SBA 7(a) Loan: How to Get the Popular SBA Loan
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The U.S. Small Business Administration’s 7(a) loan program is the federal government’s primary offering 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 issued through lenders that have partnered with the 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.
|Types of 7(a) Loans|
|Loan Amount||Terms||Guaranty Percentage||Best for|
|Standard 7(a)||Up to $5 million||Up to 25 years||Up to 85%||Working capital, equipment, real estate|
|7(a) Small Loan||Up to $350,000||Up to 25 years||Up to 85%||Working capital|
|SBA Express||Up to $1 million*||Up to 7 years if used as a line of credit||Up to 50%||Urgent needs — 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%||Entering or expanding an existing export market|
|Export Working Capital||Up to $5 million||Up to 3 years||Up to 90%||Export companies in need of working capital|
|International Trade Loan||Up to $5 million||Up to 25 years||Up to 90%||Long-term financing for growing export companies|
|CAPLines||Up to $5 million||Up to 10 years||Up to 85%||Short-term or cyclical funding|
|Community Advantage**||Up to $250,000||Up to 25 years||Up to 85%||Businesses in underserved areas|
*Reverts to $350,000 on Oct. 1, 2021
**Expires Sept. 30, 2022
The SBA expanded the 7(a) program to include the Paycheck Protection Program for business owners struggling during the coronavirus pandemic. The deadline to apply for a forgivable PPP loan up to $10 million is Aug. 8.
How do SBA 7(a) loans work?
Once you find an SBA-approved lender and meet certain criteria — we’ll talk about requirements and the loan application process, below — a lender could require you to make a down payment of 10% to 20%. The SBA prefers to work with borrowers who are willing to invest equity in their own operations. Collateral may also be required for loans in excess of $350,000, but not for loans below $25,000.
Borrowers must provide a personal guaranty, which would put you on the hook to personally repay an SBA loan if the business defaults. And because SBA loans are government financing, failing to fully repay your debt could hinder your ability to receive other federal assistance in the future.
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 3.25% as of Dec. 31, 2020.
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 7(a) and Express Loans*|
|Loan Amount||7(a) Less Than 7 Years||7(a) 7 Years or Longer||SBA Express|
|$25,000 or less||7.5%||8%||9.75%|
|More than $50,000||5.5%||6%||7.75%|
*As of Dec. 31, 2020
Current 7(a) fixed rates
Fixed interest rates also vary based on the amount of your 7(a) loan.
|Maximum Interest Rates for Fixed 7(a) and Express Loans|
|Loan amount||Maximum Fixed Rate*|
|$25,000 or less||11.25 %|
|More than $250,000||8.25%|
*As of Dec. 31, 2020
SBA 7(a) loans also come with fees up to 3.75% of the guaranteed portion. Loans of $1 million or more would have a fee of 3.5% of the guaranteed portion up to $1 million, plus 3.75% of the guaranteed portion exceeding $1 million. In addition to the SBA guaranty fee, lenders can pass on costs related to your loan closing but not the SBA service fee. The SBA waives guaranty fees for Express loans for veterans.
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 10 years
- Working capital or inventory: Up to 10 years
If you plan to use your loan for multiple purposes, your maximum term may be based on the purchases that take up the majority of your loan proceeds.
You could use an SBA 7(a) loan calculator to estimate the monthly cost of an SBA loan based on your rate and terms.
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 have invested personal time and money in the business
- Must have exhausted other financing options
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. 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 680 or higher.
Businesses in a number of industries are not eligible for SBA 7(a) loans, including:
- Real estate investment firms
- Firms involved in speculative activities
- Gambling activities
- Dealers of rare coins and stamps
- Firms involved in lending activities
- Pyramid sales structures
- Charitable, religious or other nonprofit institutions
As mentioned earlier, business owners with low credit scores or those with less than two years in business may not qualify for an SBA 7(a) loan.
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 (SBA Form 413)
- 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
- Overview and history of the business
- Copy of any business lease
If you plan to use your SBA loan to purchase an existing business, you would need to submit information about that business as well. The SBA would need:
- A current balance sheet and profit and loss statement
- Two years’ worth of tax returns
- A proposed bill of sale that includes the terms of the sale
- Asking price and a list of inventory, machinery, equipment, furniture and fixtures to be acquired
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.
How long does it take to get an SBA loan?
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 guaranty for a lender.
What are the SBA 7(a) loan fees?
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.
What is the maximum 7(a) loan amount?
The maximum loan amount for a standard SBA 7(a) loan is $5 million. The maximum guaranty percentage is 85% for loans up to $150,000 and 75% for loans exceeding $150,000.