SBA 7(a) Loan: How To Get the Popular SBA Loan
The U.S. Small Business Administration’s 7(a) loan program is the federal government’s primary program for general business financing. SBA 7(a) loans can cover business expenses like working capital and operating costs, real estate and equipment, up to $5 million. The 7(a) loan program provides financing with favorable rates and terms up to 25 years to businesses that have difficulty obtaining funding elsewhere.
What is an SBA 7(a) loan?
SBA 7(a) loans are a type of business loan issued through lenders that have partnered with the Small Business Administration (SBA), including banks, credit unions, community development organizations and microlending institutions. The SBA guarantees a portion of each loan, which is how lenders are able to keep rates relatively low. Business owners can apply for other types of SBA loans beyond 7(a) loans, including CDC/504 loans and microloans.
You could use an SBA 7(a) small business loan as working capital to cover seasonal expenses or make one-time purchases of fixed assets like furniture, real estate or machinery. You could also use a 7(a) loan to fund construction or remodeling projects.
Types of 7(a) loans
There are several types of loans under the 7(a) program that meet different needs for borrowers, such as the SBA Express for faster turnaround times or seasonal and short-term financing options using an SBA line of credit.
| Loan amount | Terms | Guarantee percentage | Best for | |
|---|---|---|---|---|
| Standard 7(a) | $500,001 to $5,000,000 | 5 to 7 years for working capital Up to 25 years for equipment and real estate 10 years for other uses | Up to 75% | Working capital, equipment, real estate, refinancing debt, changes in ownership |
| 7(a) Small Loan | Up to $500,000 | Up to 25 years | Up to 85% for loans up to $150,000 Up to 75% for loans greater than $150,000 | Working capital, equipment, real estate, refinancing debt, changes in ownership |
| SBA Express | Up to $500,000 | Up to 10 years if used as a line of credit | Up to 50% | Emergency funding — SBA turnaround within 36 hours |
| Export Express | Up to $500,000 | Up to 7 years if used as a line of credit | Up to 90% for loans of $350,000 or less Up to 75% for loans more than $350,000 | Entering or expanding an existing export market |
| Export Working Capital | Up to $5,000,000 | Up to 3 years | Up to 90% | Export companies in need of working capital |
| International Trade Loan | Up to $5,000,000 | Up to 25 years | Up to 90% | Enter new markets and make investments to compete with other importers |
| CAPLines | Up to $5,000,000 | Up to 10 years | Up to 85% for loans up to $150,00 Up to 75% for loans more than $150,000 | Short-term or cyclical funding |
How do SBA 7(a) loans work?
SBA 7(a) loans work similarly to other loans. You apply through a lender, fill out any requested paperwork and follow the repayment plan laid out by that lender.
What makes it different from a traditional loan is that part of the loan is guaranteed by the Small Business Administration. But you won’t need to pay that part of the loan back separately — you’ll generally make monthly repayments directly to your lender.
Repayment terms for SBA 7(a) loans vary depending on the assets that the loan is financing:
- Real estate: Up to 25 years
- Equipment: Up to 25 years
- Working capital or inventory: Up to 10 years
SBA 7(a) loan rates and terms
The SBA places a cap on the maximum amount of interest SBA 7(a) lenders can charge. Interest rates may be fixed or variable, and are based on the federal prime rate. The prime rate is currently 7.50%.
Current 7(a) variable rates
Your variable interest rate may be lower depending on the interest rate your bank sets.
Maximum interest rates for variable-rate 7(a) loans
| Loan amount | Max. rate | Current max. rate Based on the current prime rate of 7.50% |
|---|---|---|
| $50,000 or less | Prime + 6.50% | 14.00% |
| $50,001 to $250,000 | Prime + 6.00% | 13.50% |
| $250,001 to $350,000 | Prime + 4.50% | 12.00% |
| More than $350,000 | Prime + 3.00% | 10.50% |
Current 7(a) fixed rates
Fixed interest rates also vary based on the amount of your 7(a) loan.
Maximum interest rates for fixed-rate 7(a) and Express loans
| Loan amount | Max. fixed rate Based on the current prime rate of 7.50% |
|---|---|
| $25,000 or less | 15.50% |
| $25,001-$50,000 | 14.50% |
| $50,001-$250,000 | 13.50% |
| More than $250,000 | 12.50% |
7(a) fees
SBA 7(a) loans also come with fees up to 3.75% of the guaranteed portion. The fee is charged as follows:
- Loans less than $150,000: 2.00% of the guaranteed portion
- Loans of $150,001 to $700,000: 3.0% of the guaranteed portion
- Loans of $700,001 to $5 million: 3.5% of the guaranteed portion up to $1 million, plus 3.75% of the guaranteed portion exceeding $1 million.
- Loans with maturity terms of 12 months or less: 0.25% of the guaranteed portion
In addition to the SBA guaranty fee, lenders can pass along certain costs related to your loan closing. However, they can’t pass the SBA service fee onto you. The SBA also waives the guaranty fee for Express loans for veterans.
SBA 7(a) loan requirements
SBA 7(a) loans are open to a wide range of small businesses that meet the SBA’s size standards, which include revenue or employment limits that vary by industry. In addition to size criteria, business owners must meet these additional general SBA requirements:
- Must be a for-profit business
- Must do business and be physically located in the U.S. or its territories
- Must be creditworthy enough to assure the loan’s repayment
- Must have exhausted other financing options
According to a spokesperson from the SBA, “Lenders certify to SBA that the lender checked the eligibility requirements, and the borrower has been or would be unable to get the same type of capital in the conventional market.”
That means that you don’t need to have a loan rejection to get an SBA loan. If the lender agrees that you wouldn’t qualify for the same type of funding for reasonable terms with a traditional loan — like if no similar term lengths are available — you can get an SBA loan.
Time in business, credit requirements
Borrowers typically need two years in business to qualify for an SBA 7(a) loan, though you could be approved with less time.
While the SBA does not have a minimum required credit score, it does use the FICO® Small Business Scoring Service℠ (SBSS) to prescreen 7(a) applicants and requires a minimum score of 155 from that scoring model. The SBSS takes into account a mix of consumer and business credit bureau data, along with information borrowers and lenders supply on Form 1919 and Form 1920. You may have a higher chance of being approved with a personal FICO Score of 650 or higher.
Down payment and collateral requirements
Depending on how you intend to use your SBA 7(a) loan, you may be required to make a down payment. Most SBA 7(a) loans don’t require you to put out any down payment funds, but if you’re taking out over $500,000 and planning to use the funds to facilitate a complete change in ownership of the business, you’ll be required to put 10% down.
Collateral may also be required for loans in excess of $50,000.
SBA guaranty and personal guarantee
The SBA guarantees a certain percentage of each 7(a) loan that lenders give out. This protects the lender from loss in the event that you default on your business loan. That protection is the reason why they are able to offer more lenient qualifying standards and more favorable interest rates on SBA loans.
The guarantee on SBA 7(a) loans ranges from up to 50% for SBA Express loans to 90% on Export Working Capital and International Trade loans.
Borrowers must also provide a personal guarantee on the loan, which will put you on the hook to personally repay an SBA loan if the business defaults.
Ineligible businesses
Businesses in a number of industries are not eligible for SBA 7(a) loans, including:
- Nonprofit businesses
- Firms involved in lending activities
- Real estate investment ventures
- Life insurance companies
- Foreign businesses
- Pyramid schemes
- Businesses engaged in illegal activities
- Businesses that limit membership for reasons other than capacity
- Government entities
- Businesses with an associate under incarceration or on trial for financial misconduct
- Businesses of a sexual nature
- Businesses that have previously defaulted on a federal loan
- Lobbying businesses
- Speculative businesses
How to apply for an SBA 7(a) loan
The first step in getting an SBA 7(a) loan is finding an approved SBA lender in your area. You could begin with the SBA’s Lender Match tool to connect with a nearby financial institution, read more about these top SBA lenders or browse the 100 most active 7(a) lenders.
Once you find a lender, you’ll need to compile several documents to complete your SBA 7(a) loan application. The lender would then submit your finished application to the SBA for approval. Some lenders have received “preferred” status and are able to independently approve borrowers.
Here are the documents you’d need to submit along with your loan application:
- Personal background and financial statement
- Current profit and loss statement, as well as a projected financial statement
- Ownership information
- Business certificate or licenses
- Application history for previous loans
- Three years’ worth of personal and business tax returns
- Resume
- Overview and history of the business
- Copy of any business lease
For assistance completing your application, you could reach out to a Small Business Development Center (SBDC) in your city. SBDCs offer free business consulting in partnership with the SBA.
Alternatives to SBA 7(a) loans
If you decide that an SBA 7(a) loan is not the right choice for you, here are some alternative options:
- Microloans: If you only need a little funding, microloans offer smaller funding amounts, typically alongside more lenient eligibility requirements.
- Startup business loans: As the name suggests, startup business loans are meant to help fund newer businesses. They typically have more flexible eligibility criteria, but can come with lower borrowing limits than traditional small business loans.
- Small business grants: Small business grants offer access to funding that doesn’t need to be repaid. However, you’ll likely face stiff competition for these funds. Plus, you may have to complete a lengthy application process.
Frequently asked questions
It could take as many as two or three months to be approved for an SBA loan. Unless a lender has preferred status, it may take a few weeks just for the SBA to approve a guarantee for a lender.
Fees for an SBA 7(a) loan may be as much as 3.75% of the guaranteed portion of the loan. The SBA may allow lenders to charge additional fees if a loan requires extensive servicing.
The maximum loan amount for a standard SBA 7(a) loan is $5,000,000. The maximum guarantee percentage is 75%, or 85% for 7(a) small loans up to $150,000.
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