There are several different types of small business loans backed by the U.S. Small Business Administration (SBA). The most popular option is the 7(a) loan, which provides financing with favorable rates and terms up to 25 years to businesses that have had trouble getting funding elsewhere. You can use the proceeds to cover a wide range of business expenses, including working capital, operating costs, real estate, and equipment.
Read on for a closer look at how the SBA 7(a) loan works and how to qualify.
Key Points
• SBA 7(a) loans are designed for small businesses to fund various needs, including working capital, equipment purchase, real estate acquisition, and refinancing debt.
• The program offers loans up to $5 million with repayment terms of up to 25 years for real estate and 10 years for equipment or working capital.
• Applicants need to meet criteria like strong credit history, proven business viability, and ability to repay, with startups facing stricter scrutiny.
• The SBA guarantees up to 75% of the standard SBA 7(a) loan amount, reducing lender risk and making it easier for small businesses to secure funding.
• Other options for small businesses seeking funding include short-term business loans, business lines of credit, working capital loans, equipment financing, and more.
What Is an SBA 7(a) Loan?
An SBA 7(a) loan is a small business loan that is offered through private lenders but partially guaranteed by the SBA. The 7(a) is generally the best SBA loan option if you are looking to purchase real estate. However, this loan can also be used for:
• Short- and long-term working capital
• Refinancing a business loan you already have
• Purchasing furniture, fixtures, or supplies
The maximum loan amount for a 7(a) loan is $5 million.
You’ll find several types of loans and lines of credit in the 7(a) program. Each of them is designed to meet different needs. Some target specific industries, some are for the smallest of small businesses, and others focus on a quick turnaround time.
Program Origins
The SBA 7(a) loan program originated with the Small Business Act of 1953, which established the U.S. Small Business Administration (SBA) to support and protect small businesses.
The 7(a) program was designed as the SBA’s flagship loan offering, helping entrepreneurs access financing when traditional lenders might consider them too risky. Over time, the program has evolved to offer flexible funding options for various business needs, including working capital, equipment purchases, and real estate, with the SBA guaranteeing a portion of the loan to reduce lender risk.
Government Backing
The SBA 7(a) loan program is partially backed by the U.S. government through the Small Business Administration. This guarantee means that if a borrower defaults on the loan, the SBA will reimburse the lender for a portion of the outstanding balance — typically up to 85% for loans up to $150,000 and up to 75% for larger loans. This government backing reduces the risk for lenders, encouraging them to offer financing to small businesses that might not qualify through traditional means.
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How an SBA 7(a) Loan Works
Although 7(a) loans are backed by the government, the SBA does not actually make any direct loans. Instead, you apply for these small business loans through a regular lender that is approved to distribute SBA loans. At a minimum, the lender must require that you meet the SBA’s requirements, but it may also add some of its own criteria, such as requiring the owner to have a certain minimum credit score.
Each type of 7(a) loan comes with a maximum loan amount (or line of credit limit), along with a set repayment term. Typically, you’ll have longer to repay the loan if you’re approved to purchase commercial real estate with your loan funds. Additionally, the larger the loan amount, the longer you typically have to pay back the loan.
Loan Mechanics
An SBA 7(a) loan works through a partnership between the borrower, a participating lender (typically a bank or credit union), and the U.S. Small Business Administration.
Borrowers apply through approved lenders and can use funds for working capital, equipment, or real estate. Loan terms vary, with repayment periods up to 25 years.
Lender Relationships
You can expedite the loan approval process by working with an SBA Preferred Lender. They have a positive track record with SBA loans, giving them more authority to process SBA financing.
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Eligibility for an SBA 7(a) Loan
Here are the minimum eligibility requirements for an SBA 7(a) loan. Remember, though, that individual lenders may also have additional small business loan requirements of their own.
Business Qualification Criteria
To be eligible, potential borrowers must:
• Be a for-profit business
• Meet the SBA’s size requirements
• Do business in the U.S.
• Have equity invested in the business
• Use other resources (including personal assets) before turning to SBA 7(a) loans
• Have a need for the loan funds and use the money for sound business purposes
• Have no outstanding or delinquent debts to the U.S. government
There are also some types of businesses that the SBA will not approve, including real estate investment firms, pyramid sales plans, businesses that involve gambling activities, and non-profit organizations.
Documentation Requirements
The documentation requirements for when you apply for an SBA loan typically include the following:
• Personal and business credit reports: Lenders will assess the borrower’s creditworthiness and the business’s financial stability.
• Personal and business tax returns: Typically for the past three years to review the borrower’s and business’s financial performance.
• Profit and loss statement: A recent profit and loss statement helps to show current business financial health.
• Balance sheet: A detailed balance sheet to show the financial position of the business.
• Business plan: A detailed business plan outlining how the loan will be used and how the business plans to repay it.
• Collateral documentation: Information on assets used to secure the loan, such as real estate or equipment.
• Legal documents: Articles of incorporation, operating agreements, leases, and other legal documents relating to the business structure and operations.
• Loan application: The completed SBA loan application form, which includes personal and business information.
These documents help lenders assess the borrower’s ability to repay the loan and the overall risk involved.
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How to Get an SBA 7(a) Loan
Getting an SBA 7(a) loan can be an excellent way for small businesses to secure financing with favorable terms, but the process requires an understanding of the application process and careful preparation.
Application Step-by-Step
The step-by-step process of applying for an SBA loan is as follows:
1. Determine loan type: The first step is to decide which SBA 7(a) loan is right for your business. Common types include the Standard 7(a) loan, the 7(a) Small loan, and the SBA Express loan. Each has its specific purposes, so understanding the terms and requirements is essential before proceeding.
2. Check eligibility: Review the SBA’s eligibility criteria to ensure you meet the necessary requirements. These include U.S. citizenship, a for-profit business, a strong credit history, and the ability to repay the loan. The SBA may also look at factors like industry type and whether the business has other outstanding loans.
3. Prepare documentation: Gather all the required documents. Typical documentation includes personal and business tax returns, financial statements (e.g., balance sheets, income statements), personal financial statement, business plan, resumes of key business owners and managers, and collateral (if applicable).
4. Choose an SBA-approved lender: You must apply through an SBA-approved lender, such as a bank or credit union. Research different lenders, comparing their loan offerings, interest rates, and processing fees. Many lenders now offer SBA loan applications online, streamlining the process.
5. Submit the application: Once you’ve chosen a lender, complete the application. Most SBA lenders have online portals where you can fill out and submit your application. Ensure that all information is accurate and complete to avoid delays.
6. Wait for review and approval: The lender will review your application, financial documents, and business plan. They may request additional information or clarifications. The SBA guarantees a portion of the loan, but the lender decides whether to approve it. The approval process typically takes several weeks.
7. Negotiate loan terms: If your loan is approved, you will receive an offer detailing the loan amount, interest rate, repayment terms, and fees. Carefully review these terms and negotiate if necessary to ensure they align with your business’s needs and cash flow.
8. Sign the loan agreement: After finalizing the loan terms, sign the agreement. This is when the formal loan contract is established, and funds will begin to be disbursed according to the agreed-upon terms.
Preparation Strategies
Before applying for an SBA loan, it’s crucial to be well-prepared. Start by ensuring your business’s finances are in order, including having up-to-date financial statements and a clear cash flow projection. Having a solid business plan is key, as it demonstrates to lenders that you have a clear vision for success. It’s also beneficial to maintain a good personal and business credit score, as these will be significant factors in the approval process.
Additionally, gathering references, understanding your industry’s market, and reviewing potential SBA loan options ahead of time will help you make the best choice for your business’s financial needs.
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Types of SBA 7(a) Loans
There are several types of financing options available through the SBA 7(a) loan program.
| Type of Loan | Special Features | Maximum Loan Amount |
|---|---|---|
| Standard 7(a) | Can be used for a variety of business purposes | $5 million |
| 7(a) Small Loan | Works in the same way as a standard 7(a) loan | $500,000 |
| SBA Express | Fast turnaround time (within 36 hours) | $500,000 |
| Export Express | Loans and lines of credit designed for exporters | $500,000 |
| Export Working Capital | Capital available to help with export sales | $5 million |
| International Trade | Another option for export sales, either to fuel growth or to better compete in international sphere | $5 million |
Standard 7(a)
The Standard 7(a) Loan program lets businesses borrow up to $5 million. These loans can be used for a variety of purposes, including working capital, business expansions, or purchasing equipment and supplies.
The SBA guarantees up to 75% of the loans. Lenders are required to obtain collateral from borrowers on loans greater than $50,000. Collateral can be in the form of the business’s fixed assets, trading assets, or the principal’s personal real estate equity. You can get a funding decision for your 7(a) small business loan application from the SBA in five to 10 business days.
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7(a) Small Loan
A 7(a) Small loan offers financing up to $500,000. Similar to Standard 7(a) loans, collateral is required on loan amounts greater than $50,000. Small loans are guaranteed up to 85% by the Small Business Administration for loan amounts up to $150,000. The 7(a) Small loan follows the same general eligibility criteria as other 7(a) loans but typically offers a faster application and approval process due to the smaller loan amount.
Turnaround time for SBA 7(a) Small loans is two to 10 business days.
SBA Express
With loan amounts of up to $500,000, the SBA Express features a simplified application process and a 36-hour turnaround time for approval decisions from the SBA, making it ideal for businesses that need quick financing. Although the SBA guarantees up to 50% of the loan amount — less than the standard 75-85% for traditional 7(a) loans — it allows lenders to use their own documentation and underwriting procedures, which speeds up the process.
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Export Express
The Export Express Program is designed specifically for businesses that have been (or plan to become) involved in exporting and allows you to choose between a loan or line of credit. The maximum financing amount is $500,000. Loans are guaranteed 90% for loan amounts up to $350,000, and 75% for amounts over that amount. This program is ideal for exporters looking for a fast turnaround time. Loans are typically approved within 36 hours.
Export Working Capital
Export Working Capital loans are available through the U.S. Export Assistance Center for companies that need capital for their export sales. Look for the location that services your region — there are locations nationwide. Loans go as high as $5 million with a 90% SBA guarantee. Inventory is used as collateral and everyone with at least 20% ownership in the company must provide a personal guarantee for the funds.
International Trade
International trade is a type of long-term SBA financing up to $5 million. It helps businesses in two potential scenarios. The first is to help fuel the growth of export sales and the second is to help businesses make improvements in order to better compete with foreign companies. Funds used for permanent working capital, machinery, and equipment may be financed for 10 years, while real estate can be financed for 25 years.
CAPLines
CAPLines are designed for small businesses to meet their short-term and cyclical needs for working capital. There are four options, depending on your specific needs:
• Seasonal CAPLine: This is used to finance increased seasonal inventory needs.
• Contract CAPLine: This is used to finance costs of labor and materials for performing assignable contracts.
• Builders CAPLine: This is used to finance small builder or general contractor projects, including the construction and renovation of both residential and commercial properties.
• Working CAPLine: This is used for businesses that give credit to other businesses. It’s an asset-based line of credit that requires short-term payments.
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Choosing the Right Type of Loan
Choosing the right type of SBA 7(a) loan depends on your business’s needs, financial situation, and goals. For working capital up to $5 million, the SBA Standard 7(a) loan is a popular option, while the 7(a) Small loan is ideal for smaller loan amounts and faster turnaround times.
Assess your purpose for the loan, the loan’s terms, and eligibility requirements to determine which option suits your business the best. Consulting with an SBA lender can also provide valuable insights.
SBA 7(a) Fees
SBA 7(a) loans typically come with a guarantee fee, which ranges from 0% to 3.75% based on the size of the loan. Veterans and service members who qualify for the Veterans Advantage Program (including Reservists and National Guard) can typically get the guarantee fee reduced.
The SBA does not allow lenders to charge prepayment penalties, origination fees, application fees, or similar extraneous fees. However, lenders are allowed to charge packaging and service fees involved in processing the loan.
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Pros and Cons of SBA 7(a) Loans
A 7(a) small business loan comes with both benefits and drawbacks. Here are some you may want to consider.
Pros:
• Broad eligibility requirements
• Competitive interest rates that are capped by the SBA
• Funds may be used for a wide variety of purposes
• Multiple options for loans of different sizes
Cons:
• Slower funding timeframes compared to online business loans
• Personal assets often required as collateral
• Down payment often required
• Extensive application checklist
The Takeaway
The SBA 7(a) loan is a popular option thanks to large loan amounts, low rates, and long repayment terms. If you are thinking about applying for a 7(a) loan, you’ll want to consider how you plan to use the loan funds and which 7(a) loan is best suited to your company’s size and industry.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
Are SBA 7(a) loans hard to get?
SBA 7(a) loans can be challenging to obtain due to strict eligibility criteria, including a solid credit score, detailed financial documentation, and proof of business viability. However, businesses with strong financials and a clear repayment plan increase their chances, especially when working with experienced lenders familiar with SBA guidelines.
How much do you have to put down on an SBA 7(a) loan?
For an SBA 7(a) loan, borrowers typically need to put down 10% of the total loan amount as a down payment, though some lenders may require more depending on the business’s financial health and risk level.
What are the current interest rates on SBA 7(a) loans?
Current interest rates on SBA 7(a) loans range from 9.75% to 15.5%. However, your credit score will play a role in determining the rate you receive.
How long does the SBA 7(a) approval process take?
The SBA 7(a) loan approval process typically takes between seven to 10 business days once all required documentation is submitted. However, the full process, including underwriting and funding, can take several weeks. Delays may occur based on the complexity of the application or lender’s workload.
Can startups qualify for SBA 7(a) loans?
Yes, startups can qualify for SBA 7(a) loans, provided they meet certain criteria, such as being a for-profit business, operating in the U.S., and having a sound business plan. Lenders will also assess the owner’s creditworthiness, experience, and ability to repay the loan.
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