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.
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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.
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.
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.
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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.
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.
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How to Get an SBA 7(a) Loan
Like applying for any small business loan, you’ll need to provide a number of documents to apply for an SBA 7(a) loan. This may include:
• A personal background and financial statement
• Business financial statements
• Business certification and/or license
• Loan application history
• Income tax returns
• Résumés
• Business overview and history
• Business lease
You may also need some additional documents if you’re purchasing an existing business.
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 $25,000. 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. The collateral requirements vary by lender, but must be in line with whatever the lender requires for non-SBA loans. Lenders are required by the SBA to place a lien on any assets purchased with the loan funds, as well as a lien on any of the business’s fixed assets. That includes real estate, unless the applicant’s equity is less than 25% of the property’s market value. Additionally, the real estate lien can’t exceed the loan amount.
SBA Express
If you’re interested in SBA 7(a) loans with a fast turnaround time, you may want to take a look at the SBA Express Program. Instead of a five- to 10-day review period, the SBA commits to processing applications within 36 hours. Loans go up to $500,000 with a 50% guarantee by the SBA. As with other 7(a) small business loans, each lender has its own eligibility requirements. Lenders also have their own collateral policies for any Express Loan over $25,000.
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. The SBA processes applications within 24 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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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.
Pros and Cons
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
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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 at least 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 8.75% to 10.50%. However, your credit score will play a role in determining the rate you receive.
Photo credit: iStock/sturti
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