This article is part of a larger series on Business Financing.
Small Business Administration (SBA) 7(a) loans are good for businesses in need of long-term working capital, equipment purchases, or commercial real estate acquisition. The SBA 7(a) loan program provides up to $5 million in financing, with repayment terms of up to 10 years for working capital and 25 years for real estate. These loans feature relatively low interest rates ranging from 5.5% to 8%.
It can be difficult for businesses to get traditional loans, making SBA loans advantageous to small businesses. According to data from the SBA, the SBA has guaranteed more than 250,000 small business loans, with guaranteed loan amounts totaling more than $100 billion since 2016. Without SBA 7(a) loans, the small businesses that qualified may not have been able to acquire the affordable financing needed to keep their businesses operational.
Most SBA 7(a) loans are for less than $350,000. If that’s you, we recommend SmartBiz. With SmartBiz, you can get SBA working capital loans up to $350,000 and commercial real estate loans up to $5 million, with loan terms of 10 to 25 years. SmartBiz can have you prequalified online in minutes and funded in weeks.
SBA 7(a) Loan Requirements
Since the SBA is promising to cover some of your lender’s losses if you don’t pay―75% to 85% of the loan amount―the SBA’s requirements specify that only some businesses qualify for financing. The SBA 7(a) loan program requirements focus on your business location, the characteristics of your business and its owners, and the creditworthiness of your business and its owners.
SBA 7(a) Loan Eligibility Requirements
The SBA has a prescribed list of requirements your business must meet to be eligible to receive SBA funding. These requirements pertain to the size, management, and organizational structure of your business as well as citizenship status and need for financing.
The six primary SBA 7(a) loan eligibility requirements are:
- Management: Your business needs to be actively managed and operated, and you need to have experience owning and/or managing the business type.
- Organizational structure: Businesses need to have a for-profit organizational structure.
- Location: Only businesses located in the United States and its territories are eligible for SBA 7(a) loans.
- US citizenship status: Business owners need to be US citizens, be legal permanent residents, or meet other citizenship requirements to be eligible for SBA 7(a) loan financing.
- Small business size: While the SBA’s definition of a small business varies by industry, a business is generally considered small if it has between $750,000 and $38.5 million in annual revenue and fewer than 500 employees.
- Financing must be needed: You can only get approved for an SBA 7(a) loan if you can’t get financing from another source without it causing your business undue hardship.
While these are the basic eligibility requirements a business must meet, the SBA does have a list of businesses that are ineligible for SBA 7(a) loans. Knowing if you meet the basic SBA 7(a) loan eligibility requirements is helpful when considering an SBA loan.
SBA 7(a) Loan Qualification Requirements
Similar to those of a traditional bank loan, SBA 7(a) loan qualifications are focused on evaluating the creditworthiness of your business and its owners. When evaluating if you qualify for an SBA 7(a) loan, your lender will typically consider several factors:
A minimum FICO score of at least 680 is standard for all primary business owners. Also, primary owners must have a clear credit history with regard to government debt. This includes not having any delinquencies or defaults on debt obligations to the US government, including student loans.
Time in business
Typically, at least 2 years of history is required by lenders. Your prior business and management experience plus other requirements are needed for startup businesses. You need to show that you can manage and operate your business successfully.
Typically, a maximum debt-to-equity ratio of 3x for new businesses or 4x for established businesses is acceptable. In other words, you need to have $1 in cash invested in your company for every $3 to $4 in loan funds.
Ability to repay
A debt service coverage ratio (DSCR) on your business of 1.25x or better is generally considered sufficient to demonstrate your ability to repay your debt obligations.
While SBA 7(a) loans do not necessarily require full collateralization, it is easier to obtain financing when you have sufficient personal or business collateral available.
The SBA will also require a personal guarantee from all owners who have 20% or more ownership in a company.
While these are the general qualification requirements for an SBA 7(a) loan, other types of SBA loans may have slightly different qualification parameters. In addition to the financial qualification requirements, you will also need to meet the SBA’s loan eligibility requirements.
Uses for SBA 7(a) Loans
SBA 7(a) loans are great for businesses that have long-term working capital needs and require long-term financing for fixed assets like equipment or owner-occupied commercial real estate. The SBA 7(a) loan program can provide financing for these loan purposes up to $5 million.
The financing needs SBA 7(a) loans can address are:
- Acquiring land: Businesses can use SBA 7(a) loan proceeds to purchase land.
- Making site improvements: Some examples of site improvements are grading, parking lots, and landscaping; you can also use up to 5% of your SBA 7(a) loan proceeds to make improvements that are shared by the community, like sidewalks.
- Purchasing or renovating existing buildings: Your business can permanently lease up to 49% of the rentable square footage of existing buildings to unrelated third-party tenants, provided you will permanently use and occupy at least 51% of the rentable square footage.
- Constructing new buildings: You need to occupy 60% of the rentable square footage right away; you can permanently lease 20% of the square footage to unrelated, third-party tenants. You can also temporarily sublease 20% of the square footage, so long as you fully occupy the subleased space within 10 years and occupy some of the space within three years.
- Purchasing fixed assets or leasehold improvements: SBA 7(a) proceeds can be used to purchase equipment, machinery, leasehold improvements, and other fixed assets.
- Purchasing inventory, supplies, or raw materials: Businesses can use an SBA 7(a) line of credit to buy inventory, supplies, and raw materials.
- Financing working capital: SBA 7(a) proceeds can be used to finance temporary or permanent working capital.
- Refinancing existing debt when there is a compelling reason: You can’t use SBA 7(a) loan proceeds to refinance unsecured or under-secured loans, where the risk of loss is shifted to the SBA; you also can’t use SBA 7(a) loan proceeds to refinance debt that was originally ineligible for SBA financing and currently remains ineligible.
SBA 7(a) loans are versatile and can be used for most small business financing needs. This flexibility makes them an attractive loan option for many small businesses. In addition to the many allowable uses of the loan funds, borrowers also enjoy the comparatively low interest rates that come with SBA 7(a) loans.
SBA 7(a) Loan Rates
The maximum SBA 7(a) loan rates your lender can charge are set by the SBA. The SBA 7(a) loan rates are fixed or variable and tied to base rates like the prime rate. The base rates rise and fall with market conditions. SBA 7(a) loan rates typically charged fall in between those of traditional and online loans.
The current SBA 7(a) loan rates you can expect to pay as of August 2021 compared to other options are:
- SBA 7(a) loan rates: 5.5% to 8%
- Traditional loans: Approximately 5% to 7%
- Online loans: 10% to 30% or greater
SBA 7(a) Loan Fees
As with loan rates, the SBA also establishes the maximum amounts your lender can charge in fees. One of the largest fees assessed is an SBA guarantee fee of 2% to 3.5%. This is essentially the fee paid to the SBA in exchange for a promise or guarantee by the SBA to cover a portion of your lender’s losses—up to 85% depending on the amount of the guarantee—in the event you default on your loan.
Other SBA 7(a) loan fees that you may be assessed include:
- Packaging fee: This fee (up to $4,000) varies by lender and cannot exceed the amount charged for similarly sized non-SBA-guaranteed loans.
- Extraordinary servicing fee: The extraordinary servicing fee―not to exceed 2%―may be charged if your account will require extra work on the part of the lender like monitoring a construction project.
- Third-party expense reimbursement: This includes all direct costs related to the loan like title fees, appraisal fees, environmental report fees, attorney fees, and business valuation fees.
- Prepayment fee: On SBA 7(a) loans with terms of 15 years or greater, your lender can charge you a prepayment fee if you prepay more than 25% of your loan in the first three years. The fee is charged against the amount you prepaid and is 5% for prepayments in the first year, 3% for prepayments in the second year, and 1% for prepayments in the third year.
With the exception of the guarantee fee, the typical SBA 7(a) loan fees are similar to what you would pay with a traditional loan. The guarantee fee is essentially the price you pay to get a loan that your lender wouldn’t otherwise be willing to make. For most of the other fees, the SBA is clear that your lender can’t charge you more than what they charge for traditional loans.
SBA 7(a) Loan Repayment Terms
SBA 7(a) loans typically offer longer repayment terms than traditional loans. Maximum repayment terms are based on the type of collateral and are designed to match the expected useful life of that collateral type. Commercial real estate loans, up to 25 years, will get longer repayment terms than loans secured by equipment or machinery for 5 to 10 years. A loan that is collateralized by both equipment and real estate may feature a blended repayment term.
In contrast, payments for a traditional loan might be based on a 25-year term, but your loan might be due in full in 10 years. At that time, you’ll have to get reapproved and pay appraisal fees and origination fees again. With SBA 7(a) loans, you won’t have to deal with this hassle.
The maximum SBA 7(a) loan repayment term lengths are:
- Inventory or working capital: Up to 10 years
- Equipment, fixtures, or furniture: Greater of 10 years or the useful life of the collateral, not to exceed 25 years
- Leasehold improvements: Generally up to 10 years—may be longer on a case-by-case basis if the leasehold improvements require significant construction
- Real estate term loans: Up to 25 years, plus any amount of time that’s needed to reasonably complete construction or make improvements
When determining the repayment terms of the SBA 7(a) loan, your lender will consider your ability to repay, how you’re planning to use the funds, and the useful life of the asset that’s being financed.
Applying for an SBA 7(a) Loan
SBA 7(a) loans are issued by traditional banks, credit unions, community development organizations, nonprofit institutions, and online lenders. Working with an experienced SBA lender can make getting an SBA 7(a) loan much easier. Some of the best SBA lenders process hundreds, or even thousands, of SBA loans annually.
The process of applying for an SBA 7(a) loan will vary a little bit by lender, although there will be a lot of similarities. You’ll begin by completing an application and will then submit a lot of documentation regarding your business. The process from application to approval takes 45 to 90 days or more. To make the application process easier, we’ve developed a free SBA loan documentation checklist.
Ready to get started with an SBA 7(a) loan? With SmartBiz, you can get an SBA 7(a) working capital loan of up to $350,000. After you complete a simple online loan application, SmartBiz can have you pre-qualified in minutes and funded in 30 days or less.
Getting funded for an SBA 7(a) loan may take 90 days or more. However, small businesses can get up to $5 million with interest rates that range between 5.5% and 8%. SBA 7(a) loans are best for qualified borrowers that have a good credit score, good repayment ability, and management experience.