When looking online at the various business loan options that are available, you will probably see links with information about the Small Business Administration’s SBA 7(a) loan program. This is a very popular type of SBA loan that can be used for a wide variety of short-term and long-term working capital purposes.
This Balboa Capital blog post provides you with a complete overview of SBA 7(a) loans. You will learn what an SBA 7(a) loan is, how to apply for a loan, what it takes to qualify, what it can be used for, and much more. We think you will find this information to be very helpful.
7(a) loan description.
The 7(a) loan program is recommended for small business owners who need working capital to buy an existing business, refinance debt, or purchase equipment, office furniture and inventory. The loan amounts usually range between $125,000 and $5 million, and the repayment periods are 5 to 25 years.
The maximum maturity for a working capital loan and/or an equipment loan is 10 years. Loans used to purchase real estate and/or make improvements in land or buildings have a maximum maturity of 25 years. A 7(a) loan can also be used for multiple purposes. For example, if an entrepreneur buys an ice cream shop, makes improvements to its interior and exterior, and uses part of the loan for short-term business expenses, the maximum maturity of their 7(a) loan would be determined based on the largest percentage of the use of the funds.
In order to be eligible for a 7(a) loan, your small business needs to operate for profit, have an adequate amount of equity, and be based in the United States. In addition, you can only be considered for a loan if you intend to use it for business purposes. There are also some additional requirements that you will need to meet. For example, you will need to provide proof that you were not able to secure a loan from a bank, credit union, or other financial entity. Moreover, you cannot be delinquent on any debt to the United States government, such as income taxes or a student loan.
Next, the SBA website has a lengthy list of business types that are not eligible for 7(a) loans. The list is subject to change, so the best advice is to check with your accountant or business lawyer to find out if your business meets the SBA’s requirements.
How to qualify for a 7(a) loan.
First off, it is important to remember that the SBA does not issue 7(a) loans; it merely guarantees them. The SBA guarantees 85% of a loan up to $150,000, and 75% of a loan greater than $150,000. Therefore, you will need to find a participating SBA lender that offers 7(a) loans.
In addition to meeting the eligibility requirements that are outlined in the previous section of this blog post, you need an acceptable FICO credit score in order to qualify. Your 7(a) loan application will go through a lengthy review process that involves looking at your credit score and cash flow, evaluating your business and personal income tax returns, and assessing your ability to repay the loan. Depending on the lender you work with, you will typically need a credit score anywhere from 650 to 700.
Any collateral that you are required to provide is split between the lender and the SBA. If you end up defaulting on your loan, your collateral (real estate, automobiles, equipment, etc.) will become theirs to sell. The only way to avoid putting up collateral is to prove that your business is generating robust revenues and has sufficient cash flow.
How to apply for a 7(a) loan.
The application process for an SBA loan is lengthy and involved. The local lender you choose will provide you with a checklist of items and information that are required to complete your application. Once your 7(a) loan package is finalized, the lender will submit it to the SBA. Following is a list of what you will need to begin the process:
- SBA loan application (Form 1919)
- Personal financial statements
- Business financial statements
- Profit and loss statements for the last 3 years
- Projected financial reports
- Business certificate/business license
- Loan/financing application history
- Personal income tax returns for the last 3 years
- Business income tax returns for the last 3 years
- Business profile, history and mission statement
- Market summary/competitive analysis
- Personal resume
- Business lease/rent documents
If you need fast access to cash, an SBA 7(a) loan might not be the best option. This type of loan takes approximately two to three months to be reviewed and approved. Your SBA preferred lender might be able to expedite the process quicker, but that is not always the case.
Loan repayment options.
The majority of 7(a) loans are repaid with simple monthly payments that include principal and interest. Your lender might offer both fixed-rate loans and variable rate loans. Each of these options has its own unique advantages and risks, so do your research before making a decision.
A fixed-rate loan will not change during the life of the loan, which means your monthly payments will be predictable. This makes it easier to budget your finances each month. A variable rate loan can rise or decrease based on current market rates and conditions. If interest rates rise, so too will your monthly loan payments. This can be a real shock to your budget and disrupt your cash flow, not to mention lead to stress and worry.
Although SBA 7(a) loans are quite popular among small business owners nationwide, they are not for everyone. If you cannot afford to wait a couple of months to get a 7(a) loan because of the lengthy application process, there are other options to consider. These include unsecured business loans and short-term business loans. You can apply for either of these loans online in just minutes, and no collateral or financial documents are required for most loan amounts. Lastly, funding is provided in just a few days.