During the economic turmoil caused by the coronavirus pandemic, the Small Business Administration (SBA) supported small businesses through the Restaurant Revitalization Fund, Shuttered Venue Operators Grant, the COVID Economic Injury Disaster Loan (EIDL) program, and the Paycheck Protection Program (PPP). These programs were put in place to specifically support American businesses struggling to make ends meet.
The disaster loan programs have ended but the need for working capital for small businesses continues to grow. Entrepreneurs are ready to get back to business and access to outside funding is critical. There are many funding options available for qualified business owners but the rates, terms, use of funds, and other costs can be extremely varied.
If you're in need of funding to help meet your business goals, consider applying for an SBA loan. SBA 7(a) loans are generally regarded as the “gold standard” in small business lending with great rates, a 10-year repayment term, and low monthly payments. Read on for information about how to qualify for a post-pandemic SBA loan.
What is an SBA 7(a) loan?
SBA loans are business loans guaranteed by the SBA. This government agency provides loan guarantees of up to 85% of the loan amount provided through an SBA-approved lender—typically banks.
The 7(a) loan programs let you borrow money for business purposes—including working capital, for inventory or equipment, to refinance other debts, or to purchase commercial real estate.
SBA loans have low interest rates and long repayment terms, making them one of the most sought after types of business financing available. These loans may require a longer application than others and be slower to fund.
Who SBA 7(a) loans are for
SBA loans are good for established small business owners wanting to shore up finances or expand with new inventory, additional products, or another location. Proceeds Your business must have fewer than 500 employees, and less than $7.5 million revenue on average each year for the past three years. Your net income must be under $5 million (after taxes and not counting carry-over losses), and your tangible net worth must be less than $15 million. Learn what a small business is according to the SBA: Small Business FAQ.
How it works
Here’s the application process for SBA 7(a) loans from banks in the SmartBiz® network:
- We get to know you and your unique business
- Complete one online loan application through our advanced technology platform
- No faxing or printing required
- Discover if you’re pre-qualified in about 5 minutes with no impact on your credit score*
- We help you understand your options
Once you pre-qualify, you are assigned to a team of dedicated professionals who can answer any questions and walk you through the online loan application process. You’ll receive recommendations for the best financing options based on your unique business credit and financial profile.
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
We match you with the best lender
Using our sophisticated technology platform and experience, we match you with the banks or non-bank lenders in our network most likely to approve your loan application. Your dedicated SmartBiz team helps you stay on track throughout the financing process. About 90% of the applications referred to our trusted network are approved.
SBA 7(a) loan amounts available
Businesses can get an SBA 7(a) loan for any amount of up to $5 million. SBA has no minimum amount for any of its loan programs and SBA has guaranteed loans for small businesses for $10,000, or less. Banks in the SmartBiz network fund SBA 7(a) loans between $30,000 to $5 million.
The first important decision you will make during the loan process is to request a loan amount that will help you reach your objectives. Review your business plan to determine where you currently stand and where you want to go. Speak with your accountant to nail down an amount with the cost of the loan and all fees in mind.
Interest rates for SBA 7(a) loans
SBA loan interest rates are some of the most competitive among lenders. SBA 7(a) loans from a bank in the SmartBiz network, have a variable rate of Prime Rate plus 1.5% to 3.75%.
A variable rate means your business can borrow money at an interest rate that may go up or down over time. For example, if the base rate rises by 0.5%, the rate on your loan will rise from 6% to 6.5%. Variable rate loans tend to have more competitive interest rates than fixed rate loans.
What type of collateral is required for an SBA loan?
Collateral is something pledged as security for repayment of a loan to be forfeited by the borrower in the event of a default. Any business asset that has value, and can be sold by the lender to pay off the loan, may be considered collateral.
Most banks require some type of collateral. For banks in the SmartBiz network, collateral required depends on the SBA loan size. If you apply for a loan through a bank in the SmartBiz network for $30,000 to $350,000, a lien on business assets is required by the bank. This includes assets such as accounts receivable or inventory, as well as fixed assets such as new equipment purchased with loan proceeds or commercial real estate owned by the business. The value of these assets does not need to equal the loan amount you are requesting.
What are the repayment terms for an SBA loan?
The term for an SBA 7(a) working capital loan is 10 years, meaning monthly payments will be very low. The term for an SBA 7(a) commercial real estate loan for purchase or refinance is 25 years with no balloon payment.
You can partially or fully prepay your loan at any time with absolutely no prepayment penalty or fee.
Examples of use of proceeds
A big draw of SBA 7(a) loans is the wide use of proceeds. Those could include:
- Working capital
Working capital refers to the business funds that are used in day-to-day operations. To calculate, current liabilities are deducted from current assets. This amount should be positive and acts as a cushion for any expenses that come up on a daily basis.
Working capital can also be applied to a variety of other business purposes, from hiring to marketing and everything in between.
Small business owners wear many hats, but sometimes it takes a bit of help to get the job done. Hiring employees is one of the ways you can apply an SBA loan to growing your business.
- Equipment purchases
Maintaining and upgrading business equipment is an important way to keep the company running smoothly. An SBA loan is a low-cost option that can help you finance equipment.
- Business expansion
An SBA loan can help scale your company. Offering more products, conducting market research, making strategic partnerships, and upgrading locations to serve a larger customer base are all examples of business expansion.
- Inventory and operational expenses
Enlarging inventory to keep up with demand is another way you can put your SBA loan funds to use. During busy seasons or promotions, having additional funds on hand can help small businesses stay afloat.
- Debt refinancing
By refinancing costly debt with an SBA 7(a) loan, small business owners can apply their monthly savings of up to thousands of dollars back into their businesses. The longer terms and lower rates of an SBA loan allows you to pay down the expensive financing that’s reducing business cash flow.
- Commercial real estate
SBA 7(a) loans can also be used for purchasing or refinancing property to foster stronger business growth. Whether it be to purchase the current location or expand into a new one, borrowers can take out these SBA 7(a) loans with a term of up to 25 years.
Note that there are ineligible uses of proceeds. An SBA loan must be directly applied toward development, rather than as a temporary solution for financial troubles. According to the SBA, funds cannot be used for:
- Refinancing personal debt
- Payment of delinquent payroll, sales, or real estate taxes
- Payments, distributions, or loans to an associate or owner of the business
- Real estate purchase held primarily for sale, lease, or investment
- Floorplan financing (primarily used by auto dealers)
SBA 7(a) loan requirements
Following are requirements from banks in the SmartBiz network. Note that a business plan is not required to receive a loan when you work with SmartBiz to facilitate an SBA loan.
- 2+ years in business
- Business owners must be U.S. citizens or legal permanent residents
- Business owners’ personal credit score above 650 (675 for SBA 7(a) commercial real estate loans)
- Business and personal cash flow to service all debt payments demonstrated by tax returns and interim financial data
- No bankruptcies or foreclosures in the last 3 years
- No outstanding tax liens
- No delinquencies and/or default on government loans
- Real estate must be majority owner-occupied
SBA lenders want to know if your business is healthy enough to take on a low-cost loan. In other words, can you make every payment on time for the life of the loan? In order to assess business strength, a number of financial documents are required. Because SBA loans are guaranteed by the government, slightly more paperwork may be required. But the low-rates, long-terms and very low monthly payments are worth it. Additionally, you’ll get a clear view of where your business stands if you haven’t crunched the numbers before.
To simplify and expedite the application process, SmartBiz uses intelligent automation to request only those documents relevant to your specific application.
Following are some of the most commonly requested documents:
- Personal & Business Tax Returns
Learn more: How to Save on Small Business Taxes
- Profit and Loss Statement
- Balance Sheet
Learn more: How to Create a Balance Sheet for Your Business
Learn more: Collateral Requirements for Small Business Loans
- Proof of Appropriate Insurance Coverage
Learn more: Insurance Required to Obtain an SBA Loan
- Personal Financial Statements, required from each individual owning 20% or more of the company
Learn more: A personal financial statement is a spreadsheet that details the assets and liabilities of an individual, couple, or business at a specific point in time. Typically, the spreadsheet consists of two columns, with assets listed on the left and liabilities on the right.
Other documents, such as business licenses, Articles of Incorporation, commercial leases, or franchise agreements, may be requested depending on the particular loan application. A solid strategy is to work with your bookkeeper, accountant or tax preparer to help gather the required documents. If you’re in need of financial guidance and services, read: How to Find an Accountant for a Small Business.
SBA Loans: The Bottom Line
From keeping up with a seasonal payroll increase to getting money to grow your business, there are a lot of good reasons to get financing. Small businesses serve as the backbone of the U.S. economy and SBA loans provide the low cost funds that hard working entrepreneurs deserve.