What is an SBA 7a Loan?
An SBA 7a loan is a loan backed by the Small Business Administration (SBA) intended for helping small businesses grow. SBA 7a loans are the SBA’s most popular loan program – whether helping expand an existing business or starting up a new one that may not have a substantial history of business income, SBA loans offer reduced risk for lenders, since up to 85% of the loan can be secured by the SBA. They can be for amounts of up to $5 million and can be used for any business-related financing, such as working capital, purchasing fixed assets (such as real estate or equipment), refinancing existing debt, or even buying an existing business. SBA 7a loans are also popular given their low down payments (10% – 20%) and interest rates (~7% – 8% per month). Payment terms also tend to be longer depending on what the loan is to be used for: up to 25 years for loans used for real estate, 10 years for loans used for equipment, and 7 years for loans used as working capital). The details of an SBA 7a loan will depend on which kind you are taking out and for what purpose. SBA Express loans, for example, have a quicker processing time (up to 36 hours), but can only be for amounts up to $350,000. SBA 504 loans, on the other hand, can be for amounts of up to $5 million, but are only 40% covered by the SBA, and require a 10% down payment. To obtain an SBA 7a loan, borrowers or individuals representing a business entity (corporation, LLC, etc.) that has more than 20% interest will need to fill out an SBA 1919 form.
Table of Contents
The SBA places maximums on its interest rates, which vary depending on the length and size of the loan. SBA interest limits for SBA 7a loans longer than 7 years are:
- 2.25% over prime on loans over $50,000
- 3.25% over prime on loans between $25,000 – $50,000
- 4.25% over prime on loans under $25,000
And limits for loans shorter than 7 years are:
- 4.75% over prime on loans over $50,000
- 3.75% over prime on loans between $25,000 – $50,000
- 2.75% over prime on loans under $25,000
As with most lenders, SBA 7a lenders will want to see good credit history. Specific credit score requirements, as well as the significance of one’s credit rating generally, will vary in step with the desired total of the loan and its intended use. While applicants can be eligible for an SBA 7a loan with a credit score of 650, a score of around 680 is recommended. How strong your credit rating is will determine other aspects of the loan, such as interest rates and down payments. Average SBA 7a down payments are 10%, though they can be as low as 5% or as high as 20%, depending on your credit score/history and other factors. Overall, lenders will want to see projections of cash flow from previous years, showing how profitable your business has been and how likely is the promise of its success. If you are using an SBA 7a to start a new business, lenders will be at a higher risk, and a score of 700 is recommended, as well as high net worth. In this case, lenders will also want to see evidence of prior business experience and education.
Borrowers can use SBA 7a loans to refinance existing debt so long as it can be shown that the debt was accrued for business purposes, that it is unreasonable (exceeding maximum SBA interest rates, over-collateralized, a result of balloon maturity, etc.), and that its refinancing will benefit the business significantly.
How to Get an SBA 7a Loan
If you have strong credit, a promising business plan (either for expansion or startup), and substantial revenue, you are in good shape standing for an SBA 7a loan. Credit scores of 680 – 700 are recommended, and business revenue of at least $100,000/year is considered solid. As for business plans, lenders will want to see financial projections going ahead 3 – 5 years and demonstrating an understanding of the nature of your market. In addition, for loans over $25,000, lenders will often want some collateral provided by the borrower. Again, the amount of collateral needed will depend on other elements affecting the lender’s perceived risk.
7a loans are the SBA’s most popular loan program, though there are many others. It’s always best to check all your options and make sure you’re getting the best loan for your circumstances. After all, it’s not just your business to consider, but your finances generally, so be sure to take your time, do your research, or even talk with an expert to get the best advice you can before you make your decision.