What Is an SBA 7(a) Loan and How Can It Help My Business?

Want to grow your business but can’t secure enough funding through traditional channels?

Applying for an SBA 7(a) loan could be a smart next step.

What Are SBA Loans?

The United States Small Business Administration (SBA) is an independent agency of the federal government that assists small businesses and entrepreneurs. The SBA partners with local lenders (banks and credit unions) to provide affordable loans for a range of business purposes, including startup costs, working capital, real estate and equipment purchases, and debt refinancing.

The SBA guarantees a portion of each loan to mitigate lender risk and enable more small-business owners – including those in underserved communities – to access the capital they need. (In the case of the SBA 7(a) program, up to 85% of each loan is backed by the SBA.)

Reasons to Consider an SBA Loan

SBA loans can offer small businesses several key advantages, including:

• Competitive rates: Because they’re a lower risk for lenders, SBA loans often feature lower interest rates.
• Lower fees: SBA loans may involve an upfront and/or yearly service fee, but these are generally minimal.
• Longer terms: Maximum maturities range from 10 years (for working capital, inventory, and equipment) to 25 years (for real estate).
• More flexibility: Loan amounts range from $500 to $5.5 million, depending on your needs and capacities.
• Continued support: The SBA and its local partners offer free and low-cost business training and counseling.

What is the SBA 7(a) Loan Program?

Officially named the Standard 7(a), this is the most popular SBA loan program – in fact, it’s what many people mean when they just say, “SBA loan.” A 7(a) loan is more flexible than its closest counterpart, the SBA 504 loan, because it can be used for a broad range of short-term and long-term business financing needs.

The maximum loan amount is $5 million, with fixed or variable interest rates that are subject to SBA maximums. The maximum maturity is 10 years for working capital, inventory, or equipment, or 25 years for real estate.

Commonly, 7(a) loans require an owner equity contribution of 10%, with 75% to 85% backed by the SBA and the remaining 5% to 15% backed by your bank or credit union. For amounts over $350,000, the SBA requires lenders to secure the loan to the maximum extent possible, which means your business’s trading assets and your personal real estate may need to serve as collateral.

Am I Eligible?         

Specific eligibility requirements for 7(a) loans can vary by lender. For instance, the SBA doesn’t designate a minimum credit score or length of time in business, but individual lenders can and do set their own rules. In nearly all cases, though, your business needs to:

• Physically operate as a for-profit company in the U.S. or its territories
• Pursue a sound business plan in an eligible industry (e.g., excluding lending and gambling)
• Meet SBA size standards (which depend on your industry and annual revenue)
• Show owner equity (time and money you’ve invested in the business)
• Be in good standing on all existing government debts
• Demonstrate a need for funds and the ability to repay them from projected business cash flow

How Can I Use It?

SBA 7(a) loans can be used for a variety of purposes, including:

• Working capital
• Revolving funds (based on the value of existing inventory and receivables)
• The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
• The purchase of real estate (including land and buildings)
• The construction of new buildings or the renovation existing buildings
• Establishing a new business or acquiring or expanding an existing business
• Refinancing existing business debt (under certain conditions)

How Do I Apply?

You can work directly with your chosen lender to get the SBA 7(a) application process started. Here are some of the documents you may need to provide:

• Profit and loss statements (current within 180 days)
• Projected financial statements (one year)
• Ownership and affiliations
• Business license or certificate
• Loan application history
• Income tax returns (three years)
• Resumé
• Business overview and history
• Business lease

Ask your lender for a complete checklist of required documents. Once you’ve finished your application, your lender will submit it to the SBA for approval, close the loan, and disburse the funds. The whole process varies quite a bit, but generally takes between 60 and 90 days.

How Do I Pay It Back?

As with eligibility requirements and application processes, repayment terms for SBA 7(a) loans can vary by lender. They’re normally structured as term loans that are repaid with monthly payments of principal and interest.

With a fixed rate, you’ll pay a set amount every month until the end of the agreed-upon term, much like a standard residential mortgage or auto loan. With a variable rate, the amount you pay may change from one month to the next.

The SBA prohibits lenders from charging fees for processing, origination, application, or brokerage. However, you may pay an upfront guaranty fee and an annual service fee. Borrowers may also be subject to a prepayment penalty depending on the loan’s maturity date and the amount of time that’s elapsed since disbursement.

What Are My Other Options?

There are several other types of SBA loans you may want to consider, including:

• 504 loans, which can be used for long-term fixed assets like real estate and major equipment
• Express loans, which feature an accelerated turnaround time and have special options for exporters
• Microloans, which provide up to $50,000 for smaller startup and expansion needs
• Disaster loans, which help businesses overcome economic injury or damage in the wake of a declared disaster

Your lender can also help you to investigate non-SBA loan products and weigh the pros and cons.

Take the First Step Today

To explore all your small business financing options, including SBA 7(a) loans, contact a WesBanco lender today.

 

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