The Small Business Administration (SBA) 7(a) loan program is a financial assistance program that provides small businesses with access to funding for a wide range of purposes, including starting a business, purchasing equipment and inventory, expanding operations, and refinancing existing debt. The SBA does not provide loans directly to small businesses, but rather guarantees a portion of the loan made by a participating lender, such as a bank or credit union. This guarantee helps to reduce the risk for the lender and makes it more likely that the small business will be approved for a loan.
SBA 7(a) loans are generally available to small businesses that are unable to obtain financing through traditional means, such as a bank loan. To be eligible for an SBA 7(a) loan, a small business must meet certain requirements, including being a for-profit business, sufficient creditworthiness, and adequate cash flow to meet the monthly debt service requirements.
There are several types of SBA 7(a) loans, including the standard 7(a) loan, the export express loan, the small loan, and the CDC/504 loan.
SBA 7(a) loan terms and requirements
The terms and requirements for SBA 7(a) loans vary depending on the type of loan and the lender. However, there are some general terms and requirements that apply to all SBA 7(a) loans:
- Loan amount: The maximum loan amount for an SBA 7(a) loan is $5 million.
- Interest rate: The maximum interest rate for an SBA 7(a) loan is based on the prime rate, which is determined by the Federal Reserve, plus a fixed rate of between 2.75% – 4.75%, which is determined by the size of the loan. The SBA sets a maximum interest rate for each type of loan, but lenders may offer interests lower than the maximum.
- Repayment term: Real estate loans are amortized over 25 years; all other SBA 7(a) loans are amortized over 10 years.
- Collateral: SBA loans do not require collateral, which is an enormous benefit as very few lenders provide per cash flow loans. Traditional commercial and industrial (“C&I”) loans are called asset-based loans, as C&L require.
- Guarantee fee: The SBA charges a guarantee fee for its participation in the loan, which is a percentage of the loan amount. During Covid, the guarantee fee was waived. Post-Covid, the SBA modified the guarantee fee structure and now provides a “guarantee fee calculator” for borrowers and lenders to calculate its fee.
SBA 7(a) loan eligibility requirements
- Be a for-profit business
- Be an SBA defined small business: <500 employee
- Be located in the United States
- Be unable to obtain financing through traditional means, such as a bank loan, and not having enough personal net worth to finance the project without a loan
SBA 7(a) loan use of proceeds
SBA 7(a) loans can be used for a wide range of purposes, including starting a business, purchasing equipment and inventory, expanding operations, and refinancing existing debt. Some specific examples of uses for an SBA 7(a) loan include:
- Starting a business: An SBA 7(a) loan can be used to fund the start-up costs of a new business, including the purchase of equipment, inventory, and real estate.
- Purchasing equipment: A small business may use an SBA 7(a) loan to purchase new or used equipment, such as machinery, vehicles, or computer systems.
- Expanding operations: An SBA 7(a) loan can be used to fund the expansion of an existing business, including the construction of a new facility or the acquisition of a new location.
- Refinancing debt: A small business may use an SBA 7(a) loan to refinance existing debt, such as credit card debt or business loans, at a lower interest rate. However, a borrower cannot obtain an SBA loan to refinance an existing SBA loan.
- Working capital: An SBA 7(a) loan can be used to provide a small business with working capital to cover operating expenses, such as payroll, rent, and utilities. Important to note that many lenders will only make small working capital loans of a portion of the overall loan amount. SBA banks tend to avoid lending large amounts for working capital since their loans are for 10 years but, by definition, working capital needs are short-term in nature.
- Business acquisition: SBA business acquisition loans are the most popular type of SBA loan. Over 80% of all loan inquires to SBALenders.com are business acquisition loans.
Key SBA 7(a) loan financing details
Loan Size: $25,000 – $5,000,000
Loan Term: 10 years or 25 years for real estate
Interest Rates: Most SBA loans are variable rate, currently between 8% – 11%
Loan Use: Business acquisition, working capital, equipment, starting a business or franchise, and/or refinancing non-SBA debt
Credit Requirement: Credit score of around 650+ is usually required
Cash Flow Requirement: Loan should be 5x or less annual cash flow
Down Payment: Minimum of 10% up to 25%
Timing: Typically 30 – 90 days. Longer if real estate is involved
Difference between 7a loans and 504 loans
The Small Business Administration (SBA) 7(a) loan program and the SBA 504 loan program are both financial assistance programs designed to help small businesses access funding. However, there are some key differences between these two loan programs:
- Purpose: The main difference between SBA 7(a) loans and SBA 504 loans is the purpose for which they can be used. SBA 7(a) loans can be used for a wide range of purposes, including starting a business, purchasing equipment and inventory, expanding operations, and refinancing existing debt. SBA 504 loans, on the other hand, are specifically designed to fund the acquisition or construction of fixed assets, such as real estate or equipment.
- Eligibility: SBA 7(a) loans are generally available to small businesses that are unable to obtain financing through traditional means, such as a bank loan. SBA 504 loans, on the other hand, are only available to small businesses that are purchasing or constructing a facility and that will create or retain jobs as a result.
- Loan amount: The maximum loan amount for an SBA 7(a) loan is $5 million, while the maximum loan amount for an SBA 504 loan is $20 million.
- Interest rate: The interest rate for an SBA 7(a) loan is based on the prime rate plus a fixed rate. The SBA sets a maximum interest rate for each 7a loan. SBA 504 loans have a fixed interest rate, which is determined by the market and the specific terms of the loan.
- Repayment terms: Repayment terms for an SBA 7(a) loan depend on the use of the loan proceeds and the creditworthiness of the borrower. In general, repayment terms can range from five to 25 years. SBA 504 loans have longer repayment terms, ranging from 10 to 20 years.
SBA 7(a) FAQs
What credit score is needed for an SBA loan?
Individual credit score over 650 are generally required. A credit score of 680+ is preferred; 700+ is ideal.
How much collateral is needed for an SBA 7a loan?
Collateral is not required for SBA loans, but the lender will require that any available collateral (e.g., equipment, real estate, inventory) be pledged for the loan.
What are the payment terms for an SBA loan?
SBA loans are amortized over 10 years or 25 years for real estate loans.
What is the down payment for an SBA loan?
The SBA requires a minimum of 10% down from the buyer(s) for acquisition loans.
Do I have to personally guarantee the SBA loan?
Yes, all owners of 20% of more of the business will be required to personally guarantee. By personally guaranteeing the loan, you are essentially providing additional security to the lender and demonstrating your commitment to repaying the loan.
Can an SBA loan be used for an acquisition?
Yes. Inf fact, most of the loan inquires we see are for business acquisition loans?
Can I buy a portion of small business with an SBA loan?
Unfortunately, no. The SBA requires that the buyer purchases 100% of the equity of business.
Can the seller finance my SBA loan down payment?
Seller financing can be used for a portion of the purchase price, but seller financing cannot be used to substitute the minimum 10% down payment from the buyer.
What kind of documentation will the SBA bankers require?
- Last 3 years financial statements (balance sheets and income statements)
- Current year-to-date financial statements
- The Company’s last 3 years federal tax returns
- Your personal last 3 years federal tax returns
- Copy of LOI, purchase agreement, and/or key deal terms
- Bios of key management personnel and/or LinkedIn profiles
How hard is it to get an SBA 7a loan?
In general, SBA loans are easier to obtain than traditional commercial loans, but there are criteria unique to SBA lending that borrowers must meet. Here are the top key criteria that we see that exclude some borrowers:
- Two full years’ worth of federal tax return
- Cash flow of 5x the loan amount of less
- Direct or relatable business experience if an acquisition
- Down payment of 10% or more for acquisitions
- Personal liquidity of 10% or more after borrowers down payment