Small business owners generally need all the help they can get. This is especially true in the early days of a business. While there are many options out there, some financial help is harder to get than others.
One loan that can be helpful is the SBA 7(a). This is a financial tool that has been designed by the Small Business Administration (SBA). Its main mission is to send money into the hands of small business owners.
Although known as an SBA loan, these 7(a) loans don’t come directly from the SBA. Instead, the SBA helps small business owners secure loans by guaranteeing a section of the amount borrowed as well as capping interest rates and limiting fees.
Today, we are going to discuss what a 7(a) SBA loan is and how it differs from an SBA 504 loan. We will look at the different types of these loans available for small business owners and how to get one.
What is an SBA 7(a) loan?
7(a) loan programs are the SBA’s main method of assisting small businesses throughout the US. When applying for an SBA 7(a) loan, you will work with a lender while the SBA helps by guaranteeing a segment of the total loan payment.
Because this government agency guarantees these funds, small businesses find it much easier to acquire funds for certain projects. This is the case even if they haven’t qualified for a business loan elsewhere.
There is no doubt about it. Running a small business can be very tough. This is especially true in times of uncertainty or when there is a loss of revenue. The health crisis of 2020 and beyond has seen many small businesses struggle to keep afloat.
This is why the 2020 Paycheck Protection Program (PPP) loans came about. These are 7(a) loans designed to help small businesses affected by the ongoing health and economic crisis.
SBA loans are certainly a port in the storm. These loans can help you get back above water in terms of finances and can be used to acquire business-related essentials such as equipment, real estate, working capital, and inventory.
If you’re wondering why it’s called a “7(a)” loan, it’s because it refers to more than half a dozen different types of SBA 7(a) loans.
Every loan is made to meet different requirements. Because each loan addresses unique needs and businesses, they vary in terms of loan amounts, SBA guarantees, and further term details.
How do SBA 7(a) loans work?
The main goal of SBA 7(a) loans is to encourage lenders to supply loans to small businesses. They are in place to help businesses that may not be able to obtain fair funding otherwise.
In 2020 alone, the SBA handed out almost 42,000 7(a) loans. The total cost of these loans combined was in excess of $22 billion.
7(a) loans got their name from section 7(a) of the Small Business Act of 1953. This was the first to authorize the SBA to provide and guarantee loans to small businesses throughout the United States.
The process of obtaining an SBA loan can begin once a business owner finds an SBA-approved lender with whom they are happy to work with. On the whole, most SBA 7(a) loans can lend businesses up to $5 million.
Out of this, the SBA guarantees 85% of loans up to $150,000 and 75% of loans that are greater than $150,000.
There is a maximum interest rate that is set by the SBA. However, this can be negotiated between you and your lender as long as it is within this limit. Interest rates are always based on the prime rate, the loan’s size, and the loan’s maturity.
SBA loans also help protect businesses from various fees as well as interest cap rates. It is important to note, however, that SBA loans also come with prepayment penalties over the first three years of the loan.
How long is the process to get an SBA 7(a) loan?
Most SBA 7(a) loans have a turnaround of around five to ten working days but this can vary as every case is different. If you are in a hurry for a loan, SBA Express loans are available. These have a faster turnaround time of around 36 hours.
What is the difference between an SBA 504 and a 7(a) loan?
SBA 7(a) loans are similar to SBA 504 loans in that they both help small business owners grow or maintain their business. Nonetheless, the two loans differ in their purposes for which they can be used for.
The SBA 7(a) loan is the SBA’s most popular loan program. If you need a loan to have access to working capital, make leasehold improvements, invest in furniture/fixtures, or acquire an existing business, then an SBA 7(a) is the best option.
However, an SBA 504 loan is a much better option if you need to finance the purchase of existing buildings or land, make improvements to any existing facilities, buy new equipment for your business, or purchase ground-up commercial real estate.
The 504 loan program’s main purpose is to act as an economic development program. Its aim is to promote growth and create job opportunities. Therefore, the number of funds you obtain can depend on whether your business has any job creation possibilities.
You can take advantage of the SBA Express loan with the 7(a) program. As we have already mentioned, this express loan completes applications within 36 hours instead of a process that can usually take many weeks or months to finalize.
The same standards are usually in place for express loans when compared to the 7(a) program.
SBA loans are not offered directly through the SBA. The SBA works with financial institutions such as banks or credit unions. Sometimes they work with other business lenders too. The preferred SBA lenders will then offer SBA loans that are guaranteed by the SBA.
Therefore, if anything goes wrong with the borrower, the SBA will cover the remaining cost. This covers all bases and mitigates the risk to lend for the preferred SBA lenders.
The eligibility criteria, loans, and fees for SBA loans
Let’s take a detailed look at the loan types for SBA 7(a) and SBA 504 programs.
SBA loan amounts - These loans have a maximum of $5 million. SBA Express loans have a maximum of $350,000.
SBA loan rates - There are fixed and variable rates available but rates are subject to SBA maximums which are negotiated by the lender and the borrower.
SBA loan terms - The maturity terms mainly depend on the ability of the applicant to repay as well as the loan’s purpose. The maximum term for real estate is 25 years, for equipment is 10 years, and for working capital is 7 years.
SBA loan fees - The fees are based on the maturity of the loan and the guaranteed dollar amount at the time. The fees can then be rolled into the overall loan plan.
SBA loan requirements and eligibility - Business must be for-profit, located in and do business in the United States, have a realistic and feasible business plan, cannot be considered ineligible for assistance by the SBA, have an adequate FICO SBSS score, and they cannot have any access to other alternative funds from various sources.
SBA loan amounts - These loans have a maximum amount of $5 million but this is dependent on the scale of your project.
SBA loan rates - The rates are always fixed. For 5 and 10 year loans, the rates are usually a percentage above the US Treasury market rate
SBA loan terms - Maturity terms are available at 10 years and 20 years.
SBA loan fees - The fees are based on 3% of the debenture (long-term security at a fixed rate of interest). It is possible to roll these fees into your overall loan.
SBA loan requirements and eligibility - Business must be for-profit, located in and do business in the United States, have a realistic and feasible business plan.
They can not be considered ineligible for assistance by the SBA and cannot have any access to alternative funds or finances from any other sources.
You can find the full list of eligibility requirements and criteria needed via the SBA website.