SBA 7(a) Loans

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The Ultimate Guide to SBA 7(a) Loans

Jul 01, 2022 • 10+ min read
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      US small businesses are enormously important to the American way of life and the global macroeconomy. But as any entrepreneur will tell you, you need all the support you can muster when you’re running your own company.

      Because small businesses are so critical to the country’s success, the federal government launched the Small Business Administration (SBA) 70 years ago to help foster American small businesses. The most popular way the SBA furthers its mission is through SBA 7(a) loans—if your business qualifies, you can get funding backed by the government that can help take your enterprise to the next level.

      What Is an SBA 7(a) Loan?      

      An SBA 7(a) loan is a form of financing that is partially guaranteed by the SBA. These loans are named after article 7(a) of the Small Business Act of 1953, which launched the SBA and tasked the agency with supporting American small businesses through lending.

      SBA 7(a) loans are popular for financing real estate purchases, working capital, and purchasing furniture and supplies. They’re also commonly sought for refinancing existing business debt.

      Working capital measures how much money you have on an operational level—basically, working capital is your assets minus your debts. 

      Remember, the SBA is a federal agency, not a bank. Therefore, SBA 7(a) loans are serviced by a private financier and are partially backed by the SBA (that is, the government). Because the SBA backs the loan, this financing has certain requirements that all successful applicants must meet. 

      SBA 7(a) loans are the most popular type of loans offered by the SBA, so sometimes people just call them “SBA loans.” However, there are actually several types of SBA 7(a) loans, and the SBA also offers other lending options.

      Types of SBA 7(a) Loans

      The SBA now has a suite of different financing products under its 7(a) distinction, and each one is meant to fill a different need in the small business ecosystem.

      When considering your options, think about how large of a loan your business needs, your intended use of the funds, and how quickly you need the money. SBA loans require a fair amount of information and paperwork, so researching 7(a) loan types will save you time later.

      Standard 7(a) Loan

      As its name suggests, the standard 7(a) loan is the most common and most popular type of 7(a) loan backed by the SBA. The purpose of these loans is to allow small businesses to expand by funding working capital or the purchase of equipment, supplies, and real estate. The maximum for a standard 7(a) loan is $5 million. The maximum SBA guarantee is 85% for loans up to $150,000 and 75% for loans greater than $150,000. No collateral is needed for loans under $350,000, but for larger loans, the SBA requires lenders to collateralize the loan. For standard 7(a) loans, the SBA makes all the approval decisions, although they will allow qualified financiers the authority to make eligibility decisions. Applicants can expect a decision within 5–10 business days.                              

      7(a) Small Loan

      The 7(a) small loan is similar in many ways to the standard 7(a) loans, but it’s meant for businesses that need smaller amounts of funding to get off the ground or expand. The maximum loan amount is $350,000. Their turnaround time and eligibility decision process are the same as standard 7(a) loans. The SBA guarantees 85% of loans up to $150,000 and 75% of loans over that amount. Collateral is not required for loans under $25,000. Collateral procedures are decided by agreements between lenders and the SBA for loans over that amount.                        

      Express Loan

      The SBA express loan is built for speed—sometimes, entrepreneurs need funding ASAP. The maximum amount for an express loan is $500,000, but the turnaround time is 36 hours or less. These loans are 50% guaranteed by the SBA. The lender makes all eligibility, collateral, and credit decisions.                               

      Export Express Loan

      The export express loan was specifically created as a streamlined option for businesses in the export industry or those looking to develop an export operation. The loans, with a maximum amount of $500,000, have a breakneck turnaround time of just 24 hours or less. Lenders make all eligibility and collateral decisions. The SBA guarantee is 90% for loans of $350,000 or less and 75% for larger loans. This funding can also take the form of a revolving line of credit that can last up to 7 years.    

      Export Working Capital Loan

      Also tailored for exporters, the export working capital loan is meant to fund working capital for businesses that generate export sales. These loans can range up to $5 million, and the SBA guarantee is 90%. Eligibility decisions are made by the SBA or qualified lenders. Unlike other 7(a) loans, there is no maximum interest limit imposed by the SBA for export working capital loans. The decision turnaround time is 5–10 business days. Collateral is required, usually in the form of export inventory and personal guarantees from a business’s owners. This loan can also take the form of a revolving line of credit for 12 months or less.                          

      International Trade Loan

      International trade loans are SBA 7(a) loans aimed at businesses that want to grow their export side or need to modernize their operation to handle foreign competition. The maximum loan amount is $5 million, and the eligibility decisions, turnaround time, and SBA guarantee are the same as for export working capital loans. For international trade loans, the loan maturity is set at 10 years for permanent working capital. For equipment and machinery, these loans mature up to 10 years or at the useful life of the equipment (not to surpass 15 years). For real estate, these loans mature at 25 years.                  

      CAPLines of Credit

      CAPLines of credit are a form of a standard SBA 7(a) loan that works as a line of credit instead of a loan. Remember, a business line of credit is a form of financing that allows businesses to access money as expenses arise, similar to a credit card. With a business loan, on the other hand, a full amount is disbursed upon approval, and repayments are made based on the approved amount.

      The loan maximums, terms, and decision process of CAPLines of credit are the same as for standard 7(a) loans. The SBA offers 4 types of CAPLines:

      • Seasonal CAPLine: A line of credit meant for businesses that operate on a seasonal basis.
      • Contract CAPLine: A line of credit aimed at financing businesses that work on a contract basis.
      • Builders CAPLine: A line of credit for small general contractors or builders that construct or renovate residential or commercial buildings.
      • Working CAPLine: A line of credit for businesses that are unable to meet credit standards for other long-term financing, typically businesses that provide credit to other businesses. Working CAPLine repayment is based on assets.

      Builders CAPLines of credit can last up to 5 years; all others can last up to 10 years. Owners of applicant businesses are required to guarantee the lines of credit.

      How to Apply for an SBA 7(a) Loan                                   

      While hundreds of different lenders offer 7(a) loans, the process is fairly standardized by the SBA.

      Step 1: Research Options and Gather Documents

      Consider your business needs and determine which type of 7(a) loan or line of credit works for your company. Once you know what type of loan you want, you can compare lenders.

      Because the SBA, or a lender authorized by the SBA, will make eligibility decisions in most cases, you can prepare the documentation needed for your application ahead of time.

      The SBA requires a documentation packet that includes the following:

      • Borrower information form: SBA Form 1919
      • Background and financial statements: SBA Form 912 (statement of personal history) and SBA Form 413 (personal financial statement).
      • Business financial statements, including a profit and loss statement and projected financial statements
      • Ownership and affiliations
      • Business license
      • Loan application history
      • Business and personal income tax returns
      • Resume for each principal
      • Business overview and history
      • Business lease

      If you want to use a 7(a) loan to purchase an existing business, you will need to provide documentation including a proposed bill of sale and a current balance sheet for the business.           

      Step 2: Submit Application With an SBA 7(a) Loan Lender

      Once you know what type of SBA 7(a) loan works for your business, compare qualified lenders. You can do this online using the SBA website or with a financing platform like Lendio. You can easily compare options and get specifics on what exactly you need for your application packet.

      Also, with a website like Lendio, you can easily compare several different small business financing options beyond SBA 7(a) loans. You might find that a 7(a) loan doesn’t work for you or that the paperwork requirements are too burdensome. Fortunately, there are many other possibilities, from short-term business loans to business credit cards

      Once you know the packet requirements and terms of the loan you want, submit your application to a lender.             

      Step 3: Close on Loan and Receive Funds

      Depending on the type of 7(a) loan, the turnaround times for decisions can range widely. You might receive a decision on an application for an express 7(a) loan in just a few days, but you might have to wait several weeks to find out about approval for your standard 7(a) loan application. Patience is always a virtue when dealing with the federal government. 

      If you need funds faster, you should look into non-SBA loans—Lendio has dozens of options that will likely fit your needs. With some financing methods, you can receive funds in your bank account in 24 hours or less. 

      Once an application has been approved, make sure you understand the repayment terms. Further down, we will discuss standards for repayment length terms, interest rates, and fees imposed by the SBA. You want to make sure the loan agreement follows SBA guidelines and that repayment is reasonable for your business—reach out to the lender if something doesn’t make sense. 

      Once you accept a 7(a) loan’s terms, you’ll receive your loan. This might take a few days to about a month based on the type of loan and the lender. Oftentimes, working with a qualified lender can mean you receive your funds much quicker.

      Eligibility Requirements for SBA 7(a) Loans

      The SBA notes that almost all American businesses are eligible for SBA 7(a) loans, but there are exceptions, like if your organization is structured as a nonprofit or is a recreational facility or club that selectively denies membership to members of a particular minority group. Also, if any of the principals of the business is currently incarcerated, on parole, or on probation, your application will not be accepted. 

      To be eligible for a SBA 7(a) loan, your business must:

      • Operate for profit
      • Operate, or propose to operate, in the United States
      • Have owner equity to invest
      • Utilize some financial resources, like personal assets, before applying for loans   

      SBA 7(a) Loan Terms

      SBA loans are meant to support long-term small business growth. Loan maturity terms, as a result, are based on the ability to repay, the purpose of the loan, and the life of assets financed by the loan. Loan maturity refers to how long it takes for a borrower to repay the loan—at the end of your loan maturity term, you’ll make the final repayment. 

      The maximum maturities for SBA loans are as follows:

      • The maximum maturity for real estate is 25 years
      • The maximum maturity for equipment is 10 years
      • The maximum maturity for working capital or inventory is 10 years

      SBA 7(a) loans used to buy fixed assets, like real estate or equipment, carry a maturity limited to the economic life of those assets, not to exceed 25 years. Fixed assets, which also include commercial property or furniture, are assets meant for long-term use that cannot be quickly converted to cash.

      SBA 7(a) Loan Rates

      With SBA 7(a) loans, the interest rate is negotiated between the borrower and the lender. In most cases, the lender will determine a rate based on an applicant’s creditworthiness, and the applicant either accepts or rejects that rate. You might be able to further negotiate a rate by talking with a lender. Importantly, the SBA sets maximum interest rates for all 7(a) loans besides export working capital loans.

      This maximum interest rate is based on multiple factors, and it continually varies alongside the prime interest rate. As loan amounts become smaller, the maximum interest rate increases. You can also opt for fixed rate or variable rate loans. For the latter, the maximum interest rate is less for loans with a shorter maturity term.

      Using the prime rate of June 2022, the maximum interest rates set by the SBA for SBA 7(a) loans ranged from 7%–11.25%. Again, this rate is based on the size of the loan, maturity terms, and the type of SBA 7(a) loan you want. For example, if you want an express loan for less than $50,000, the maximum interest rate currently is 11.25%. If you want a standard 7(a) loan for more than $50,000 with a repayment period of less than 7 years, the current maximum interest rate is 7%.

      What Can an SBA 7(a) Loan Be Used For?        

      With this funding, you can buy needed real estate, refinance existing debt, buy business materials, and more. Whatever your small business needs, there is probably an SBA loan for you in just the amount you require.

      Proceeds from a 7(a) loan may be used for working capital,equipment purchases, real estate, new-building construction, renovation or expansion, starting a new business, or purchasing an existing business. Loan proceeds may not be used to pay off an existing business loan, buy out a partner, pay delinquent state or federal withholding taxes, or anything else that wouldn’t be considered a sound business purpose as determined by the SBA.

      SBA 7(a) Fees                            

      Along with interest rates, you should expect to pay a guaranty fee to the lender for SBA 7(a) loans. This fee will be based on the size of the loan and the type of 7(a) loan you apply for. Generally, guaranty fees between 0.25%–3.5% are normal. 

      Expect a fee of at least 3% if your loan is for $150,000 or more and your maturity term is over a year. This fee is based on the size of the loan guaranteed by the SBA. Say you are approved for a $150,000 loan that is 85% backed by the SBA, and the lender charges a 3% guaranty fee. The additional fee will be 3% of $127,500 (which is 85% of $150,000). Therefore, you would be charged an additional $3,825.

      Here is how the SBA breaks down what fees lenders can charge borrowers:

      Gross Loan Size Fees Maturity Terms
      Loans of $150,000 or less 2% of guaranteed portion Maturities of over 12 months
      SBA Express Loans to qualified Veterans & Spouses up to $350,000 $0 Maturities of over 12 months
      $150,001 to $700,000 3% of guaranteed portion Maturities of over 12 months
      $701,001 to $5,000,000 3.5% of guaranteed portion up to $1,000,000 PLUS 3.75% of the guaranteed portion over $1,000,000 Maturities of over 12 months
      Short term loans, i.e., 7(a) loans with repayment periods of less than a year, often express 7(a) loans 0.25% of the guaranteed portion Maturity of 12 months or less

      Notably, the SBA expressly prohibits lenders from charging most other fees, including processing, origination, application, and brokerage fees.

      Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. 

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      About the author
      Barry Eitel

      Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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