SBA 7(a) Loan Guide for Business Owners

The COVID-19 pandemic of 2020 will leave far-reaching and long-lasting implications across America. The crisis has crushed the U.S. economy with small businesses being enormously impacted. Banks tend to pull back on small business lending during times like these and entrepreneurs can find staying above water difficult.

Sign up for Advisor. It's free!

Although the Paycheck Protection Program (PPP) offered some relief for payroll and utilities, the use of funds is very restricted in order to receive full forgiveness. When those funds run out, what are the options available now?

The SBA 7(a) program can provide funding businesses need to keep operations running. Known as the “gold standard”, SBA 7(a) loans have low rates, long terms, and very low monthly payments. Here’s why an SBA loan can be the best way to rebuild a business and what you need to know about acquiring an SBA 7(a) loan in 2020.

Special SBA 7(a) deferment guidelines related to the coronavirus pandemic

As part of coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a) loans disbursed prior to September 27, 2020. Borrowers do not need to apply for this assistance. It will be automatically provided as follows:

  • For loans not on deferment, SBA will begin making payments with the next payment due on the loan and will make six monthly payments.
  • For loans currently on deferment, SBA will begin making payments with the next payment due after the deferment period has ended, and will make six monthly payments.
  • For loans made after March 27, 2020 and fully disbursed prior to September 27, 2020, SBA will begin making payments with the first payment due on the loan and will make six monthly payments.
  • Lenders have been instructed to refrain from collecting loan payments from borrowers. If a borrower's payment was collected after March 27, 2020, lenders were instructed to inform the borrower that they have the option of having the loan payment returned by the lender or applying the loan payment to further reduce the loan balance after SBA's payment.

What is an SBA 7(a) loan?

The Small Business Administration (SBA) is a government agency founded in 1953 and created to support hard-working entrepreneurs and small business owners in the United States.

The mission of the SBA is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.”

One way they support small business is with their specialized loan programs. The most popular, the 7(a) loan program, is the SBA's primary program for providing financial assistance to small businesses. The SBA doesn’t actually lend money themselves. The administration makes the loans safer for lenders to give out instead by guaranteeing a certain percentage of each loan, lowering the risk for banks to work with qualified business owners.

Use of Proceeds for SBA 7(a) loans

If you’ve secured a Paycheck Protection Program (PPP) loan, you probably know that there are strict use guidelines to qualify for forgiveness. SBA loans are extremely flexible and can be used for a multitude of purposes.

  • Working Capital  Purchase equipment, increase inventory, add marketing programs, use for operating expenses or to hire additional staff.
  • Debt Consolidation Loans Refinance merchant cash advances, short-term business loans, high interest business loans, daily or weekly payment loans or business credit cards.
  • Commercial Real Estate Refinance an existing commercial real estate mortgage, buy an office building or other owner-occupied commercial space.

Advantages & disadvantages of SBA 7(a) loans

Before deciding to apply for an SBA loan, review these advantages and disadvantages.

Advantages

  • Highly competitive, low interest rates
  • Long loan terms, up to 25 years
  • Fixed and variable-rate options are available
  • A variety of businesses are eligible
  • Wide use of proceeds allowed
  • Most SBA loans, including 7(a) loans are fully amortizing, meaning borrowers don’t have to worry about balloon payments

Disadvantages

  • Approval times can be lengthy
  • Lots of documentation required
  • Certain businesses, including real estate investing, lending, gambling, and speculation are prohibited
  • High credit scores are typically required

Rates & fees

Rates

The SBA sets a cap on the interest rates that lenders can charge. It breaks down into a base rate plus an additional percentage based on the loan amount and the repayment term. Many lenders use the Prime Rate as the base, which is set quarterly by the Federal Reserve.

Rates for an SBA 7(a) loan from banks in the SmartBiz network as of August 2020 are 4.75% - 7.00% with a variable rate of Prime Rate plus 1.5% to 3.75%.

7(a) loan interest rates can also be fixed or variable. Fixed means that the rate remains unchanged throughout the life of the loan, while a variable rate can be updated regularly.

Fees

The interest rate is not the only charge associated with 7(a) loans, which is why it’s helpful to check the APR (Annual Percentage Rate) as well. You’ll probably be responsible for a guaranty fee paid to the SBA.  In addition, you might encounter origination fees, packaging fees, and other closing costs. Even with these fees and other costs, SBA 7(a) loans are still a better deal than most small business loans.

//resources.smartbizloans.com/wp-content/uploads/Banner-03-Call-Us.png

SBA 7(a) turnaround time

From qualifying to moving through the application to being approved for funding, the turnaround time for an SBA 7(a) loan will mostly depend on how prepared you are to provide financial documents and answer any questions that may arise.

Even still, some elements of the process can take longer than others. For example, you might have to spend some time working with an accountant to gather specific paperwork or adjusting to your lender’s timeline.

SBA 7(a) amounts available

Banks in the SmartBiz Loans network offer SBA 7(a) loans from $30,000 – $350,000 for debt refinancing and working capital. Working capital includes operational expenses, marketing, hiring, etc. SBA loans can be used to fund new equipment purchases as well.

SBA Commercial Real Estate loans are available from $500,000 – $5 million from banks in the SmartBiz network. Funds can be used for the purchase or refinance of commercial real estate that is 51% owner-occupied.

SBA 7(a) maturity

Business owners don’t need to worry about large monthly loan payments that can cut into valuable cash flow. That’s why an SBA 7(a) loan with long terms is often the best choice. Payments are very low and more manageable.

SBA 7(a) loans used for working capital or debt refinance have a payment length of up to 10 years. For example, a $100,000 loan with an 10% annual percentage rate would require monthly payments of $1,424 over 10 years. The same loan with a five-year term would require monthly payments of $2,260.

For loans used to buy commercial real estate, the maturity is up to 25 years.

Eligibility

For a $30,000 to $350,000 SBA 7(a) working capital or debt refinance loan:

  • Time in business must be above 2 years
  • Business owner’s personal credit score must be above 660
  • Business must be U.S. based and owned by US citizen or lawful permanent resident who is at least 21-years old
  • No outstanding tax liens
  • No bankruptcies or foreclosures in the past 3 years
  • No recent charge-offs or settlements
  • Current on government-related loans

For a $500,000 to $5 million SBA 7(a) Commercial Real Estate loan:

  • Time in business must be above 2 years
  • The business owner’s personal credit score must be above 660
  • The real estate must be majority owner-occupied, i.e. at least 51% of the square footage of the property you’re buying must be occupied by and used by your business
  • Sufficient business and personal cash flow to service all debt payments, demonstrated by 3 years of tax returns and interim financial data
  • No delinquencies and/or defaults on government loans

Read 5 Reasons You Can’t Get an SBA Loan for more information about eligibility.

How to apply

Applying for an SBA 7(a) loan takes some work on a business owner’s part to submit accurate financial documents and other paperwork. Because of the coronavirus pandemic’s effect on small businesses, SBA 7(a) lenders now have additional questions regarding how your business is operating.

Your best bet is to be as organized and prepared as possible and have realistic expectations about effort and timing. A good strategy is to work with your bookkeeper, accountant, or another small business financial professional to gather paperwork. Here are steps to help the process move smoothly.

1. Determine Eligibility

Before beginning your application, make sure that you meet basic eligibility requirements. You don’t want to invest your valuable time if you don’t qualify. Eligibility requirements, in addition to SBA requirements, can vary from lender to lender.

At SmartBiz Loans, the eligibility requirements for an SBA 7(a) loan of up to $350,000 are:

  • Time in Business: 2+ Years
  • Business owners must be U.S. citizens or legal permanent residents
  • Credit Score: Business owners must have personal credit scores above 675
  • Cash Flow: Sufficient business and personal cash flow to service all debt payments demonstrated by tax returns and interim financial data
  • Public Records: No bankruptcies or foreclosures in the past 3 years; no outstanding collections; no open tax liens
  • SBA Specific Requirements: no delinquencies and/or default on government loans

The eligibility requirements for a SmartBiz SBA commercial real estate loan above $500,000 are:

  • The real estate must be majority owner-occupied. This means at least 51% of the square footage of the property you’re buying or refinancing must be occupied by and used by your business.
  • Time in Business: 2+ Years
  • Business owners must be U.S. citizens or legal permanent residents
  • Credit Score: Business owners must have personal credit scores above 675
  • Cash Flow: Sufficient business and personal cash flow to service all debt payments demonstrated by tax returns and interim financial data
  • Public Records: No bankruptcies or foreclosures in the past 3 years; no outstanding collections; no open tax liens
  • SBA Specific Requirements: no delinquencies and/or default on government loans
  • The rent replacement option requires a loan payment that does not exceed the current monthly lease expense

Want to know if you’re SBA loan ready before you apply Check out our free SmartBiz Advisor™ tool. This online educational tool helps small business owners learn about how banks evaluate them and offers steps that small business owners can take to help them become SBA loan ready if needed. SmartBiz Advisor helps you determine what it takes to strengthen your unique application so you can qualify for the best terms.

2. Prepare a Business Plan

If you’re ready for an SBA loan and meet the basic qualifications, the next step is to solidify a business plan to demonstrate that your small business is financially healthy and eligible for low-cost, secure funding. FYI: SmartBiz Loans does not require a business plan to qualify.

Submitting a business plan is a unique opportunity for you to present a roadmap with concrete details on how you plan to achieve your goals. A business plan will help you set milestones to measure success and position yourself within your industry. You’ll give lenders an accurate picture of where you’re headed in the future.

3. Gather the paperwork

No matter which lender you’re working with, having all the necessary documentation is crucial to obtaining your funds as quickly and efficiently as possible. As you’re progressing through the application, you’ll need to demonstrate that you’re able to make regular payments. Some of the most common documents that our partners request include:

  • Personal & Business Tax Returns
  • Personal Financial Statements, required from each individual owning 20% or more of the company
  • Profit and Loss Statement
  • Balance Sheet
  • Collateral

For additional information read: Application for a Business Loan: What You Will Need.

4. Prepare for questions about your operations during the coronavirus shut-down

Since the pandemic, lenders will also want to know:

  • The industry you operate in and how it was impacted overall
  • How the coronavirus has impacted your business
  • Changes you’ve put in place to mitigate the financial impact
  • How you will use the funds to rebuild

5. Connect with an SBA Loan Lender

Avoid going from bank-to-bank to find a lender who will approve your application. When you work with SmartBiz Loans, we’ll help you increase your chances of getting a “Yes” by matching you with the bank partner most likely to fund your particular business profile. See if you prequalify by answering a few questions about your business and you’ll be on your way to applying for quick, easy, and transparent funding.

For additional information about SBA 7(a) loan applications, review this article from the SmartBiz Small Business Blog: 4 Ways to Prep for a Stellar Small Business Loan Application.

* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.

//resources.smartbizloans.com/wp-content/uploads/Banner-10-Soar.png