SBA 7(a) Loans

Get to know SBA 7(a) loans

Gerri Detweiler • May 4, 2022

---

What is an SBA 7(a) loan?

SBA 7(a) loans refer to the types of loans made under the main SBA small business loan program.  This program is the primary way the U.S. Small Business Administration (USA) provides financial assistance to small businesses. The SBA doesn’t make these small business loans; it guarantees them.

The maximum loan amount is $5 million and funds may be used for a variety of business purposes, including working capital needs, commercial real estate, equipment, or even refinancing certain debts. Interest rates are low and repayment periods can be as long as 10— 25 years.

Types of SBA 7(a) Loans

There are several types of SBA 7(a) loans: 

Loan type	Maximum Amount	Repayment Term	Worth noting:
Standard 7(a) Loans	$5 million	10-25 years	Great for working capital, real estate, refinance debt
7(a) Small Loans	$350,000	7-25 years	Abbreviated credit underwriting with acceptable FICO SBSS Score
SBA Express Loans	$500,000	up to 10 years	Faster decision from SBA
Export Express Loans	$500,000	7-25 years	Reduced documentation requirements
Export Working Capital Loans	$5 million	1, 2 or 3 years	Short-term working capital line of credit for exporters
International Trade Loans	$5 million	10-25 years	Helpful for businesses engaged in international trade
CAPLines	$5 million	10 years	Offers 4 short-term lines of credit for working capital needs

The qualification requirements for each are largely similar, though there may be certain requirements that go with each type of loan. For example, to qualify for an International Trade Loan, you’ll have to demonstrate loan proceeds will be used to significantly expand an existing export market or develop new export markets, or that your business has been hurt by import competition and proceeds will be used to improve your competitive position. 

Veterans Advantage is a program that reduces or waives fees for business at least 51% by veterans, active duty members eligible for TAP,  members of the National Guard (including reservists) and spouses of those listed.

What are the SBA 7(a) loan requirements?

When it comes to qualifying for an SBA loan, the most important requirement is that the business has enough cash flow to pay back the loan. In its guidelines, the SBA states that: 

“A Lender must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral.” It goes on to state: “If the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.” 

Beyond that, though, the SBA has specific eligibility requirements businesses must meet. These are extensive, but generally applicants must:

• Be a for-profit business located in the U.S.
• Meet the SBA size standards as a small business (varies by industry)
• Not be able to qualify for similar credit elsewhere 
• Not operate in an ineligible industry, including certain passive businesses
• Not have caused a prior loss to the government on a federal debt (i.e. defaulted student loans or tax debt without resolving that debt)
• Meet the character requirements for all owners with 20% or greater ownership, including prohibitions on business owned by individuals with certain types of criminal histories
• Must be owned (51% or more) by a US citizen or lawful permanent resident

There are nuances to many of these restrictions. For example, a for-profit subsidiary of a non-profit organization may be eligible. And prospective borrowers who are on a repayment plan for federal tax debt or who rehabilitate federal student loans may be eligible. If you’re not sure whether you qualify, you can review the restrictions starting on page 141 of the Standard Operating Procedures or, better yet, talk with an SBA lender.

What credit score is required for an SBA 7(a) loan? 

SBA requires acceptable credit. There is no specific minimum personal credit score; however, all 7(a) Small Loan applications (loans of $350,000 or less) will begin with a screening for a FICO^® Small Business Scoring Service^SM Score (SBSS Score).

The FICO SBSS is a business credit score that can analyze the personal credit data of up to five owners (those with 20% or greater ownership), the business credit of the business and even financial data. If the FICO SBSS score is below 155 (out of a score range of 0-300), it doesn’t necessarily mean you’re out of luck. In that case, the application must go through additional screening. 

It is not unusual for banks and other SBA lenders to have their own minimum personal credit score requirements. Minimum credit score requirements typically range from 650—700. 

As mentioned earlier, the ability to repay the loan from cash flow is paramount to the lender evaluating an SBA loan application. Existing businesses must be able to document the ability to repay the loan from cash flow.

New businesses should be able to demonstrate the ability to project positive cash flow within two years.

What can an SBA 7(a) loan be used for?

SBA 7(a) loans are often working capital loans and they may be used for working capital purposes that include:

• Purchase inventory, supplies and raw materials
• Refinance certain existing business debts

An SBA loan may also be used to: 

• Acquire land (lease or purchase) for an eligible project
• Improve a site (e.g., grading, streets, parking lots, landscaping) including up to 5 percent for community improvements such as curbs and sidewalks
• Purchase one or more existing buildings
• Convert, expand, or renovate one or more existing buildings
• Construct one or more new buildings
• Acquire (lease or purchase) and install fixed assets

An SBA loan may also be used for business acquisition or changes in ownership, as long as certain conditions are met. 

Notably there are some important restrictions on the use of proceeds. They include: 

• Real estate investments for property that will be acquired primarily to use for sale, lease, or investment
• To pay certain delinquent taxes
• To relocate out of the community when that will result in a net loss of job (with some exceptions)

If you are hoping to use a 7(a) loan to acquire real estate, the general rule of thumb is that your business must occupy at least 51% of the rentable space when acquiring an existing property. For new construction, your business must generally occupy at least 60% of the rental property with restrictions on how long you can lease out remaining property over the next decade.

What are the SBA 7(a) loan interest rates?

Interest rates on 7(a) loans are considered competitive and are often lower than borrowers can get elsewhere. Loans may carry a fixed or variable interest rate. Variable rate loans will be tied to the prime rate, the SBA Optional Peg rate or one-monthly LIBOR (though LIBOR is being phased out.)

While lenders negotiate interest rates with borrowers, they cannot exceed the SBA’s maximum interest rate. Unlike other small business loan interest rates, a default rate is not allowed. That means the borrower’s rate won’t skyrocket if they miss a monthly payment. 

You can find current SBA loan rates here.

What are the SBA 7(a) loan fees?

The SBA requirements on loan fees help protect small business borrowers against excessive fees. A few are allowed, while others are prohibited. Generally, though, small business owners will find the fees on these loans are less than loan fees and closing costs on other commercial loans. 

One example of allowable fees are loan packaging fees based on an hourly rate or percentage of loan amount. In the case of the latter, this fee can’t exceed 3% on loans of $50,000 or less; 2% for loans between $50,000 and the first $1,000,000 and 0.25% on the portion over $1,000,000. And $30,000 is the absolute maximum that may be charged on a percentage basis. Whether charged on an hourly or percentage basis, the loan packaging fee must be reasonable and documented by the lender. 

Servicing fees are generally not allowed except when “extraordinary servicing” is required, and even then those servicing fees are capped. Plus the SBA must approve them in advance.

SBA lenders may require borrowers to pay out of pocket expenses such as: UCC filings or recording fees, photocopying, delivery charges, collateral appraisals and environmental investigation reports. Legal fees may also be charged to the borrower, within certain limits. 

Late fees of up to 5% may be charged if a borrower is more than 10 days delinquent on a payment. 

Some fees are not allowed, including origination or broker fees, points, or renewal fees.

What is the repayment term for an SBA 7(a) loan?

The length of the loan will depend on how the loan proceeds will be used.  (The repayment period may also be called the “loan term” or “loan maturity.”) Generally the SBA requires the lender to make the loan for the shortest period of time based on how the loan proceeds will be used, the useful life of assets acquired, and the borrower’s ability to repay. 

The SBA guidelines require the following loan repayment terms: 

• Working capital and inventory: up to ten years. 
• Equipment, fixtures, or furniture loans: up to ten years, though it can be extended to 15 years if the useful life of the asset justifies it. 
• Real estate: up to 25 years, with extensions in some cases involving construction or renovation.
• Leasehold improvements: up to 10 years plus up to an additional 12 months allowed to complete improvements.
• Mixed purpose loans may result in a blended maturity date.

Do SBA 7(a) loans require a personal guarantee?

Personal guarantees are generally required. An individual who owns 20% or more of the business must provide a full unlimited personal guarantee. (Sometimes referred to as “guaranty.”) And each loan must be guaranteed by at least one individual or entity. Sometimes the SBA may require a personal guarantee from a key person in the business even if they don’t own 20% or more of the business. Spouses may be required to sign a personal guarantee when the combined interest of the two spouses and minor children totals 20% or more. In addition, non-owner spouses will be required to sign off if jointly held collateral (such as home equity) is pledged.

What are the collateral requirements? 

You don’t have to have collateral to get an SBA loan. However, the SBA will require the applicant to pledge collateral when it is available to fully secure the loan. If there is not sufficient collateral in the business, the SBA must take available equity in the personal real estate (residential and investment property) of any owners with 20% or more ownership. (An exception is made if there is less than 25% equity in personal real estate.)

SBA 7(a) Small Loans of $25,000 or less do not require collateral. 

Personal guarantees are also generally required. An individual who owns 20% or more of the business must provide a full unlimited personal guarantee. (Sometimes referred to as “guaranty.”) And each loan must be guaranteed by at least one individual or entity. Sometimes the SBA may require a personal guarantee from a key person in the business even if they don’t own 20% or more of the business. Spouses may be required to sign a personal guarantee when the combined interest of the two spouses and minor children totals 20% or more. In addition, non-owner spouses will be required to sign off if jointly held collateral (such as home equity) is pledged. 

Note that startup businesses (businesses in year for one year or less) require the small business owner to contribute at least 10 percent of the total project costs. While you may think of this as a down payment, it is officially called an “equity injection.”

What are the SBA 7(a) insurance requirements?

Many small business loans require insurance to help protect the lender and SBA loans are no different. Hazard insurance is required on any assets the business pledges as collateral. Additional insurance may be required as appropriate, including:

• Marine insurance
• Flood insurance
• Product liability insurance
• Worker’s compensation
• Malpractice insurance
• Disability insurance

Life insurance may be required on the owners or key employees of certain businesses where the loan is not fully secured by collateral.

Is there SBA 7(a) loan forgiveness?

Many business owners don’t realize that Paycheck Protection Program loans (PPP loans) are a type of 7(a) loan created under the CARES Act in 2020. PPP loans were fully forgiven if the loan proceeds were used for specific purposes, primarily payroll costs. Outside the PPP loan program, however, 7(a) loans are not forgivable.

Where do I get an SBA 7(a) loan? 

These loans are made by banks and other financial institutions approved by the SBA to participate in SBA lending. Their job is to ensure the loan application meets the SBA requirements. If they do so and the borrower defaults on the SBA guaranteed loan, they can collect on the SBA guaranty. (Lenders also pay a guaranty fee—or “guarantee fee”—to the SBA.) 

However, they do not want to have to rely on the SBA guarantee. For one thing it only covers a portion of the loan (generally 75–85% of 7(a) loan amounts, sometimes less), and for another, a lender with too many defaulted loans may not be able to continue making SBA loans. So expect the lender to scrutinize your application to make sure your business is likely to repay the loan. 

You may see the term Preferred Lending Partner, or PLP. This means the lender has been given approval by the SBA to underwrite their SBA loans and make credit decisions without SBA approval (in most cases). A PLP may be able to process an SBA loan application more quickly.

Also keep in mind that each lender may have its own preferred target customer. As long as a lender meets the SBA requirements and doesn’t discriminate on a prohibited basis,  it may impose additional requirements. If your application with one SBA lender doesn’t get approved, try to find out why and determine whether that’s due to SBA loan requirements or the lender’s internal standards. 

How hard is it to get an SBA 7(a) loan?

Getting an SBA loan will likely be harder than getting an online loan, but should be no harder than getting a typical bank loan. Be prepared for a fairly long turnaround time, though there are some lenders that can streamline the process to about a month or so. You should be prepared to provide financial statements, tax returns and other documentation. Your lender can guide you through the process.

What disqualifies you from getting an SBA loan?

The main things that will disqualify you from getting an SBA loan include:

• The business falls under the types of businesses ineligible for SBA loans
• Low credit scores
• Can’t demonstrate the ability to repay the loan
• Certain criminal histories
• Defaults on other federally guaranteed loans

Talk to the lender if you aren’t sure whether you will qualify. Make sure you understand whether the requirements the lender states are SBA requirements, or lender requirements. As mentioned earlier, an SBA lender may impose additional requirements (such as higher minimum credit scores or 2 years in business) as long as they don’t discriminate on a prohibited basis.

Are there other SBA loan programs?

Keep in mind that there are times other SBA financing programs may be a better fit for your business needs. Just a few examples: 

• SBA Express loans are streamlined loans up to $350,000. (Temporarily raised to $1 million through December 31, 2020.)
• SBA Disaster Loans help businesses impacted by a federal declared disaster such as a flood, fire or hurricane.
• SBA Microloans are smaller loans (of up to $50,000) 
• 504 CDC Loans may be used for real estate acquisition or expansion of facilities as well as the purchase of certain equipment
• Export loans may be used by businesses currently involved in, or hoping to be involved in, exporting. 

Learn more about the various types of SBA loans here.

What if I can’t get an SBA loan? 

Not all businesses will have the time or patience to qualify for SBA loans. The loan application process can take weeks, and it can easily be 1-3 months before the loan funds. In addition, it can be challenging to get an SBA loan for a startup. 

If you don’t qualify for an SBA loan, you may want to look for other types of small financing options. If your business has strong financials and strong credit, you may be eligible for conventional financing through a bank or credit union. Other options may include lines of credit, invoice financing, crowdfunding, or even a small business credit card. You’ll find more information on small business loan options here.  

SBA 7(a) loan companies

While there are many lenders that partner with the SBA to lend out money under the 7(a), 504, and microloan or short-term loan program to qualified small businesses, these are a few that have earned high marks from borrowers. Read more about each to see if they might be a good fit for you.

SmartBiz

If you were reluctant to apply for any of the SBA loans because of a long and frustrating application process, you are in luck. SmartBiz has made a simplified application part of its mission, making it possible to apply for SBA 7(a) loans completely online. Those who qualify will get their loan proceeds within one month from the time they submit their application. Make sure you meet their lengthy requirements before you start; borrowers who do will find the extra prep work to be worth their time in dealing with this preferred lender.

Celtic Bank

Another favorite for SBA lending is Celtic Bank. Unlike some of the short-term working capital options available through other banks, this lender’s SBA loans offer low rates with limits of up to $5 million. Like other online lenders, expect to provide two years of business documentation and have a very good credit score. If you’re qualified, you’ll appreciate their high lending limits and no penalties for prepayment on 10-year loans.

Wells Fargo

A trusted brand for SBA lending, Well Fargo has made its mark by offering everything from short-term loans with fixed-rate financing to long-term loans designed to help the mid-sized businesses and start-up businesses alike do more at a lower rate. While this lender is friendly to new customers who may not have used them before, if you have existing business with them, more favorable terms may apply.