SBA 7a loan is one of the small business loans partially backed by the Small Business Administration Department in the US but offered by private lenders. This is a loan program that the Small Business Administration offers to meet the needs of small businesses. Under the 7(a) loan program, several other loan offers are provided to address specific needs for different companies.
As a small business owner, running your business could be a lot more difficult if you lack the financing required to carry out several business activities. These business operations could range from purchasing relevant equipment or machinery, buying over a business, increasing the working capital, acquiring real estate, etc.
Through different loan programs, the SBA has developed financing opportunities to help small businesses overcome certain challenges. In financial difficulties, businesses could use the SBA 7a loan program for different purposes. This loan offers small and medium-sized companies financing at low-interest rates within a favorable turnaround time.
We’ll go over what an SBA 7a loan is and all you’ll need to know about this program.
How Does The SBA 7a Loan Work?
As a business owner applying for this loan, you’ll work with the SBA and the lender. The SBA will have to guarantee a part of the loan for you to receive the funds. On finding an SBA-approved lender, a business owner can start the loan application process.
Though the SBA guarantees a portion of the loan, the difference will be based on the loan amount. The SBA will guarantee 85% for loans that are up to $150,000 and 75% for loans that are greater than $150,000. If a borrower defaults on the loan, this guarantee will reduce some of the risks to the lender.
Most times, a 7(a) loan could be the best option for small businesses that are not eligible to receive bigger loan amounts. The 7(a) loan is primarily valuable for purchasing equipment, debt payment, real estate, employing and maintaining new employees, business expansion, etc.
Which businesses are eligible for this program?
The primary sba 7a loan requirements for this loan state that the business must be for-profit within the US and must not be less than two years. Also, what the business does for profit, and its financial history are other factors for consideration. More factors include:
- It must be a small business according to the SBA qualifications of a small business.
- The business should possess the ability to provide at least a 10% down payment.
- It must not have defaulted on any government loan.
- It should have tried to use an alternative of its financial resources.
- It must be willing to expand in business or buy a business.
Ineligible businesses include:
- Businesses carrying out illegal activities.
- Loan agencies.
- Businesses that promote religious objectives.
Types of Loans Under The SBA 7a Loan Program
The sba 7a loan program has eight options available for applicant. So a business owner applying for the SBA 7a loan will have to choose the options that best suit the business need.
Option 1: Standard 7(a): In Standard 7a, the SBA takes up an 85% guarantee of loans up to $150,000 and 75% guarantees if the loan is more than $150,000. It offers borrowers the privilege to negotiate the interest rates with lenders. Still, it should not be above the SBA maximum.
Option 2: Small Loan: This loan type has similar SBA guarantees, interest rates, credit decisions, and collateral with the standard loan. The only difference is its maximum loan amount, which is $350,000.
Option 3: Export Working Capital: This loan is meant to max out between $500,000 to $5 million to support businesses that need extra capital to generate more sales. The SBA guarantees 90% to interested business owners no matter the size of the loan.
The lenders and borrowers negotiate on the interest rate, but the SBA makes the credit decision.
Option 4: SBA Express Loan: The SBA Express loan offers businesses a short turnaround within 36hours of application, but SBA guarantees only 50% of the loan amount.
The maximum loan amount is $350,000 with a 7years line of credit. Compared to the standard and small loans, the lender makes the eligibility decision.
Option 5: International Trade: International trade loans offer long-term financing to businesses that are growing because of export sales but need to address the negative effects of imports. Though it’s similar to the export working capital loans in guarantee and loan amount, the loan maturity could take 10- 25years.
Option 6: Export Express: This loan offers $500,000 maximum loan financing to businesses that are into exports within a 24hours response time. Here, the SBA guarantees 90% of these loans that are less than $350,000 and 75% of loans that are more than $350,000.
Option 7: Veterans Advantage: Among the fastest-growing businesses in the US, veteran-owned businesses are listed as one that holds an important segment in the economy. For a business to be eligible, it must be at least 51% veteran-owned and managed.
Option 8: CAPlines: The CAPlines under SBA 7(a) loan is to aid small businesses with a maximum amount of $5million that can’t meet their short-term working capital needs. This loan has a 5-10days turnaround time from the SBA. And the SBA guarantees 85% for loans up to $150,000 and 75% for loans more than $150,000.
If you have decided on the type of 7a loan you need, you can apply for sba 7a loan online to get a quote
Terms and SBA 7a Loan Interest Rate
The SBA sets a general guide for each type of loan under the 7(a) loan, and each business owner must ensure to abide by these guidelines. They include the terms for each loan, interest rates, the maximum and minimum amount.
You could receive other requirements from your lender, and you have the privilege to negotiate the interest rate within what the SBA sets.
Loan maturity could depend on the use of the loan, ability to repay the loan or the lifeline of the equipment to purchase. Working capital could take 10years, equipment 10years, and real estate 25 years.
Do you know the exact amount you need, but you are wondering about the monthly payments you have to make? You can use this sba 7a loan calculator to get the exact payment of both principal and interest as well as the amortization schedule.
How To Get an SBA 7(a) loan
You’ll need to look for an SBA licensed lender as a business owner. Then you’ll need to provide the necessary documents for application and work with the lender in any paperwork the SBA requires.
While you’re in the application process, you’ll be required to present some current personal and business statements.
To increase your chances of securing the SBA 7(a) loan as a business owner, you need to have a business plan, financial projections, and expense report for the next five years.
How Long Does it Take To Get an SBA 7a Loan?
Every loan under the 7(a) has a turnaround time that’s peculiar to the loan, depending on the purpose of the loan.
Most times, the turnaround time falls between 5-10 days, except for those that require an immediate turnaround.
Borrowers Application Checklists
When you’re applying for a loan from the SBA, there are some documents your local lender will require to enhance the application process.
- SBA Application form
- Personal history statement and financial statement.
- Business statement of the borrower
- Personal and business income tax
- Business profit and loss history
- History of all applied loans
- Business property lease
- Business license or certificate
- Other affiliations or ownership
For business owners who need to purchase an existing business, they need to provide the following documents in addition:
- The selling price of business equipment, machinery, fixtures, and furniture
- Federal income tax of the business for two years before application,
- Proof of purchase
- Terms of sale
- Business current balance sheet.
Advantages & Disadvantages of SBA 7a Loans
Benefits of the SBA 7(a) Loan
7(a) loan program offers a wide range of benefits to a business owner. Some of the benefits include:
- The SBA 7(a) offers low-interest rates.
- Loan terms could last up to 25years.
- There’s a variety of options to choose from as a borrower.
- Most small businesses are eligible for this loan.
- It encourages imports and export-related businesses.
- The 7(a) loan offers fixed and variable rates options.
- Low down payment between 10-20%.
Disadvantages of the SBA 7(a)
As a business owner, you could take advantage of all the benefits the SBA 7(a) offers to apply for this loan. Still, it’s important you also look into the downside of this loan before taking the first step.
- It requires a high credit score( typically 680+)
- The loan application requires a lot of documentation.
- It could have restrictions on additional or supplemental financing.
- Collateral is frequently required.
- Not all businesses can apply for this loan
- Approval time for this loan could be lengthy.
Are you thinking of getting an SBA 7(a) loan? You could go through the requirements and documents to process the loan you require.
If you want to know other SBA loan types, you can check out the sba 504 loan to see if it suits your business needs. But if you already know about the 504 loan, you could check out the differences between the 504 and 7a loans to help you decide on which one to go for.