SBA 7(a) loans should absolutely be on your radar if you’re searching for the least expensive terms possible. Learn everything you need to know about the SBA 7(a) loan program, qualification requirements, terms, and how to apply.
Here is your comprehensive guide on all things SBA 7(a) loans:
The SBA 7(a) Loan Program: How It Works
Many people assume that an SBA loan comes directly from the government entity that it’s named after, the Small Business Administration. But the SBA doesn’t actually do any direct lending of their own.
Rather, the SBA partially guarantees loans that banks and other direct lenders make to qualifying small businesses. The partial guarantee ranges from 50% to 85% of an SBA 7(a) loan depending on the size of the loan and the borrower’s qualifications. The SBA guarantee ultimately makes lending to a small business or startup less risky in the eyes of lenders. If the borrower defaults on the loan, the SBA guarantee ensures that the bank will get 50% to 85% of the loan back.
Since the SBA guarantee provides some safety in the event of borrower default, lenders are more likely to approve small business owners for a loan and to provide attractive terms. Without the SBA guarantee, these businesses might not be able to get funding.
SBA 7(a) Loans: What You Can Use Them For
The SBA has several loan programs to fulfill different business needs. The SBA 7(a) loan is the most flexible and popular of all the programs, and with good reason. Eligible business owners can qualify for up to $5 million in financing and can use the money for virtually any business purpose.
Examples of eligible SBA 7(a) loan purposes include:
General working capital
Buying real estate
Buying an existing business
Refinancing existing debt
Along with traditional SBA 7(a) loans, there are other types of 7(a) loans. For example, the SBA 7(a) express loan is an expedited loan program for loans under $350,000. And CAPLines are lines of credit that provide seasonal and cyclical working capital. The terms of your SBA 7(a) loan will vary depending on how you use the proceeds and the specific program you apply for, but you can enjoy low interest rates and long terms on SBA financing.
SBA 7(a) Loan Requirements: What You Need to Be Eligible
The biggest disadvantage of an SBA 7(a) loan is that it’s difficult to qualify. SBA 7(a) loan terms are very attractive, so even with the SBA guarantee, these loans are highly competitive. Specific requirements vary from lender to lender, but there are certain basic criteria that apply across the board.
Here are the basic eligibility requirements for an SBA 7(a) loan:
- Your business is officially registered as a for-profit business.
- Your business meets the SBA’s definition of a small business.
- Your business is located in and operates in the US.
- You, as the business owner, have invested your own time and/or money into the business.
- Sufficient time in business
Although startup owners can sometimes qualify for an SBA 7(a) loan, most lenders only extend loans to businesses that have been operating for a couple years. You should experience in the industry you’re in or in a related industry.