders underwrite the loan and determine if you qualify. If they take on the risk and your loan qualifications meet the SBA guidelines, the SBA will pay the lender back if you default.

The Types of SBA 7(a) Loans

The most common SBA 7a loan is the Standard Loan. Businesses can borrow up to $5 million. Loans less than $25,000 don’t require collateral, but any loan over $25,000 requires traditional collateral. Businesses usually receive an answer (approval or denial) within 10 business days.

The SBA 7a Small Loan is the next most common SBA financing option. It’s similar to the Standard Loan except as the name suggests, it’s for small loan balances up to $350,000. If you pass the initial prescreen, the lender can ‘fast track’ your loan. If you pass the initial screening, you’ll get your funds in a few days. If not, you’ll go through the same underwriting process as the Standard Loan.

Other SBA 7(a) Loan Options

Besides the two most common Small Business Administration Loans, they offer:

• Express Loan – This is a version of the SBA 7a Small Loan but businesses get approval in 36 hours or less. The SBA only guarantees 50 percent of the loan, though, so it’s riskier for lenders.

• Export Working Capital – Exporting companies can borrow up to $5 million for export working capital if they use their export inventory as collateral. Underwriting takes up to 10 business days and has a 90 percent SBA guarantee.

• Export Express Loan – This version of the Export Working Capital Loan provides funding up to $500,000 with a 36-hour turnaround and up to 90 percent SBA guarantee.

• International Trade Loans – This loan is for businesses competing with other foreign companies who need more working capital. They have a 10-day underwriting turnaround and up to 90 percent guarantee.

• SBA CAPLines – These loans are lines of credit that last for 5 to 10 years, which businesses can use for a variety of purposes.

The SBA 7(a) Loan Requirements

Qualifying for an SBA 7(a) loan isn’t the easiest, but if you know what’s required, you can work your way toward it:

• Personal credit score of 680 or higher
• Business revenue of at least $100,000 per year
• A debt service coverage ratio of at least 1.15 percent (your cash flow versus your debts)
• At least a 10 percent down payment
• A solid business plan
• Adequate collateral

Understanding the SBA 7A Loan Rates

The SBA doesn’t set the SBA 7A loan rates – lenders do. Lenders base the rate on your loan size, credit score, amount of collateral, and down payment. They base the rate on the prime rate plus a predetermined margin. The prime rate changes often, but the margin remains fixed throughout the loan’s term.

The Pros and Cons

SBA 7(a) Pros

• Relaxed underwriting requirements – Because of the SBA guarantee, lenders are more flexible, giving businesses a better chance of approval.

• Affordable interest rates – The SBA sets the maximum SBA loan rates, keeping them affordable for small business owners.

• Low down payment requirements – Most businesses need 10 percent or less down.

• Long repayment terms – Most SBA 7a loans have repayment terms up to 25 years, except equipment loans, which have a max 10 year term.

• Relaxed collateral requirements – Most lenders don’t require extensive collateral, making it easier to qualify.

SBA 7(a) Cons

• A lot of competition – Many small businesses fight for SBA funding, which makes the requirement stricter for some lenders since funding is limited.

• Some lenders require personal collateral – The SBA doesn’t require extensive collateral, but individual lenders might, making it harder to qualify.

• Tough application process – There is a lot of paperwork, underwriting, and conditions you must satisfy to secure an SBA 7a loan.

Is an SBA 7a Loan Right for You?

The SBA 7a loan helps small businesses start, grow, and remain operative. There is a lot of competition for the funding, so it pays to maximize your qualifying factors before applying for a loan.

Make sure you shop around too. No two lenders will offer the same rates or require the same qualifications. If you don’t get approved by one lender, look around because there may be an option with another lender.

Make sure you look at the bottom line. What’s the full cost of the loan and how does it affect your profits? Don’t bite off more than you can chew, but if you can afford it the SBA loan can help you create the empire you dreamt of when you started your business.