How to Qualify for an SBA 7(a) Loan

Small businesses are the backbone of America. Making up the majority of businesses in America, small businesses employ many people and are at the heart of many communities. Without the backing of large capital or corporate capabilities, small businesses face unique financial and logistical challenges. Whether it comes to investing in their business, challenges in operations, or expansions of their small business, small business owners are interested in affordable financing and loan options. After all, making a business more profitable is good for a variety of reasons.

The United States Small Business Administration (SBA) is interested in helping small businesses achieve their goals. They have created an SBA 7(a) loan program designed to help small businesses invest in their future and survive current financial challenges. This provides a unique and intriguing option for small businesses seeking financing. If you are potentially interested in an SBA 7(a) loan for your small business, you should read further to understand if your small business is the right fit and if you qualify for one. In this article, we’ll cover the following topics in depth:

What is an SBA 7(a) Loan?

The SBA 7(a) loan program is the most common loan program of the Small Business Administration. It provides financial assistance to small businesses, given that they meet special requirements.

Most SBA 7(a) loans are used by small businesses to purchase real estate for their business. If a bakery needs a new location for its storefront, it might take on an SBA 7(a) loan to help fund its purchase. Yet, these are not the only purposes of SBA 7(a) loans.

Many small business owners make use of the small business loan for other purposes. One such reason could be refinancing debt that they already have. Sometimes, a small business might have previously taken on debt to purchase large capital. For example, a local brewery might buy equipment to expand its small beer brewing operation. To do so, this business took on debt. The debt might carry a high interest rate or have otherwise unfavorable terms. Thus, a small business owner might be looking to refinance the loan. To do so, they might look to an SBA 7(a) loan with better terms for their debt, making the loan cheaper for them.

Another reason a small business might want an SBA 7(a) loan is that they are interested in making a large purchase of capital for their restaurant. For example, you might own a cafe. Yet, even though you might be able to pay for the cafe location, you might need more capital to pay for the inventory, equipment, and furniture inside the cafe. To do so, an SBA 7(a) loan might be a cheap way to stock your cafe with the furniture and coffee-making supplies it needs.

If your startup is experiencing a crunch in paying off a large amount of debt or accounts payable, you might need some cash to help cover your expenses. Getting an SBA 7(a) loan may provide your small business the financial flexibility it needs to get back on track to managing capital in a more effective and efficient manner.

As you can see, an SBA 7(a) loan has a lot of potential uses for a small business. The financing options that it offers are plentiful, but it is important to note that the maximum loan value the SBA 7(a) program issues is $5 million. If you are planning on needing more than $5 million, you may need to find an additional source of financing for your purposes.

You should also consider whether your small business is initially eligible for this type of business financing. Your eligibility will be determined by your business purpose for what it does to earn money. The loan will also depend on the credit history of the business, your personal credit score, as well as where the business conducts its business.

Types of SBA 7(a) Loans

If you are interested in exploring whether you qualify for an SBA 7(a) loan, you should understand the type of SBA 7(a) loans that are made available to you and your small business.

Standard 7(a) Loan

The standard 7(a) loan for small businesses is the most typical loan for a small business, which has a maximum loan value of $5 million for your small business. This type of loan can be used as working capital for your business, or it can be used for equipment and supply purposes. If your small business needs to purchase furniture or office items, this might be the right loan for you. Similarly, if you are running a restaurant, equipment for your restaurant kitchen could be covered by this loan.

If you are looking to expand your business or acquire real estate for your small business, this would be the right kind of loan for you. Your small farming business might want to purchase additional acreage or construct an extra shed. This type of loan would be great for your small business.

7(a) Small Loan

The 7(a) small loan is a different kind of loan from the standard 7(a) loan but with a similar structure. The 7(a) small loan has a maximum loan amount of $350,000. This is much smaller than the $5 million limit in the standard 7(a) loan. The 7(a) small loan is intended to be used for smaller purchases. If you anticipate needing a small amount of funding, or less than $350,000, then this might be the loan for you.

The processing times are the same for the standard 7(a) loan and the small 7(a) loan, so there is not necessarily an advantage in the processing times.

Express Loan

An SBA express loan is a small business 7(a) loan used when you need funding quickly. Whereas the processing time for a standard 7(a) loan or small 7(a) loan is approximately 5-10 days, the processing time for an express loan is only 36 hours. If you need funding urgently, this might be the best loan option for you. Keep in mind that you can only access up to $500,000 on this kind of loan. Moreover, this loan allows banks to be guaranteed a lesser percentage of the loan value than a standard 7(a) loan or small 7(a) loan, so banks may be less likely to grant this financing option.

Export Express Loan

An export express loan is similar to an express loan, with a maximum cap of $500,000. However, it has a shorter processing time of only 24 hours. Moreover, there is a higher guarantee for banks willing to issue these loans than the express loan.

The condition of the export express loan is that it must be used for the export development of a business. This is a core requirement of this type of SBA 7(a) loan.

Export Working Capital Loan

An export working capital loan is used specifically to support working capital in an export business so that it can be used to support export sales. If this is the purpose that your small business needs, you can access up to $5 million in credit on this kind of loan. The processing times for the loan are higher than the express loan, usually between 5-10 days. The core advantage to applying for this kind of loan is that banks are covered by a very high guarantee, at a rate higher than most of the rest of SBA 7(a) loans, so you should be confident in this option if you need working capital to support export sales.

International Trade Loan

The international trade loan has the same terms as the export working capital loan, but the main difference is contained in the purpose of the loan. To be eligible for an international trade loan, the purpose must be to use the funding to support a long-term expansion of your export capacity or used to improve your current systems or competitiveness in international trade.

CAPLines of Credit

CAPLines of credit are a line of credit to be used for working capital needs in the short and medium term. There is a maximum of $5 million for the line of credit. The processing time is similar to non-express loans under the SBA 7(a) program, so if you need a line of credit, this might be the best option.

Components of an SBA 7(a) Loan

Now that you are aware of the common types of an SBA 7(a) loan, you should be aware of the details of the components of an SBA 7(a) loan, as this will determine the overall expenses of your business. Moreover, selecting the correct loan for your small business can help you be sure that you qualify for it.

Terms of an SBA 7(a) Loan

If you are looking into an affordable SBA 7(a) loan for your business, one of the first concerns you might have with the loan is the amount of the monthly loan that you will be required to make. Indeed, this has a great influence on the amount of debt that you can take on to help your small business get the most amount of leverage possible for you to achieve your goals.

The first question you should ask yourself in order to figure out the terms of an SBA 7(a) loan is to ask yourself what the business debt will be used for. If it is used to buy real estate, you can expect a maximum term loan to be 25 years. So, if you are acquiring more land for a small business farm you have, the longest term will be 25 years. If you are buying equipment, inventory, or working capital, the longest term will be 10 years. So, if you are buying equipment or supplies for a restaurant or cafe, you will want to factor this into your decision-making.

Rates on an SBA 7(a) Loan

As much as terms are important for figuring out your monthly payment, your interest rate is also important in calculating the debt burden for your business. Your business will have to leverage its cash flow every month to pay down your debt. The interest rate will greatly affect how much your small business may have to pay on its debt.

With a current prime rate of 7.75%, interest on loans can be expensive. For a loan of $25,000 or less, the interest rate on this loan will be between 12-12.5%. Between $25,000-$50,000, the interest rate on the loan will be between 11-11.5%. With a loan greater than $50,000, the interest rate on the loan will be between 10-10.5%.

As you can see, the rates on an SBA 7(a) loan are quite high right now. This has to do with increased interest rates across the board right now. SBA 7(a) loan interest rates are based on a series of guidelines based on the prime rate.

The prime rate is a number used by banks to benchmark consumer loans. Of course, this rate adjusts according to the actions of the Federal Reserve. The remaining interest rate is what is called a spread. The spread is the number that a lender chooses based on the term length and loan size.

The interest rate differs for express loans and export express loans. It is important to check which loan you are considering to see if your business’ finances can qualify for making payments on the loan.

The loan terms for interest rate are one part of the cost you will have to pay if your business acquires an SBA 7(a) loan. There is likely also a guaranty fee that will accompany the loan. The fee can range from .25%-3.75% depending on the loan size you select. Veterans are also eligible to get this guaranty fee waived on express loans they take out.

Please also note that the interest rate and guaranty fee are not the only charges for an SBA 7(a) loan. There are also loan packaging and loan servicing fees you should watch out for and calculate to make sure your business can pay for the loan you may qualify for. The short-term implications of these expenses can be high if you do not anticipate them well.

Requirements of an SBA 7(a) Loan

If you are interested in qualifying for an SBA 7(a) loan and later go on to apply and accept a loan, your small business will have to meet a set of requirements. These requirements come from two parties: the U.S. Small Business Administration and the lender from which you are receiving the loan. While the requirements for your small business by the lender can vary, there are some standard requirements from the SBA that you should make sure your business qualifies for.

The first set of requirements provides that you must be an operating small business according to the definition of a small business.

First, you need to make sure that your business meets the definition of a small business, as defined by the United States Small Business Administration. It is critical that you meet this definition, as without it, you are unable to apply for an SBA 7(a) loan.

Part of this definition implies that you must be a for-profit business in the United States, doing business in the United States. This means that if you are not a business, such as a charity, you cannot qualify for an SBA 7(a) loan. Moreover, if you are a real estate investor, for example, these loans are not available to you. You cannot qualify if your business activities are not in line with small business requirements.

Alongside needing to have a clear business purpose for your small business is needing to prove that your small business will use the funds as you say for that business purpose. Moreover, this need has to be proved on your application. Your business should demonstrate that that loan is important for the operations of your business and should be used.

As a small business owner, you must also show that your time and money are a part of this business. This is important in distinguishing the business structure as a small business and not as some part of a broader business. Part of this demonstration needs to show that you have a serious stake in the equity to be applying for an SBA 7(a) loan. If you have an insignificant amount of equity in the application process, it might call into question your application and against the stated eligibility requirements.

The second set of SBA requirements focuses on the small business’s management of its debt and the future debt it takes on.

The first of these requirements is to ensure that your small business does not have any outstanding government loans for which it has late payments. It is important to be up to date on any government loans and any loans in general when you go to apply for an SBA 7(a) loan.

The other requirement in this category is that you must have demonstrated that your small business has sought alternative forms of financing before deciding to apply for an SBA 7(a) loan. If you cannot demonstrate this, your small business may not qualify.

The final part of this type of requirement is to be able to provide an SBA guarantee in the form of collateral for SBA 7(a) loans on loan amounts larger than $25,000. Similar to any type of loan, it is important that a lender can be confident that they can recuperate the lost value of a loan if a borrower defaults. For an SBA loan, it is crucial that a loan application over $25,000 contains evidence of collateral in the small business for the security of the loan program and the SBA lender.

The other category of requirements is for owners of a small business. The Small Business Administration expects that owners of the company with a stake of 20% or greater can put up a personal guarantee for the loan. This process de-risks the loan for potential lenders and is a requirement of the loan programs so that the SBA can ensure the security of its funds when it loans them out.

Documents Needed to Apply

Part of the process of qualifying for an SBA 7(a) loan will come from the stage of submitting documents to your lender. Your lender will then send information to the Small Business Administration.

There are many SBA forms you will need to fill out in the application process to be sure that you qualify.

The first of these forms is a borrower information form, which is known to the SBA as Form 1919. This form’s purpose sounds as intended. It asks for information about the borrowing business, the activities of the business, the purpose of the loan, previous government loans, and more.

Financial statements, submitted via SBA Form 413, are another set of documents that need to be submitted. These help analyze the financial eligibility and feasibility of the loan for your small business. These financial statements are your personal financial statements, allowing the SBA to gain insight into your personal financial situation and relationship with the small business.

Other sets of documents contained in the business financial statements will also be required. This includes the profit and loss statement, current in the last 180 days, as well as supplementary financial schedules from the previous three fiscal years. Another set of statements required is the projected financial statements of a detailed one-year out projection, including a description of how you plan to achieve those targets. This may be a sort of business plan.

In addition, ownership and affiliate information needs to be filled out for your other business interests and stakes in other companies. Your business license and certificate will also be required in the application process, or your corporate seal stamp on the application if you are a corporation. Your loan history is also required for the application to determine your eligibility. This must include a history of past loan applications.

Income tax returns will be required for your SBA 7(a) loan application of both business and personal tax returns for the last three years. Your SBA loan application will also need to include the resumes of each principal in the business. A business overview, business history, and business lease are the final required documents for an SBA 7(a) loan application.

Conclusion

Qualifying for an SBA 7(a) loan application can greatly help your business access beneficial financing. Some of the terms offered on SBA 7(a) loans are great, such as no penalty for prepayment. It is important to understand the uses of the SBA 7(a) loans, the types of loans available to you, the loan requirements you can afford, and the eligibility requirements and required documents to ensure that you meet the qualifications for your small business loan. Taking good care of your application in the process can help you qualify and ensure that your existing business gets the best loan repayment terms possible.

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