Backed by the U.S. Small Business Administration (SBA), the 7(a) loan is an innovative solution for many small businesses. The 7(a) loan program provides loans to small businesses up to $5 million for a wide range of purposes, including purchases, acquiring a business, and working capital.
This popular solution for small businesses comes with flexible loan amounts and rates, but it does have a complicated application process where the company has to meet different requirements.
Let’s explore the SBA 7(a) loan in more depth to see how this loan can help your business.
What is an SBA 7(a) loan?
The 7(a) loan is the crown jewel of SBA loan programs. The loans provide different amounts, terms, and funding speeds. Still, business owners will usually qualify for $5 million through the standard 7(a) loan, with the application process and funding taking anywhere between five to 10 business days.
The benefit of the 7(a) loan program is that once the funds are disbursed, business owners can use them in various ways. Repayment terms are normally between 10 to 25 years, depending on the type of loan the business applied for and the use of those funds. It’s a combination of these factors that make this loan option the most flexible.
How Does the SBA 7(a) Loan Work?
Issued by SBA-approved lenders, the loan provided to small businesses is partially guaranteed by the Small Business Administration - upwards of 90%. In case of a default on the loan, the SBA pays the lender the amount they guaranteed when the loan was approved.
Before funds are disbursed, business owners apply for the loan through an approved lender and wait for a review to be conducted by the SBA. Approval usually takes five to 10 days, which is considered short for many programs. If the loan is approved, the next step in the process is underwriting and closing with the borrower’s bank or credit union.
One of the requirements of the loan is collateral, though the type can vary from loan to loan though it does not apply to loans $25,000 and under. For loans between $25,000 and $350,000, the lender is allowed to set their collateral requirements. However, for any loan above $350,000, the SBA requires the borrower to pledge personal real estate if business assets aren’t sufficient to cover the loan amount.
The flexibility of the 7(a) loan program makes it one of the most popular choices for small businesses. Business owners have the ability to use the funds for any business-related purposes, such as working capital, purchasing inventory, or buying a business. Even building or renovating business structures and expanding the business in various ways is an option for the funds.
In depth Information About 7(a) Loans
Before deciding on the type of loan that would help the business, it’s best to review all the information surrounding the SBA 7(a) loans.
Types of 7(a) Loans
Depending on the amount, time frame, and potential use of funds, there are a couple of different 7(a) loans for business owners to choose from.
Standard 7(a) Loans
Maximum Loan Amount: $5 million
Maximum SBA Guarantee: 85% for loans up to $150,000 and 75% for loans greater than $150,000
Application timeframe: 5 to 10 business days
7(a) Small Loan
Maximum Loan Amount: $350,000
Maximum SBA Guarantee: 50%
Application timeframe: 5 to 10 business days
Express Loan
Maximum Loan Amount: $500,000
Maximum SBA Guarantee: 90% for loans up to $350,000 and 75% for loans greater than $350,000
Application timeframe: 36 hours
Export Express Loan
Maximum Loan Amount: $500,000
Maximum SBA Guarantee: 90% for loans up to $350,000 and 75% for loans greater than $350,000
Application timeframe: 24 hours
Export Working Capital Loan
Maximum Loan Amount: $5 million
Maximum SBA Guarantee: 90%
Application timeframe: 5 to 10 business days
International Trade Loan
Maximum Loan Amount: $5 million
Maximum SBA Guarantee: 90%
Application timeframe: 5 to 10 business days
CAPLines of Credit
Maximum Loan Amount: $5 million
Maximum SBA Guarantee: 80% for loans up to $150,000 and 75% for loans greater than $150,000
Application timeframe: 5 to 10 business days
7(a) Loan Terms
The loan term will vary by loan program and how the business will use the loan funds. Real estate will come with a maximum term of 25 years, whereas equipment, working capital, and inventory loans will have a max of 10 years.
CAPLines normally come with a term of up to 10 years. The only exception is Builder’s CAPLines which have a term of 5 years. Though lenders are required to company with SBA maximum loan terms, the financial institution will make the ultimate loan term decision depending on what the borrower qualifies for.
7(a) Loan Rates
Interest rates have a cap set by the SBA and will depend on several factors. This will include the type of loan, the amount of the loan, and the repayment term. Most are the current prime rate plus an additional spread set by the SBA.
The current SBA rates for 2023 range from 10.75% to 13.25% depending on the loan amount and repayment term due to the Federal Reserve raising the prime rate.
7(a) Loan Fees
As with many other loans available to individuals and businesses, the 7(a) loan comes with loan fees. Since these loans are backed by the SBA, there are specific rules surrounding the payment amount required by the lender to the SBA.
Of course, the lender can pass this fee on to the business owner applying for the loan; however, there are caps. The SBA states the lender cannot charge more than 3% on the loan with a maximum cap of $30,000. The lender also cannot charge a late fee of more than 5% of the payment amount.
7(a) Loan Requirements
The SBA sets different qualifications that the applicant needs to meet before getting approved for the loan. Normally, the applicant has to operate within the U.S. and be categorized as a small business by SBA’s standards.
The qualifications are:
Reasonable invested equity in the business
Attempt to obtain other financial resources
Demonstrate a need
Plan to use the loan for business purposes
No delinquency on other debts with the U.S. government
Though the SBA sets these qualifications, the applicant has to meet their specific lender qualifications.
How to Apply for an SBA 7(a) Loan
There are a few general steps for a potential application to follow in their application for an SBA 7(a) Loan.
Find an SBA Approved Lender
The SBA backs SBA 7(a) loans up to a certain percentage, as mentioned above. This means that to start applying for a 7(a) loan, the applicant must find the right financial institution. The SBA Lender Match tool online is a useful place to start.
Compile Documentation and Submit
As with other loans, the SBA and lender will have to evaluate the applicant’s ability to repay the loan without defaulting. The applicant needs to gather and submit various documentation to show their creditworthiness. Some of the documents are
Personal and business tax returns for the past three years
Financial statements such as profit and loss statements for three fiscal years
Projected financial statements, which includes a year of projections
Loan application history for the past year
Copies of business certificates or licenses, leases, and anything else relevant
A business plan that includes an overview and history of the company
Wait for Loan Approval
The loan approval times will vary, but generally, the SBA will require five to 10 days. Some loans, such as Express or Export Express loans can be as quick as 24 to 36 hours. If the applicant is working with an SBA Preferred Lender, the wait times may be quicker since they are familiar with the procedures.
Close and Receive Funds
SBA loans can take 60 to 90 days to process from the application and closing. Once the loan is approved, the applicant will be asked to meet additional authorization requirements, such as proof of collateral.
The closing might require payment of fees, environmental investigations, and collateral appraisals. Funding timeframes will vary by loan type and lender used.
Takeaway
Despite the cumbersome application process, the SBA 7(a) loan has many benefits for business owners. From the flexibility to capped interest rates, this loan can provide much-needed cash for businesses who would like to invest in their business or for acquiring a business. It becomes the perfect solution for business owners who exhaust all other options and want to continue on. For sellers that are looking to get a head start on SBA preapproval, we have another great article on how to prequalify your business for SBA loans without a buyer.