SBA 7(a) loans are the Small Business Administration’s most common loan program. They are designed to give small businesses financial assistance if they have special requirements.
As with any loan, figuring out whether you qualify for a 7(a) loan can be a bit of a nightmare. Here is the ultimate guide on what the SBA 7(a) loan is, how you can qualify, and what happens once you have qualified.
What is a 7(a) loan?
A 7(a) loan is a program designed by the Small Business Administration that provides money to small businesses that have specific requirements.
As there are several types of 7(a) loans, the SBA will direct a small business to a lender who will then organize a loan program alongside the business. The SBA will guarantee a portion of the loan.
The reason the SBA guarantees a portion of the loan amount is to encourage lenders to offer fair loan programs to businesses.
For example, a small business with equipment issues could apply for a 7(a) loan, where the SBA will guarantee part of the loan to benefit both the lender and the business. In return, the lender will offer a fair loan that will benefit the small business rather than terrify them with debt.
After the small business owner has found the lender they want, the loan process begins. As for how much you can get, 7(a) loans can offer up to $5 million. The lower the loan the better, because the SBA will guarantee 85% of loans under $150,000, and 75% of loans over $150,000.
The interest rates are negotiated between the business owner and the lender, and usually depend on the size of the loan and the prime rates.
How do I qualify for a SBA 7(a) loan?
As with any loan, there are specific requirements that must be met to qualify for an SBA 7(a) loan. It’s often harder for small businesses to apply for loans, especially if they are yet to open their doors.
As 7(a) loans are designed specifically for small businesses, however, they are somewhat straightforward to qualify for.
To qualify for a SBA 7(a) loan, here are the requirements:
- Business must operate for-profit
- Must do business in the United States
- Must be considered a small business by the SBA’s standards
- Must have tried other financial efforts (including personal assets) before choosing a loan
- Must only use the loan funds for a specified business purpose
- Must demonstrate their need and desire for a loan
- Must be clear of existing debts to the United States government
The types of businesses that aren’t eligible for a 7(a) loan are ones that invest in illegal activity, investment and lending, multi-sales distribution (to outside the U.S), loan packaging, or gambling. The business owner(s) must also not be on parole.
As small business owners are likely to rely on their personal finances to start their business, the SBA will also look into the owner’s credit score, debt-to-income ratio, and a minimum annual revenue of $100,000.
However, as 7(a) loans are specific to different purposes, the requirements will vary.
Business owners can apply for an SBA 7(a) loan through their website.
How much do you have to put down on an SBA 7(a) loan?
Unlike other SBA loan programs, you don’t have to put down a payment for a 7(a) loan. However, there are some requirements for this.
To qualify for no down payment, here are some of the requirements:
- Your purchased building must be occupied by at least 51% of the square footage by your business
- If your business has purchased another business of the same type (for example, a retail store buying a competitor)
- If your business is expanding into another location
Even if you don’t meet the requirements, most lenders are open to negotiation. The 100% financing deal is offered as a 5-year fixed rate or a floating rate - and sometimes a 25-year fixed rate for some businesses.
If your lender does require a down payment, it is usually 10%. The acceptable forms of this payment include:
- Borrowed funds
- Equity in personal property or another owned business
- Cash in hand
- Retirement account rollovers
How long does it take to get an SBA 7(a) loan?
The average time it takes to get an SBA 7(a) loan is usually 4 weeks. The length of time will change depending on the amount of the loan and the lender.
These loans are generally faster than other SBA loans. Some lenders can take only 10 days for the documentation process and the transfer.
Lenders with more experience with loans and small businesses (and the lenders with specific experience in the loan you wish for - such as Equipment financing) will provide a fast process. This is because they know what small businesses to approve due to their experience.
How hard is it to get an SBA 7(a) loan?
Whilst the requirements seem fairly straightforward, it is usually notoriously difficult to get an SBA 7(a) loan.
This is because lenders don’t want to give out loans to businesses - they won’t see businesses as an investment, they see businesses as a risk. This is especially the case for small startup businesses.
One of the requirements to qualify for an SBA 7(a) loan is that business owners provide evidence that they have tried every possible route for financial assistance, and applying for a loan is their last resort. This goes to show how difficult the journey of getting a 7(a) loan is.
Small businesses and startups are ever-increasing by the day. Therefore, lenders aren’t likely to hand out loans to every business.
They won’t care about the uniqueness of a new business that “customers need”, they only care about a detailed business plan that explains why they need the money, what they will do with the money, and how they plan to pay the loan back.
Whilst it is difficult to get an SBA 7(a) loan, the struggle is almost definitely worth it. These loan programs are designed for small businesses and come with a multitude of benefits including minimal (if any) down payments and low-interest rates.
In short, the reason why SBA 7(a) loans are so popular is because of how effective and successful they are. They are a hot commodity and highly accessible for businesses, so it only makes sense why the competition is so fierce.
What can you use SBA 7(a) loan for?
There are several types of SBA 7(a) loans. These include:
- Standard loan:
Lenders can lend up to $5 million for building purchases, expansion, startup costs, renovation, equipment, fixtures, working capital, and more.
- Small loan:
Lenders can lend up to $350,000 for all of the same uses as a standard loan.
- Express loan:
Lenders can lend up to $350,000 for all of the same uses as a standard loan and for a revolving line of credit
- 504 loan:
Lenders can lend up to $5.5 million for building purchases, land, renovation, and equipment
What is the difference between SBA 7(a) and SBA 504?
SBA 504 loans are for owner-occupied properties that require real estate financial assistance. SBA 7(a) loans are used to assist existing businesses with help for equipment, startup costs, renovation, and other specific programs.
Both are fairly similar in that they offer low-interest rates and are equally popular, but an SBA 504 loan can lend up to $5.5 million whereas a 7(a) will only lend up to $5 million. In short, a 7(a) loan is more versatile and for specific uses, and a 504 loan is for larger expenses like commercial real estate.
So, there you have it! We have established that it’s not easy for a small business to get an SBA 7(a) loan, however, the loan programs are mostly worth the struggle and the wait.
These loans are designed to provide financial assistance to businesses that desperately need the money for equipment, fixtures, rent, salaries, and more.
Lenders are only willing to give out these loans if the business owner(s) has provided substantial evidence of their personal and business credit history, their debt-to-income ratio, their detailed business plan, and how they intend to repay the loan.