Business growth is exciting, yet it may stretch a small business to its limits. An SBA 7(a) loan may sustain a business until it reaches the next phase of business development and beyond. To help you gain familiarity with an SBA 7(a) loan, we’ll describe what it is, why your small business may need one, and how to get the process rolling.
With historically low interest rates, little or occasionally no collateral required, and generally liberal repayment terms, there are generally plenty of reasons a small business owner may find SBA 7(a) loans attractive.
What is an SBA 7(a) loan: A quick overview
The Small Business Administration (SBA) is a cabinet-level federal agency that supports small businesses with working capital, counseling, and contracting expertise, and it’s an agency every small business owner on their way to the top should become familiar with.
The SBA partners with lending institutions to offer funds to businesses while reducing some of the risks of loans for small businesses. To support business owners and banks, the SBA provides a guarantee of up to 85% of the loan amount to lenders on behalf of the federal government.
With the benefit of an SBA 7(a) loan, your business gets the benefit of working capital without sacrificing equity or a stake in the company. There are nine types of business loans available for small businesses. An SBA 7(a) loan is the most common type of business loan, and it’s the SBA’s primary program.
Federal business loan programs typically require a bit more of a business owner’s time and effort than applying for a conventional business loan. The extra diligence may be worth it, especially considering many lenders may charge high interest rates on new business loansSBA-approved lenders offer financial assistance to business owners to allow them to invest in their businesses – often when they need it the most.
For example, retailers may stock up on merchandise all year and make the bulk of their sales during the holiday season, and seasonal businesses such as landscapers may struggle with cash flow in the early spring before experiencing a cash windfall during late autumn.
As a bonus, business owners who make their monthly payments on time typically get the benefit of enhancing their credit scores.
Do you meet the requirements for SBA 7(a) loans?
Before moving forward with an SBA 7(a) loan, it’s wise to check out SBA’s requirements for an SBA 7(a) loan approval to make sure you qualify.
The SBA considers the number of employees and the business income to determine whether a company meets the definition of a small business. Business owners must have, at most, 500 employees to meet the small business definition. Business owners may check to see if they qualify as a small business by checking their average annual receipts against the Electronic Code of Federal Regulations (eCFR) table, as business income eligibility varies by industry.
Beyond business income and employee counts for an SBA loan, business owners must satisfy certain business and personal requirements.
To be eligible for small business loans through the SBA loan program, businesses must meet the following requirements:
- Must be in business for at least two years
- The business must produce a solid annual revenue
- The business must be based in the United States
- The business owner must be a United States citizen or a lawful permanent resident
- The business owner must be at least age 21
Also, the following types of businesses are not eligible for an SBA 7(a) loan:
- Casino or gambling
- Life insurance sales
- Religious teaching
- Primarily political activities or lobbying
- Wildcat oil drilling
- Mortgage servicing
- Real estate developing
- Bail bond agencies
You can find more details on SBA small business loans on the SBA loan website.
An SBA-preferred lender will want assurance that business owners can responsibly manage their personal assets and finances and not have an overabundance of existing debt obligations. For that reason, they will check your credit history and make sure you meet the minimum credit score requirements, as well as make inquiries about existing business debt.
Here are some of the issues that may disqualify businesses for SBA loans:
- A credit score under 650
- Outstanding tax liens
- Recent charge-offs or settlements
- Past-due payments on government business loans
Use of funds
There are few limits on how you can use the loan proceeds of an SBA 7(a) loan. Here are some of the common ways business owners may utilize funds:
- Working capital
- Equipment, machinery, materials, supplies, fixtures, furniture
- Commercial real estate
- Renovation of facilities
- Building or expanding a business
- Refinancing business debt
- Upfront costs of acquiring a new business
- Revolving funds based on receivables and current inventory
Once you are prepared to apply for an SBA loan, the next step is to choose a lender to work with to get your small business financing.
3 steps on how to apply for an SBA 7(a) loan
The process of applying for an SBA loan program will typically be much easier if you think of it in terms of three steps – knowing where to go, gathering the necessary documents, and following up on the application process. Your lender will review and discuss the maximum loan amounts that may be appropriate for your business.
1. Where to get started
The first place to start is to go online and review the many offers provided by lenders within online marketplaces without having to leave your home. You can go to the SBA website and use their lender match tool or simply use an online SBA loan marketplace, like SmartBiz®. Another option is to go the more traditional, time-consuming, route of visiting local or large national banks individually and see if they have any options available.
As a tip, make it a point to ask your loan officer if they have experience with small business financing. Their knowledge and expertise may increase your chances of approval.
2. Collecting the required documentation
Generally, one of the more challenging tasks in applying for an SBA business loan program is gathering the required financial statements and other documents for the Small Business Administration review.
An SBA-approved lender may ask for the following documents or other supporting information:
- Each small business owner’s resume
- Business overview and history
- Business certificate or license
- Business lease
- Business tax returns
- SBA Forms 912 – Statement of Personal History
- SBA Form 413 – Personal Financial Statement
- Business financial statements (current balance sheet, profit and loss statement, and statements of financial projections
- List of business fixed assets
- Loan application history, including loans approved
3. Going through the loan application process
Once you’re ready, fill out the loan application and submit it, and wait for an approval or denial from the SBA lender.
If your SBA loan is approved, the lender will typically prepare everything for your closing. They will also obtain collateral from you if needed and prepare the loan documents. They’ll also double-check to make sure they’re meeting all authorization requirements.
The lender will advise you of the loan terms, disburse the funds at your closing and inform you of your monthly payment.
With a SmartBiz SBA loan, you can get low interest rates on a minimum of $30,000 and a maximum loan amount of $350,000 loan with a 10-year repayment plan and a low payment, and there are even more reasons to get an SBA loan.
Why you may consider an SBA 7(a) loan
When you need alternative financial resources because you lack working capital, it’s generally important to weigh your options carefully. Getting a business loan that’s a poor fit for your business may set your business backward rather than move it forward.
It’s common for a traditional business loan to require a large down payment of 15% up to 30% of the amount needed for the loan, and you may also have loan fees. An SBA loan works much differently. You will likely have a lower down payment or maybe none at all.
Low interest rates you won’t find anywhere else
Another big reason to consider an SBA 7(a) loan is that they are highly competitive. You may expect fixed and variable interest rate options, which will typically be lower than traditional business loan interest rates.
Long repayment terms that fit your schedule
Traditional loan repayment terms are generally 1–3 years for a short-term loan and 3–10 years for a longer-term loan. With SBA 7(a) loans, you have ten years to pay off loans for equipment, inventory, or to use as working capital. Lenders give you up to 25 years to pay off loans for commercial real estate.
As an added benefit, most SBA loans are fully amortizing, so there’s no worry about a balloon payment down the line.
Flexible use of funds for all types of businesses
Regardless of the industry, all types of businesses may benefit from an SBA 7(a) loan.
Once a business owner receives the loan proceeds, they may use them for almost any legal purpose. Business owners may build new facilities, renovate existing structures, expand to new locations, acquire another business, or refinance their existing business debt.
No collateral requirements
SBA lenders typically won’t require collateral for loans up to $25,000. Banks have the liberty to require capital for loans over $25,000.
Per the SBA, lenders must collateralize loans to the maximum extent for loans over $350,000, and there may be other reasons why this type of loan may not be right for you.
A real business owner who received an SBA 7(a) loan
The backstory behind Glampin’ Life LLC® makes a good case story of the value of an SBA 7(a) loan.
Owner Mike Mayleben came up with a unicorn of an idea for a business product as he struggled to get his beach gear out onto the beach without difficulty. He designed and developed a beach cart with balloon wheels that move quickly across the sand. Soon, Mike had a strong following of beach vacationers and RVers, and he added accessories and apparel to his product line.
With an eye on even greater expansion, Mike shopped around for financing. He soon learned he could get an SBA 7(a) loan for $200,000 from SmartBiz with better interest and a longer term than his current business loans. He plans to use the funds to increase the size of his facility from 300 sq. ft. to 7,000 sq. ft., and an SBA 7(a) loan was just what he needed to fulfill that dream.
Why an SBA 7(a) loan might not be the fit for you
An SBA 7(a) is a popular loan for most business owners, but there may be better fits for your business. It may take months to get approval, the eligibility guidelines are strict and may be difficult to meet, and loans are not fully guaranteed.
The application process can be lengthy
The greatest drawback of an SBA 7(a) loan is the length of time it takes to process. Banks have their own internal approval process, and the SBA must oversee loans to ensure they meet credit standards and eligibility guidelines. Meanwhile, you could be waiting months with no assurance that the loan will be approved.
The eligibility requirements can be strict
Unlike traditional loans, where banks have some flexibility to make exceptions for a business loan, the eligibility requirements for SBA loans are quite strict, and they’re listed in detail on SBA’s web page. The site also lists the eligibility guidelines, special considerations, and ineligible businesses for SBA loans. There are no shortcuts and no leeway in getting around the rules.
The personal guarantee can increase risk
Something unique about SBA 7(a) loans is that they aren’t fully guaranteed. The SBA only guarantees loans from 50% to 85%, and they won’t guarantee more than $3,750,000. The SBA will only guarantee 90% of the total loan amount for international trade loans.
The percentage of the guarantee generally depends on various factors, such as which SBA loan the business owner applied for and the loan amount for a for-profit business.
Frequently asked questions about SBA 7(a) loans
How long does it take to get an SBA loan?
The length of time it takes to get word of an SBA loan approval will likely be a few weeks, even for small loans. It may take up to a few months if the lenders are very busy. The important thing to remember is to respond quickly to requests for more information from the lender.
What can SBA 7(a) loans be used for?
You may use the loan proceeds for an SBA 7(a) loan for working capital, equipment loans, or any sound business purpose. The rules don’t permit you to use funds for personal reasons, so you can’t pay off your mortgage or credit cards or buy personal real estate.
What is the interest rate on SBA 7(a) loans?
The interest rates on SBA 7(a) loans are generally lower than traditional loans. The SBA sets the interest rates based on the size of the loan. The interest rate fluctuates in accordance with the prime rate.
What is the repayment term for various SBA 7(a) loans?
A small loan may be repaid within ten years, while loans greater than $300,000 must be repaid within 25 years.
How hard is it to get an SBA 7(a) loan?
Getting an SBA 7(a) loan is typically easy if your business has good revenue, a good credit score, and it's been in business for at least two years.
SmartBiz is proficient at offering business financing via SBA loans which can help you purchase real estate, equipment, or provide working capital in a loan amount that meets your needs. SBA loan rates are low, there are no upfront costs, and the repayment terms are generous even for loans greater than $350,000.
Overall, an SBA loan is a lucrative business loan option for small businesses that qualify for them. Most small business owners find the benefits of an SBA 7(a) loan far outweigh the negatives of providing intensive documentation and waiting for approval.
An easy way to apply for SBA loans is by see if you pre-qualify with SmartBiz. We offer a variety of SBA loans and are happy to help you choose the one that’s right for your company.