Introduction
You might have heard SBA loans are the gold standard for small business owners who want to expand.
The (SBA) administers several programs to support small businesses, including loan guaranty programs designed to encourage lenders to provide loans to small businesses that “might not otherwise obtain financing on reasonable terms and conditions.”
An SBA 7(a) loan is a small business loan issued by a private lender and partially backed by the SBA. It's designed to provide small businesses with the capital they need to grow and expand. Funds from these loans can be used in a multitude of ways including working capital, expanding your business or purchasing equipment and supplies. SBA 7(a) loans are the most common type of SBA loans. In 2021, the SBA approved over 51,800 7(a) loans totaling $36.5 billion. The average approved 7(a) loan amount was over $700,000.
With an SBA loan, you get great rates, long repayment terms, and low monthly payments. In most cases, the only collateral required is a blanket lien on business assets and a personal guarantee. However, it is not an easy loan to get. If you're approved for an SBA loan, there are a few steps you'll have to go through before receiving funds from your lender.
Types of SBA 7(a) loans
The SBA 7(a) loan program consists of several different loan types. The best one for your business will depend on the amount of funding you need, how you intend to use the funding and how quickly you need it.
SBA 7(a) loan terms
The maximum term lengths for SBA 7(a) loans typically depend on the use of loan proceeds:
25 years for real estate.
10 years for working capital, equipment, or inventory loans.
The SBA sets general guidelines for the 7(a) loan program that lenders must abide by, dictating maximum loan amounts, term lengths and interest rates; however, you'll receive the specifics of your SBA 7(a) loan from your participating lender.
SBA 7(a) loan rates
SBA 7(a) loan interest rates are set based on the prime rate — a benchmark used by banks to dictate rates on consumer loan products, which changes based on actions by the Federal Reserve — plus a spread that is negotiated between you and your lender.
The spread may be fixed or variable, but it is subject to SBA maximums, which are determined by the term length, or maturity, and the size of your loan.
SBA Express and Export Express loans are subject to a different set of interest rate guidelines. For these loans, lenders can charge:
Prime rate plus 4.5% for loan amounts of over $50,000.
Prime rate plus 6.5% for loan amounts of $50,000 or less.
SBA 7(a) loan fees
It’s important to note that the interest rate is only one part of the overall cost of a 7(a) loan.
Although the SBA restricts the fees lenders can charge, most SBA 7(a) loans will have a guaranty fee, which ranges from 0.25% to 3.75% based on the size of the loan.
The SBA waives guarantee fees on Express loans for veteran-owned businesses.
Depending on the lender, you may also face packaging and servicing fees — however, the SBA specifies that lenders cannot charge prepayment penalties, origination fees, application fees or similar extraneous fees.
General SBA 7(a) loan requirements
Regardless of the type of 7(a) loan, you'll have to meet a standard set of requirements laid out by the SBA, as well as any requirements from your lender in order to qualify for financing.
Businesses that qualify for an SBA loan are typically profitable, cash flow positive, and able to show that they can afford to make the monthly loan payments. They should also meet the following criteria to qualify for an SBA 7(a) loan:
Must be a for-profit business operating in the U.S.
Must be a small business, as defined by the SBA.
Must be in business 2 or more years.
Must have a minimum annual revenue of $250,000
Must have invested your own time and money into your business.
Must have sought out other forms of financing before turning to an SBA loan.
Must be able to demonstrate the need for a loan and show the business purpose for which you’ll use the funds.
Proceeds must be used for working capital, debt refinance, equipment purchases, marketing
Individuals owning 20% or more of business must be US citizens or legal permanent residents
Individuals owning 20% or more of business cannot work for SBA and have no felonies
Individuals owning 20% or more of the business must provide a personal guarantee.
The borrowing business must not have defaulted on any government-backed loans
No outstanding tax liens
No bankruptcies or foreclosures in the past 4 years
No recent charge-offs or settlements
Underwriting requirements
Although the SBA does not set minimums for evaluating creditworthiness, lenders are required to analyze applications to be sure you’ll be able to repay the loan.
Lender’s use the following to evaluate your eligibility:
Personal credit history
You’ll typically need to have good credit — a score of 680 or higher.
Business credit history
You will also want to have a solid business credit history. The SBA uses the FICO Small Business Scoring Service to evaluate your business credit history.
You will need a business credit score (liquid credit) of 155 or higher to pass the prequalification.
Business finances
You will need to show strong annual revenue (a minimum of $250,000) and positive cash flow. You will need to have a debt service coverage ratio (known as DSCR) which compares your available operating income to your current debt obligations of 1.15 or higher.
Be prepared to provide a YTD profit & loss and balance sheet as well as your business debt schedule.
Collateral
For many SBA loan programs, lenders are required to obtain collateral to fully secure the loan. Acceptable forms of collateral include real estate, equipment, and inventory. Lenders cannot, however, deny loan applications solely based on lack of adequate collateral.
Background check
The SBA will review your credit report and criminal history, as well as other information provided by you. The SBA will also contact the IRS to verify that you are not currently under audit or in litigation with the IRS.
How to apply for an SBA 7(a) loan
To apply for an SBA 7(a) loan, you’ll want to work with an SBA lending partner, like a bank or credit union, or with a loan broker that specializes in processing SBA loan applications. Lenders and brokers will submit your application and all necessary documentation to the SBA to receive a loan guarantee; this way, if you default on the loan, the SBA will repay the lender the guaranteed amount (typically 75-85% depending on the loan amount).
If you think your business might qualify for an SBA 7(a) loan, you can complete the application process by following these three easy steps:
1. First find an SBA 7(a) lender
Many financial institutions offer SBA 7(a) loans, including national banks and credit unions. You can start by contacting your local bank to see if they offer SBA 7(a) loans. The SBA also has a lender match tool available through its website that can connect you with a lender in your area.
You’ll want to find an SBA lenders or broker that has experience processing 7(a) loans, as they will be able to expedite the application process and answer any questions you may have.
2. Gather your documents and submit your application
An SBA lender or broker will be able to provide you with a list of the necessary documents to prepare and submit your completed SBA loan application. While the requirements may vary based on the lender and the type of SBA 7(a) loan, here is some of the more common types of documents you may need to provide:
Business financial statements (i.e. balance sheets, profit and loss statements, projected financial statements)
Income tax returns – personal and business.
Personal background and financial statement (SBA Forms 912 and 413).
SBA Form 1919, Borrower Information Form.
Loan application history.
Business certificate or license.
Business overview and history.
Business lease.
3. Receive an approval
Once you have submitted your application, you’ll need to wait for approval. In some instances, SBA Preferred Lenders can approve loans without the SBA reviewing the application making the timeline quicker.
Once your loan is approved, the lender will begin the closing process. They will need to prepare the loan documents, secure collateral, and fulfilling any other authorization requirements.
After the contracts have been signed, the lender will release the funds and you will begin to repay the loan in monthly payments over the course of the term. The application and funding process usually takes 6-12 weeks though turnaround time varies.
For more information about SBA loans and how to apply, visit our website or call 877-545-7020