Every year, thousands of people start a new business to secure a financially strong future. These businesses require funds. However, banks and other financial institutions consider lending to these budding businesses a risky venture as they have a high chance of failing. Even if they offer a loan, the terms and conditions are difficult to meet for the entrepreneurs. The SBA 7(a) loan can save the day. In this article, you will get a step-by-step SBA 7(a) loan guide.
What Is An SBA 7(a) Loan?
The SBA loan is a government-backed loan for small businesses. The government agency doesn’t give a loan directly to the client. It discards the risk that banks and other lenders face in giving money to small businesses by guaranteeing repayment up to 75%, sometimes more, even if these businesses fail to repay.
SBA loans offer better terms with a lower down payment compared to traditional loans. The fees are also lower, and the loan terms are longer, sometimes up to 25 years. Thus, the monthly payment becomes lower as it is spread across a longer period. SBA has a number of loan programs, but the 7(a) loan is the most popular one. It can give you a maximum loan amount of $5 million.
The SBA loans can serve different purposes, including starting a new business, expanding a business, meeting its working capital needs, construction and renovation, or financing equipment, inventory, or real estate projects. Recently, SBA 7(a) loans have also been used to buy AI-powered digital tools like accounting software and different automation products.
Conventional Loan vs SBA 7(a) Loan
You will need to understand the differences between conventional loans and SBA 7(a) loans before deciding to apply for the government-backed loan. A conventional loan needs you to show a constant cash flow of your business and collateral. SBA 7(a) loan, on the other hand, doesn’t need any collateral for less than loan amount $25,000. The conventional lenders will ask for a down payment of 20 to 25% to buy a property; whereas, SBA 7(a) requires only 10%. Loan period for conventional loans is 5 to 7 years, and that of SBA 7(a) is 10 to 25 years. You can reduce monthly debt payments with an SBA loan, but it’s not possible with a conventional loan. The SBA loan also differs by the fact that it can finance different intangible assets like goodwill.
SBA 7(a) Loan Guide: The Application Process
The application process for SBA 7(a) may take from 12 to 18 months. However, if you have the proper documentation, then the time can be shorter. So, if you are thinking of applying for this loan, you must plan well ahead. Before starting the application process, you need to find out whether you can pay the monthly repayment amounts on time. For that, your total income must be minimum 1.25 times the total expenses every month. You must include your loan payment as part of your monthly expenses. If you can afford it, then you must apply for the loan. Here is the detailed SBA 7(a) loan guide.
1. Eligibility
To be eligible for the loan, your business must be in the US. You must provide evidence that you really need the loan and for what purpose. You need to have at least a 680 FICO credit score. The SBA 7(a) requires that you make a down payment of a minimum of 10% and be in the business for more than two years. You must present a business plan with a minimum of three years of financial projections showing that you understand the industry and competitions well.
2. Look Out For An SBA 7(a) Loan Provider
You must find a loan provider who will provide an SBA 7(a) loan. You need to knock at banks and other lenders like credit unions. There are online tools available that match different businesses with prospective lenders. Some lenders have the SBA Preferred Lender Program, which offers a quicker loan approval process.
3. Do The Paperwork
You need a number of documents to apply for the SBA 7(a) loan. Some of these include business financials, profit and loss statement, balance sheet, proof of ownership, projected financials of 1 to 3 years, business license, tax returns, and others.
4. Fill Up The Application Form
You need to fill out the SBA Form 1919 and 1920, which are Borrower Information forms, and also SBA Form 413, which is the Personal Background and Financial Statement form. Along with these forms, you must submit the various business documents requested by the lender. After submitting the form, you will have to wait for the loan to be reviewed. You might have to wait from 30 to 90 days to get a decision from the lender.
SBA 7(a) Loan Interest Rates And Fees
You can choose either fixed-rate loans or variable-rate loans. For the fiscal year 2025, the fixed interest rate varies between 12.50% to 15.50%, with the lowest rate for loan amount greater than $250,000 and the highest rate for loan amount $25,000 or less. The variable interest rate varies from 10.50% to 14.00% with the lowest rate for loan amount over $350,000 and the highest for loan amount $50,000 or less.
You need to pay a guarantee fee for the SBA 7(a) loan. There is no guarantee fee for loan amount $1 million or less, irrespective of the loan term. If your loan term is 12 months or less, you need to pay 0.25% of the guaranteed part of the loan if the loan amount is more than $1 million. If the loan term is over 12 months, then you must pay 3.50% of the guaranteed part of the loan up to $1 million. You will also need to pay 3.75% for the rest of the amount that is greater than $1 million.
Types Of 7(a) Loans
There are different SBA 7(a) loan types for specific small business needs. You should choose one that matches your business requirements.
🔶 Standard Loans
You can get up to $5 million loan for various business purposes. You can negotiate interest rates with the lender. The turnaround time for this loan is 5 to 10 days. The SBA guarantee percentage is between 75% and 85%. You will need to present collateral if the loan amount exceeds $350,000.
🔶 Small Loans
You will be offered a maximum loan limit of $350,000. To approve this loan, the lender will review your business credit, personal credit, and business financials. The interest rate is negotiable, and the SBA guarantee percentage is between 75% and 85%.
🔶 Express Loans
These loans are for those business owners in need of fast access to working capital. The lenders can approve the loans quickly. However, the interest rate will be higher, and SBA will only guarantee 50% of the loan amount.
🔶 Export Express Loans
If your business is exporting, then you can apply for this loan. You can get up to $500,000, and the approval decision is fast. In this loan, the guarantee percentage can be up to 90% depending on the amount you borrow. You can negotiate the interest rates with the lender.
🔶 Export Working Capital (EWCP) Loans
You can get up to $5 million for export-related activities like purchasing goods or inventory. SBA may guarantee up to 90% of the loan amount. The lender will take export-related receivables and inventory as collateral.
🔶 International Trade Loans
This can amount to up to $5 million for supporting international trade with an SBA guarantee of up to 90%. The terms and conditions, like interest rate, are negotiable.
🔶 CAPLines Lines of Credit
If you are facing a seasonal or short-term funding crisis, then you can apply for this loan. You can fund your payroll, inventory purchase, of other tasks with this loan amount. The loan period is 5 to 10 years. SBA guarantees between 76% to 85% of credit lines, depending on the loan amount.
This SBA 7(a) loan guide will help you to secure a good amount of loan for your business. You must know that if your business is related to gambling, loan packaging, or marijuana, then you won’t be eligible for the SBA 7(a) loan.
Conclusion
The SBA 7(a) loans provide an opportunity to small businesses that find it difficult to apply for the traditional loans due to their strict terms and conditions. This SBA 7(a) loan plays an important part in the economy by ensuring businesses can progress even when they are short of funds.
