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An SBA 7(a) loan is a small business loan issued by a private lender with a partial guarantee from the U.S. Small Business Administration. It can be difficult to qualify for these loans. Still, they can be an ideal source of financing for small businesses, given their relatively low-interest rates, long repayment terms, and generally accommodative features.
- 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.
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 does not lend money directly via the SBA 7(a) program. It works through a group of authorized lenders to issue the loans. This group consists of many well-known commercial banks and credit unions, including the high volume lenders noted in the list: Top 100 SBA Lenders.
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. SBA 7(a) loans can be used for a variety of purposes, including working capital, refinancing debts, real estate purchases and others
- 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.
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.
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
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.
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.
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 https://www.sba.gov/partners/lenders/7a-loan-program/100-most-active-sba-7a-lenders
U.S. Small Business Administration. (n.d.). Community Advantage. Retrieved from https://www.sba.gov/partners/lenders/7a-loan-program/pilot-loan-programs#section-header-0
U.S. Small Business Administration. (n.d.). Lender Match Connects You to Lenders. Retrieved from https://www.sba.gov/funding-programs/loans/lender-match
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