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When looking online at the various business loan options, you will probably see links to the Small Business Administration’s SBA 7(a) loan program. This is a popular type of loan that business owners use for a wide variety of short-term and long-term working capital purposes. This Balboa Capital blog post provides a complete overview of SBA 7(a) loans.
You will learn what the loan is, how to apply, 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.
SBA 7(a) loan description.
This 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 working capital and equipment loans is ten years. On the other hand, loans used to purchase real estate and improve land or buildings have a maximum maturity of 25 years. In addition, SBA 7(a) loans can be used for multiple purposes. For example, if an entrepreneur buys an ice cream shop, they can improve its interior and exterior and use part of the loan for short-term business expenses.
To qualify for a 7(a) loan, your small business needs to operate for profit, have adequate 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 must prove that you could not 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. Again, the list is subject to change, so the best advice is to check with your accountant or business lawyer to determine if your business meets the requirements.
How to qualify for an SBA 7(a) loan.
First, it is essential to remember that the SBA does not issue loans; it merely guarantees them. For example, 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 outlined in the previous section of this blog post, you need an acceptable FICO® Score to qualify. Your 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 your lender, you will typically need a credit score from 650 to 700.
Any collateral you must provide is split between the lender and the SBA. If you default 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 generates robust revenues and has sufficient cash flow.
How to apply for a 7(a) loan.
The local lender you choose will provide you with a checklist of items and information required to complete your application. Once your loan package is complete, the lender will submit it to the SBA. Following is a list of what you will need to begin the process:
- Loan application (Form 1919)
- Personal financial statements
- Business financial statements
- Profit and loss statements for the last three years
- Projected financial reports
- Business certificate/business license
- Loan/financing application history
- Personal income tax returns for the previous three years
- Business income tax returns for the previous three years
- Business profile, history, and mission statement
- Market summary/competitive analysis
- Personal resume
- Business lease/rent documents
Loan repayment options.
Most SBA 7(a) loans are repaid with simple monthly payments, including principal and interest. Your lender might offer both fixed-rate loans and variable-rate loans. Each option has its unique advantages and risks, so do your research before deciding.
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. On the other hand, 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 shock your budget and disrupt your cash flow, leading to stress and worry.
Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the Small Business Administration or FICO. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.