Firstly,
ask yourself:
- How do I
know which SBA Loan is the right one?
- Seek
professional advice
- File
everything, even a receipt for toilet paper
What Is an SBA 7(a) Loan?
An SBA 7(a)
loan is a financing arrangement designed by the U.S. Small Business
Administration (SBA) to facilitate domestic small business growth. The title's
7(a) aspect refers to Section 7(a) of the Small Business Act of 1953, which
authorizes the SBA to provide and guarantee loans to small businesses.
The SBA
doesn't issue SBA 7(a) loans. Rather, the organization partially guarantees
them to encourage authorized lenders to extend financing. The supportive nature
of the program enables small businesses to obtain loans that are otherwise
unattainable – with relatively advantageous terms, often including SBA 7a loan
forgiveness.
Types of SBA 7(a) Loans
The term
SBA 7(a) loan broadly refers to seven distinct types of SBA-sponsored loans.
They are designed for different borrowing circumstances and business needs. As
a result, their terms vary as may the SBA 7a loan application process. The most
prominent differences relate to maximum loan amounts and the extent of SBA
guarantees, but many other differences exist.
A full
description of the various SBA loans provided by the SBA is available here: Types of SBA 7(a) Loans. The key terms and conditions are summarized below. As you
review the information, reflect on your particular financing needs. The optimal
loan largely depends on the amount of funding you need, how you intend to use
it, and how quickly you need it.
* Note: In
conjunction with any of the loan types outlined above, the SBA offers Veterans
Advantage loans. These low-fee arrangements are available to businesses that
are at least 51 percent veteran-owned and controlled.
Pilot Programs
In addition
to the loan types outlined above, the SBA frequently runs pilot programs to
test out new loan structures. If deemed worthwhile, they become a permanent
part of the SBA loan offers. Otherwise, they expire.
One pilot
program is currently running through September 30, 2022. Named the Community
Advantage program, it is designed to “meet the credit, management, and
technical assistance needs of small businesses in underserved markets.”
How Does an SBA 7(a) Loan Work?
The SBA has
established general guidelines for its 7(a) loan offering, specifying:
- Maximum
loan amounts
- Term
lengths
- Interest
rates
Lenders and
borrowers can negotiate certain terms, but they may not exceed the SBA
maximums.
If you're
interested in an SBA 7(a) loan, you'll need to consult with an authorized
lender to identify an optimal loan and work through the terms and conditions.
The best lenders have ample experience on this front and can help streamline
the process for you. To facilitate your effort, we offer the information below.
Qualification Criteria - SBA 7a Loan Requirements
Generally,
to qualify for an SBA 7(a) loan, you must satisfy the following SBA 7(a) loan requirements:
- Operate (or
intend to operate) for profit in the U.S. or its territories
- Be defined
as a small business by the SBA
- Demonstrate,
as the business owner, reasonable equity to invest in your business
- Demonstrate
efforts to use alternative financial resources, including personal assets,
before seeking financial assistance
- Outline the
viable business purpose for which you intend to use the funds
- In certain
circumstances, carry adequate property/casualty insurance on business assets
and life insurance on owners and/or key employees
Additionally,
while the SBA doesn’t specify a minimum credit score, authorized lenders typically
require a very good personal credit score (670 or higher), sound annual
revenue, positive cash flows, and at least two years of business history. It’s
also critical not to be delinquent on any existing government loans.
Important
Note:
SBA 7(a)
loans larger than $25,000 require the borrower to provide collateral, but
requirements can vary by lender. Additionally, any individual that owns more
than 20 percent of the borrowing business must provide a personal guarantee.
Prohibited Businesses
While most small businesses are eligible for SBA 7(a) loans, there are exceptions. Prohibited businesses include those that conduct illegal activities or participate in any of the following activities:
- Lending,
investing and speculating
- Multi-sales
distribution
- Dealing in
rare coins, stamps, and other collectibles
- Gambling
Nonprofit
organizations are also ineligible to receive SBA 7(a) financing. However, the
Paycheck Protection Program loans made available via the American Rescue Plan
Act of 2021 provide financing options to nonprofits.
Rates and Fees
Interest
rates on SBA 7(a) loans are based on the size of the loan, the term length, and
the prime rate, which is the benchmark rate commercial banks offer to their
highest-quality borrowers. Depending on the loan structure, the rate can be
fixed or variable. Regardless, it is likely to be lower than possible outside
the SBA program.
Ultimately,
the interest rate on an SBA 7(a) loan is negotiated between the borrower and
the lender, but it cannot exceed the SBA’s permissible maximum. The current
limits, based on loan size, are outlined below. They reflect the 3.25 percent
prime rate reported as of November 2021.
The
interest rate is only one aspect of the total cost of an SBA 7(a) loan. While
the SBA discourages loan origination and servicing fees, most SBA 7(a) loans
have a guaranty fee, which ranges from 0.00 percent to 3.75 percent, depending
on the size of the loan.
SBA 7(a)
loans with a maturity of 15 years or longer are also subject to prepayment
penalties for the first three years of the loan. They can range from 1.00 to
5.00 percent of the prepayment amount. Late fees are also common for delinquent
payments.
Loan Application Process
The SBA 7a loan application process is very straightforward at a high level, reflecting the organization’s focus on championing small business interests through a diverse network of well-equipped lenders.
Here are
the three distinct steps that make up the SBA loan application process:
Step 1 –
Select an SBA 7(a) Lender
Identify
the SBA-approved lender with which you’d like to work. Perhaps, it’s your
existing commercial bank. If you’re having difficulty locating a lender, the
SBA offers a lender match tool that can help you connect with a lender in your
area.
All
authorized lenders have cleared a screening process, but it’s always smart to
look for lenders that have experience issuing SBA 7(a) loans. These
institutions are best positioned to expedite the application process, answer
complex questions and increase your chances for approval.
Step 2 –
Gather Your Documentation and Submit an Application
Once you select a lender, you can apply for an SBA 7(a) loan. The lender will guide you through the process of completing appropriate SBA application forms and attaching necessary supplemental documentation. The documentation requirements vary based on lender and the type of SBA 7(a) loan.
Here are
the most commonly required documents:
- Borrower
information forms (Forms 1919 and 1920)
- Personal
background and financial statement forms (Forms 912 and 413)
- Business
financial statements
- Business
certificate or license
- Loan
application history
- Income tax
returns
- Resumes/professional
biographies for each business owner
- Business
overview and history
For a
comprehensive checklist of likely documentation requirements, please refer to
the following link: Loan Application Checklist.
Step 3 – If
Approved, Close the Loan and Obtain Funding
After you’ve submitted your SBA 7(a) loan application, you need to wait for the approval. In some instances, preferred lenders have the right to approve loans without the SBA reviewing the application, which can expedite the process. In other instances, the SBA retains control over credit decisions.
Regardless,
you must secure approval to obtain funding. If approved, your lender will start
the closing process, which entails securing collateral, preparing loan
documents, and fulfilling other SBA authorization requirements.
According
to the agreed-upon terms, your lender will disburse your funds following the
closing effort. Before the COVID-19 pandemic, which has stressed the SBA’s financing
channels, the approval turnaround time for most SBA 7(a) loans was five to ten
business days. The Express and Export Express products had even shorter
turnaround times – at less than 36 and 24 hours, respectively.
Final Words
An SBA 7(a)
loan is a small business loan partially guaranteed by the SBA. Qualifying for
one can be difficult, but the terms offered are usually much more advantageous
than loans available outside of the SBA program. This advantage can make a big
difference in profitably growing your business.
Across the spectrum of SBA 7(a) lenders, we rank Credibly near the top of the list. The lender has achieved above-average scores for its consistent willingness to extend loans below SBA 7(a) maximum limits while facilitating the loan application and underwriting process in a highly efficient manner. If you need funding, this lender is worth a look. For more information on Credibly, please visit Finimpact.com Credibly Review.
Sources
Corporate
Finance Institute. (n.d.). Prime Rate. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/prime-rate/
Credibly.com.
(n.d.). Homepage. Retrieved from https://www.credibly.com/
U.S. Small
Business Administration. (2021, September 30.). 100 most active SBA 7(a)
lenders. Retrieved from
U.S. Small
Business Administration. (n.d.). Community Advantage. Retrieved from
U.S. Small
Business Administration. (n.d.). Lender Match Connects You to Lenders.
Retrieved from
U.S. Small
Business Administration. (n.d.). 7(a) Loan Application Checklist. Retrieved
from https://www.sba.gov/sites/default/files/oed_files/7a_Checklist.pdf
U.S. Small
Business Administration. (n.d.). Terms, Conditions, and Eligibility. Retrieved
from https://www.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility
U.S. Small
Business Administration. (n.d.). Types of 7(a) Loans. Retrieved from https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans
