Keep reading to learn more about what SBA 7(a) loans are, the different types that are available to small businesses, and how to get one.
What Is an SBA 7(a) Loan?
The 7(a) loan program is the SBA’s primary method of assisting small businesses in the U.S. When you apply for an SBA 7(a) loan, you work with a lender and the SBA participates by guaranteeing a portion of the loan amount. This guarantee from a government agency helps businesses acquire funds, even if they may not have otherwise qualified for a business loan. Running a small business can be tough, especially in times of uncertainty and loss of revenue. One port in the storm could be an SBA loan. In times of hardship, this “do everything” loan could help you get back on your feet. These loans can be used to acquire business essentials like real estate, equipment, working capital, and inventory. The term “7(a) loan” is a catch-all term that refers to more than half a dozen different types of SBA 7(a) loans. Each loan is designed to meet a different need. Since they address different needs and businesses, 7(a) loans vary in their loan amounts, SBA guarantees, and other term details.
How an SBA 7(a) Loan Works
The stated purpose of SBA 7(a) loans is to encourage lenders to provide fair loans to businesses “that might not otherwise obtain funding on reasonable terms and conditions.” In the fiscal year 2020, the SBA facilitated nearly 42,000 7(a) loans. Combined, the value of these loans totaled over $22 billion. Once a business owner finds an SBA-approved lender that they want to work with, they can begin the process of obtaining an SBA loan. Most SBA 7(a) loans allow businesses to borrow up to $5 million. The SBA will guarantee 85% of loans up to $150,000 and 75% of loans greater than $150,000. The SBA sets a maximum interest rate, but you and your lender can negotiate within that limit. Interest rates are based on the prime rate, the size of the loan, and the maturity of the loan. In addition to interest rate caps, SBA loans also protect businesses from certain fees. However, SBA loans also come with prepayment penalties that cover the first three years of the loan.
How to Get an SBA 7(a) Loan
The SBA does not directly lend money to small businesses in the form of a 7(a) loan. You must first find an SBA-approved lender. The lender will ask you to complete an application for a 7(a) loan, and you will work with the lender on the paperwork required by the SBA. For your business to be eligible for a 7(a) loan, you must:
Be defined as a small business by the SBA (depending on what industry you operate in, these standards may correspond to a number of employees or the value of average annual revenue) Operate for profit Operate (or intend to operate) in the U.S. or its territories Have the resources to invest your assets in your business, and you must show that the loan is for a sound business purpose Have used other financial resources before applying for this loan
Most types of businesses are eligible, but there are exceptions. Businesses can’t receive SBA 7(a) loans if they deal in illegal activities, loan packaging (or any kind of lending), speculation (or any kind of investment), multi-sales distribution, rare coins, and stamps, or gambling. Nonprofits are also ineligible, including all charities and religious groups. One exception is the additional PPP loans made available through the American Rescue Plan, which opened the door for nonprofit organizations to apply.
How Long Does It Take to Get an SBA 7(a) Loan?
The turnaround time for most 7(a) loans is five to 10 business days, but every case is unique. For those in a hurry, the SBA Express loan has an accelerated turnaround time of 36 hours.
Types of SBA 7(a) Loans
The SBA lists nine different kinds of 7(a) loans on its website. They’re all designed to meet different needs, so businesses in some industries may find that one 7(a) loan is better suited for them than others.
Standard 7(a)
Most small businesses will qualify for this kind of 7(a) loan. These loans max out at $5 million. The SBA will guarantee 85% of loans up to $150,000 and 75% of loans greater than $150,000.
7(a) Small Loan
These loans max out at $350,000, but otherwise have the same features of the Standard 7(a) loan.
SBA Express
This is the expedited loan for businesses that need a short turnaround. The SBA says it will respond to your application within 36 hours. The maximum loan is $350,000, and the SBA will only guarantee up to 50% of the loan. It can be used for a revolving line of credit for up to 7 years.
Export Express
This program is for exporters who need loans and lines of credit up to $500,000. The lines of credit last for up to seven years. The SBA will guarantee up to 90% of loans under $350,000 and 75% of loans that exceed that amount. This also has an expedited turnaround time of 24 hours.
Export Working Capital
This loan is for businesses that need additional working capital to support their export sales. Loans are available through the Export Assistance Center for up to $5 million. The SBA can guarantee up to 90% of the loan, no matter the size of the loan. These lines of credit last for one year or less.
International Trade
These are long-term loans to businesses that are either expanding because of export sales or need to modernize to address the adverse effects of imports from foreign competition. These loans are similar to the Export Working Capital loans in size and guarantees, but they last much longer—10 years for working capital, machinery, and equipment, and up to 25 years for real estate.
Veterans Advantage
These low-fee loans are available to businesses that are at least 51% veteran-owned and controlled (spouses and widows of veterans count toward this requirement). Veterans may apply to other SBA loans and then apply the Veterans Advantage benefits to those loans.
CAPLines
CAPLines loans follow the general outline of the Standard 7(a) loan, but rather than a lump-sum loan, CAPLines extends an ongoing line of credit. This line of credit is meant to help small businesses meet short-term and cyclical working capital needs. There are four lines of credit covered by this program, all of which last for up to 10 years except the Builders CAPLines:
Seasonal: This is designed for businesses that experience seasonal ebbs and flows, such as a retail store that needs to hire more workers during the holiday shopping season.Contract: This is designed to provide flexibility for businesses that may need to ramp up resources and staff to meet an influx of contract jobs.Builders: This is designed for small general contractors and builders that need help meeting material and labor requirements. Unlike the other three CAPLines, Builders CAPLines only last for up to five years.Working: This is designed for businesses that have cyclical growth or recurring short-term needs. Money may be borrowed to obtain short-term assets, and the loan is repaid when those short-term assets are converted to cash.
