SBA 7(a) Loan: A Comprehensive Guide

The 7(a) Loan Program is offered by the SBA to help small businesses get the financing they need to make both immediate and long-term investments. When compared to other kinds of business loans, SBA 7(a) Loans may come with a few distinct benefits.

Despite this, the application procedure is complicated and can take anywhere from sixty to ninety days from start to finish (from application to closing). The SBA 7(a) Loan financing information that you require is included in this guide in its entirety.

What Is an SBA 7(a) Loan?

There are a few different types of funding available through the SBA’s flagship loan program, the 7(a) loan, including the traditional 7(a) loan, the Express loan, and the CAPLines. 

Standard 7(a) loans allow business owners to borrow up to $5 million and typically have a funding timeline of five to ten business days. Lending amounts, terms, and funding timelines can vary widely depending on the loan program.

There is flexibility in how the money is spent after it has been disbursed, and repayment terms can range from ten to twenty-five years. As a result, 7(a) loans are the SBA’s most versatile and widely used loan program.

How Do SBA 7(a) Loans Work?

The SBA 7(a) program may appear complex to someone who isn’t familiar with federal lending programs, but it’s actually quite straightforward. For those who have been unsuccessful in securing capital elsewhere, this program may be the answer.

A business owner can join by securing a loan through a private lender. When this happens, the borrower pays the SBA a guaranty fee and the SBA guarantees a portion of the loan. The lender will charge an upfront fee for arranging the loan, and they will also provide loan servicing while the borrower is making payments.

A 7(a) loan requires a down payment, but there are other requirements as well. The business seeking the loan, for instance, must operate for profit and fall under the SBA’s guidelines for small businesses. 

Types of SBA 7(a) Loans

The SBA 7(a) program provides access to a variety of financing options. If you meet the requirements for one type of loan but not another, you may not meet the requirements for either.

7(a) loans come in several varieties, each catering to a certain group of borrowers with unique requirements, such as veteran-owned enterprises or those with extensive foreign trade.

Here are some examples of available loans:

• Standard 7(a) loan
• 7(a) Small Loan
• SBA Express
• Veterans Advantage
• CAPLines

Typically, these loans are made available to borrowers. Paycheck Protection Program (PPP) is one of the newer loan options made available by the SBA in response to the recent coronavirus outbreak. To help eligible small business owners keep their employees employed, the 7(a) loan program offers the PPP.

SBA 7(a) Loan Rates and Fees

The SBA sets a maximum interest rate for 7(a) loans, which varies with loan type, loan amount, and payback duration. SBA-mandated rate caps are based on the prime rate plus a spread.

The spread on a 7(a) loan might be fixed or variable, depending on the loan’s size, term, and other factors. In May of 2022, for instance, the cap on interest rates for conventional 7(a) loans is 6.25%, and the cap on interest rates for alternative 7(a) loans is 8.75%.

SBA 7(a) Loan Requirements

Businesses seeking an SBA 7(a) loan must meet the agency’s stringent eligibility criteria. The applicant company must be a for-profit entity located in the United States or one of its territories, and it must also meet the SBA’s size requirements. To join the ranks of the qualified, company owners must also:

• Put a respectable amount of money into the company.
• Before qualifying for a Small Business Administration loan, you should explore other funding options, such as selling off personal assets.
• Prove that you really require the loan money.
• Make sure you’re putting the money to good use in your firm.
• Not be past due on any payments owed to the government.

Borrowers must also meet the specific standards, such as credit score and number of years in business, set by each lender.

SBA 7(a) Loans: Pros and Cons

Pros

You should think about getting a 7(a) Loan for several reasons, but the low-interest rate is one of the most appealing.

SBA 7(a) (a) The maximum amount that a loan’s interest rate can increase in relation to a benchmark rate is predetermined. Because of this, the Small Company Administration is able to offer extremely competitive interest rates to business borrowers, but a lender that is not affiliated with the SBA might not be able to offer you the same benefits.

The borrowing limitations are generous, considering that without a government guarantee, it may be difficult to find lending limits of up to $5 million. If your credit isn’t quite up to par, you could find it easier to qualify for an SBA 7(a) Loan. 

If you have credit that is considered to be “fair,” financial institutions may be more likely to cooperate with you since the Small Business Administration will guarantee your loan.

Cons

There is no such thing as instant funding with 7(a) Loans; the only exception to this rule is SBAExpress loans. It may take up to 45 days, on average, for your loan application to be approved, and it may take a few extra days after that before it is financed.

To qualify for a 7(a) Loan, you will need to demonstrate that you have some sort of financial stake in the enterprise. 

This entails a minimum equity requirement of at least $1 for every $4 of the loan amount for established businesses and a usual equity demand of $1 of cash or business resources for every $3 of the loan amount for new enterprises. You will normally be required to provide collateral in the form of business assets in order to secure the loan.

If you have more than a 20% stake in the company, you must also provide a personal guarantee. If you sign a personal guarantee, you are legally obligated to repay the company’s debt in full. 

When deciding whether or not to use a 7(a) Loan to expand your company, it is crucial to consider this factor in addition to the collateral and the pace of the money.

How to Apply for SBA 7(a) Loans

Applying for a 7(a) loan through the Small Business Administration is a reasonably simple procedure, despite the fact that there are several shifting components involved. All that is required of you is to go via a lender approved by the SBA, and then your lender can cooperate with the SBA.

In this regard, the application procedure for SBA loan 7(a) is far less complicated than the application procedure for some other SBA loans, such as SBA loan 504, which requires you to collaborate with an SBA-approved creditor and a recognized development business.

The following are the actions that need to be taken in order to get a 7(a) loan:

1. Determine a requirement – Before asking for a loan from the Small Business Administration, the owner of a small business should first determine the purpose of the financing they require. The borrower’s need to borrow a certain amount of money, for a certain amount of time, and under certain conditions will be determined by the reason they are taking out a loan. 
   
   In order for a company to qualify for a loan, the company’s reasons for doing so have to be in line with its overall business strategy.

2. Collect all of your necessary papers – It is recommended that you compile the necessary paperwork before beginning the application process for a loan. Your lender will need to analyze a variety of business and financial papers, including business tax filings, a balance sheet, and a breakdown of ownership in order to make a loan decision. 
   
   They will also need to conduct an examination of your company, despite the length of time you have been in operation. When you request a loan from the Small Business Administration (SBA), the agency will encompass personal pledges from all individuals who control over 20% of the firm.
   
   Therefore, in addition to reviewing the records of the firm, the creditor will also require to evaluate some of the borrower’s personal financial documents, such as the borrower’s personal tax filings.

3. Get in touch with a financial institution – In the event that you already have a banking connection with an SBA-approved lender, such as a commercial bank, you should get in touch with that institution first to see whether or not they are able to assist you in the application process.
   
   If you are in need of a lender and don’t already have one, you may want to look through the SBA’s list of the most active lenders. Your chances of being authorized may improve if you work with any of these financial institutions because they are all very experienced with the application procedure.

4. Put in your application – Following the gathering of all of your financial data and the selection of a financial institution to work with, you will need to finish the formal loan application. Lenders often require further paperwork or clarification before proceeding, so be prepared for some dialogue.
   
   Keep in mind that when you’re ready to make a formal application, your lender may require an application fee. This price is not charged by every lender; if your lender requires a significant application fee with no assurance that you will be approved, you should exercise caution.

5. Finish up with the loan – You should anticipate that it will take between sixty and ninety days for your loan to be officially approved after you have submitted the application for it. If you apply for the loan through a preferred lender, which is often a smaller community bank, you have a far better chance of getting accepted quickly.
   
   At the time that you close on your loan, you will also be required to pay a number of costs. These fees will include the SBA upfront guarantee fee and (possibly) a creditor packaging fee. 
   
   These costs are often subtracted from the amount that you are able to borrow through your loans. As soon as the loan is paid off, however, the money can be used to expand the company.

Alternatives to SBA 7(a) Loans

There are numerous additional loan options available to you to investigate, in the event that you are unable to obtain a 7(a) Loan due to a lack of eligibility or because you require a source of money that is more expedient. 

You might want to think about the following options, depending on how long you’ve been in business, your sales, your credit score, and the amount of financing you require:

• Loans with a short repayment period
• A line of credit extended to businesses
• Working capital loans
• Credit cards for businesses that offer invoice financing

Other financing alternatives include purchase order finance, inventory financing, equipment loans, and merchant cash advances. While the other three options are usually tailored to address short-term capital needs, equipment finance can be utilized to cover more long-term demands.

Before applying for the loan, it is important to familiarize yourself with the fundamental needs as well as the terms. Also, think about the things that you can change about your company to make it a more appealing candidate for a loan. 

You can improve your chances of being certified for a 7(a) loan or any other kind of business loan by raising your personal and business credit scores, paying off some of the debt you already have, and boosting your cash flow.

Bottom Line

To qualify for a Small Business Administration 7(a) loan, you’ll need to show that your business has been around for at least two years, has strong annual revenue, and has a good credit score (690 or higher). 

Although the specific conditions for getting an SBA 7(a) loan will vary by lender, you should be able to expect to fulfill these standards in general. Getting an SBA loan approved could take as long as three months. The SBA’s approval of a lender’s guarantee request can take several weeks unless the lender has favored status.