The SBA 7(a) Loan Program: The Ultimate Guide
What Is an SBA 7(a) Loan?
SBA 7(a) loans are small business loans of up to $5 million that are partially guaranteed by the Small Business Administration (SBA). Lengths can go up to 25 years, and SBA 7(a) interest rates can be as low as the market prime rate plus 2.25%. Additionally, the SBA 7(a) loan program is the most popular of all the SBA loan guaranty programs because the capital it lends can be put toward a wide range of business purposes.
For these reasons, an SBA 7(a) loan should absolutely be on your radar if you’re searching for small business loans. Learn everything you need to know about the SBA 7(a) loan program, qualification requirements, terms, and how to apply. See Your Loan Options
How the SBA 7(a) Loan Program Works
As we mentioned, the SBA partially guarantees SBA loans that banks and other direct lenders make to qualifying small businesses. The partial guarantee ranges from 50% to 85% of an SBA 7(a) loan depending on the size of the loan and the borrower’s qualifications.
This guarantee ultimately makes lending to a small business or startup less risky in the eyes of lenders. If the borrower defaults on the loan, the SBA guarantee ensures that the bank will get 50% to 85% of the loan back.
Since the SBA guarantee provides some safety in the event of borrower default, lenders are more likely to approve small business owners for this type of SBA loan and to provide attractive terms.
SBA 7(a) Loan Types
Under the umbrella SBA 7(a) program are several types of 7(a) loans and lines of credit. The main differences among the different loan types are the loan amounts, the processing times, and use of funds.
Here’s are the different types of SBA 7(a) loans.
Comparison of SBA 7(a) Loan Types
|LOAN AMOUNT||TIME TO FUND||BEST FOR|
|7(a) standard loan||Up to $5 million||5 – 10 business days||Business expansion, working capital|
|7(a) small loan||Up to $350,000||5 – 10 business days||Working capital|
|Express loan||Up to $350,000||36 hours||Time-sensitive financing needs|
|Export express loan||Up to $500,000||36 hours||Small export businesses|
|Export working capital||Up to $5 million||5 – 10 business days||Small export businesses that need working capital|
|International trade loan||Up to $5 million||5 – 10 business days||Businesses that need to compete with foreign entities|
|SBA CAPLines of credit||Up to $5 million||5 – 10 business days||Commercial builders, seasonal businesses, businesses that are fulfilling government contracts, and businesses with cyclical gaps in cash flow|
1. Standard 7(a) Loan
Standard 7(a) loans can go up to $5 million, and the funds you acquire through this loan can be used toward a variety of business reasons, whether you’re looking to expand your business or need additional working capital. With the standard 7 (a) loan, the SBA will review your loan application and give you an initial approval decision within five to 10 business days.
For this type of SBA 7(a) loan, lenders aren’t required to take collateral for loans below $25,000. For loans above $25,000, the SBA requires that lenders follow the same collateral policies that they use for non-SBA loans.
2. SBA 7(a) Small Loan
SBA 7(a) small loans are similar to standard 7(a) loans, but the maximum loan amount is $350,000. This type of SBA 7(a) loan functions almost exactly like a standard 7(a) Loan, except for assessing the borrower’s creditworthiness.
For the SBA 7(a) Small Loan, the SBA prescreens applicants based on personal credit, business credit, and business financials. If you pass the prescreen, the lender will fast track your application. If you don’t pass the prescreen, you’ll have to go through the more rigorous standard 7(a) underwriting process.
3. SBA Express Loan
The SBA Express loan offers amounts up to $350,000 and offers a quick turnaround to applicants in a time-sensitive bind. Instead of the usual five to 10 business days, the SBA will review your application and give you an initial approval decision within 36 hours for Express loans. Since the approval decision is faster, the SBA only guarantees up to 50% of that loan.
4. Export Express Loan
With the Export Express 7(a) loan, small export businesses can secure up to $500,000 in funding with a 36-hour turnaround from the SBA. Depending on how much you borrow, the SBA will be able to guarantee up to 90% of this type of 7(a) loan.
5. Export Working Capital
This type of SBA 7(a) loan can provide up to $5 million in funding to companies that produce export sales and need additional working capital. The SBA will be able to guarantee up to 90% of Export Working Capital loans and will have a turnaround of five-10 business days. The SBA requires the lenders to take as collateral all export-related inventory along with all receivables tracing from the export sale.
6. International Trade Loans
Long-term international trade loans are also available through the SBA for businesses that need to better compete with foreign entities. The maximum SBA guarantee on these loans actually go up to 90%, and the turnaround is five to 10 business days.
7. SBA CAPLines
Through the CAPLines program, the SBA offers four types of SBA lines of credit. These lines of credit, going up to $5 million, can help commercial builders, seasonal businesses, businesses that are fulfilling government contracts, and businesses with cyclical gaps in cash flow. The term on these lines of credit ranges from five to 10 years.
If none of these 7(a) loan programs meet your needs, find out about other SBA loan programs, including the CDC loan program for real estate and equipment financing and the microloan program for startups.
SBA 7(a) Loan Terms: Rates, Fees, Repayment Schedule
SBA 7(a) loan terms are some of the best you can secure. But just how good are the terms, and how do they stack up against alternative sources of business financing?
While SBA 7(a) loan terms will vary based on your business’s qualifications, here’s some information about what you can typically expect.
SBA 7(a) Loan Terms
|SBA 7(a) loans||Loan Maturity Under 7 Years:|
– Under $25,000: Prime rate + 4.25%
– $25,000 to $50,000: Prime rate + 3.25%
– Over $50,000: Prime rate + 2.25%
Loan Maturity Over 7 Years:
– Under $25,000: Prime rate + 4.75%
– $25,000 to $50,000: Prime rate + 3.75%
– Over $50,000: Prime rate + 2.75%
|– SBA loan guaranty fee|
– Credit check fees
– Packaging fees
– Closing costs
– Appraisal fees (if the loan is to buy real estate)
– Late payment fees
– Prepayment fees (applies to loans with terms of 15 years or greater, if prepaid within the first three years)
|– Up to 25 years for real estate|
– Up to 10 years for equipment
– Up to 7 years for working capital
SBA 7(a) Loan Rates
The SBA sets specific interest rate maximums on SBA 7(a) loans that banks have to comply with. The interest rate maximums are tied to the Prime rate, or MPR, which is a benchmark interest rate that affects the cost of home loans, student loans, and other types of loans.
The interest rate maximums are as follows for an SBA 7(a) loan:
- Loan Maturity Under 7 Years:
- Under $25,000: Prime rate + 4.25%
- $25,000 to $50,000: Prime rate + 3.25%
- Over $50,000: Prime rate + 2.25%
- Loan Maturity Over 7 Years
- Under $25,000: Prime rate + 4.75%
- $25,000 to $50,000: Prime rate + 3.75%
- Over $50,000: Prime rate + 2.75%
The current market prime rate is 3.25%, as of March 16, 2020.
Our guide to SBA loan rates offers more detail about the interest rates for an SBA 7(a) loan. You can also learn more about interest rates on SBA loans by using an SBA loan calculator.
SBA 7(a) Loan Fees
The rates we mentioned above don’t include fees on 7(a) loans:
- SBA loan guarantee fee
- Credit check fees
- Packaging fees
- Closing costs
- Appraisal fees (if the loan is to buy real estate)
- Late payment fees
- Prepayment fees (applies to loans with terms of 15 years or greater, if prepaid within the first three years)
Out of all these fees, the highest is the guarantee fee. The SBA charges the lender a guarantee fee, but the lender usually passes on this fee to the borrower. The guarantee fee ranges from 2% to 3.75% depending on the size and term of the loan. The key thing to remember is that the fee is calculated on the guaranteed loan amount, not on the total loan amount.
SBA 7(a) Loan Term Lengths
The repayment term on an SBA 7(a) loan term depends on what kind of funding you’ll be securing through the program. The SBA sets limits on the maximum terms for various loan uses:
- Up to 25 years for real estate
- Up to 10 years for equipment
- Up to 7 years for working capital
Your lender will determine your specific repayment schedule, but in most cases, you pay back an SBA 7(a) loan with a fully amortized monthly payment schedule. If your loan is fixed-rate financing, then the monthly installments will remain the same throughout the life of the loan. If your loan has variable interest rates, the monthly payments will change as market rates change.
SBA 7(a) Loan Requirements
The biggest disadvantage of an SBA 7(a) loan is that it’s difficult to qualify for. Specific requirements vary from lender to lender, but there are certain basic criteria that apply across the board.
Here are the SBA loan eligibility requirements for an SBA 7(a) loan:
- Good personal credit score: While there’s no specific score minimum, lenders usually expect the primary borrower to have a FICO score of at least 650.
- Revenue/profitability: You should have solid business revenues (at least $100K per year) and be profitable, although the SBA will make exceptions for new businesses with strong credit.
- Acceptable debt service: For loans over $350,000, the SBA requires the debt service coverage ratio (DSCR) to be at least 1.15.
- Business plan: You’ll need to submit a business plan showing three to five years of financial projections and a clear understanding of your market and competitors in the same space.
- Collateral: The more valuable assets you have that you can put down as security, the stronger your application will be.
In addition, the to get an SBA 7(a) loan you must meet the following basic requirements:
- Your business is officially registered as a for-profit business.
- Your business meets the SBA’s definition of a small business.
- Your business is located in and operates in the US.
- You, as the business owner, have invested your own time and/or money into the business.
- Sufficient time in business
For more detailed eligibility criteria, review the SBA’s eligibility questionnaire and guidance to lenders.
Author: Priyanka Prakash