Definition Of Finance 6427508

What is an SBA 7(a) Loan?

Being a successful business owner, there’s a high chance that you are aware of the advantages of taking the SBA 7(a) loan. There’s probably no business expense that this type of loan cannot cover. No wonder the SBA 7(a) loan has gained huge popularity among entrepreneurs due to its extensive range of uses and benefits.

SBA 7(a) loans can provide good financial backup to business owners for almost any expense their company needs. Be it making a makeover, hiring new staff, implementing advanced machinery, software or technologies, purchasing essential furniture, or even clearing a bad debt – SBA 7(a) loans got you covered!

What is an SBA 7(a) Loan?

An SBA 7(a) loan program is designed by the Small Business Administration (SBA) to offer financial backup to small business owners to cover their core business expenses. However, the SBA doesn’t provide these loans directly, but rather through a network of lenders and partner banks across the world.

SBA 7(a) loans are offered up to a certain percentage. This loan program from SBA guarantees a certain portion of the business loan amount borrowed while limiting the fees and interest rates. The portion that SBA guarantees depends upon the total loan amount requested.

For example, if the loan amount is less than or equal to $150,000, SBA’s guaranteed amount is 85%.and for loans greater than $150,000, the SBA guarantees 75%. This guaranteed portion reduces some of the risks the lender might face, in case you default the loan.

This is why the SBA 7(a) loan program enables financial institutions to offer loans to ‘riskier borrowers.’ This is possible only because the SBA guarantees a portion to the lender if they default on the loan. Therefore, the program allows small businesses and startups to fund their expenses more comfortably, thus helping them grow.

Types of SBA 7(a) Loans

Business owners can apply for one of the following various types of SBA 7(a) loans, depending on the uses. They include –

  • Standard 7(a): This is quite popular among small businesses and entrepreneurs, as most of them would qualify for this option. The Standard 7(a) loan program offers loans that max out at $5 million, and the SBA guarantees 85% of the loan amount up to $150,000. For loans higher than $150,000, the SBA guarantees 75% of the total amount.
  • 7(a) Small Loan: These loans have similar features as the Standard 7(a) loan, only that it extends up to $350,000.
  • SBA Express: This program offers an accelerated turnaround time for the SBA to review the loan request. It will approve (or disapprove) your loan application within 36 hours. Further, the maximum loan amount is $350,000, and the guaranteed amount from SBA is up to 50% of the loan.
  • Export Working Capital: These types of loans are suitable for businesses generating export sales and those who require additional capital to finance their sales.
  • Export Express: This program offers lenders and exporters a more streamlined process to get loan amounts and lines of credit up to $500,000.
  • CAPLines: These loans abide by the general outline of the Standard 7(a) loan. The only difference is, instead of offering a lump-sum amount, CAPLines helps businesses meet their short-term goals and cyclical financial needs by extending an ongoing line of credit.
  • International Trade: This loan program offers long-term financing to fast-growing and expanding businesses because of the rising export sales. Those who need to modernize themselves to beat the foreign competition or those who are badly affected by imports can also apply for the International Trade loan.
  • Veterans Advantage: These are low-fee loans offered to businesses that are at least 51% owned and operated by persons, including spouses of veterans, service-disabled veterans, honorably discharged veterans, reservists, etc.
  • Preferred Lenders: Under this program, the SBA provides more authority to process, service, close, and liquidate SBA-guaranteed loans to select lenders.

Benefits of SBA 7(a) Loans

The SBA 7(a) loan program comes with several advantages for business owners, such as –

  • It offers low-interest rates that are highly competitive.
  • It provides long loan terms of up to 25 years.
  • Under this scheme, a range of businesses are eligible to apply and get approvals.
  • It has low down payments, generally about 10-20%.
  • You will get multiple loan options, such as the ones discussed above.
  • You can get both variable and fixed-rate options.
  • Allows business owners to obtain working capital even after a recession.
  • SBA 7(a) loans provide the longest repayment terms.
  • By offering flexible payment schedules, businesses don’t need to go through financial strain.
  • You can use the funds obtained from SBA 7(a) loans literally for any business expense. For example, you can purchase inventory, buy land, upgrade your office space, implement the latest technologies, refinance any existing debt, and the list goes on!
  • Some SBA loans even offer access to mentorship opportunities and training, allowing business owners to broaden their community and network.

Eligibility Criteria to Apply for SBA 7(a) Loans

To get approved by the SBA, you need to meet certain requirements before applying for a loan. These are –

  • You must be legally operating your business and must have registered your company officially as a for-profit business.
  • Your organization must have a total employee strength of less than 500.
  • Your average annual revenue must be less than $7.5 million for the past 3 years.
  • Your net income must be below $5 million (excluding carry-over losses and including taxes), and the tangible net worth should be under $15 million.
  • Being a business owner, you cannot be on parole.
  • You must prove that you are investing your own money and time into the business.
  • Your business must have a physical presence in the United States, and your services must be within the United States and its territories.
  • You need to show you have got an appropriate business idea and propose that is valid for the requested loan.
  • Your intended financial expenses must be approved by the SBA.
  • You must prove that you are applying for the SBA 7(a) loans only after trying and failing to get the capital from other financial institutions or lenders.
  • You must not be delinquent on any existing tax or loan debts to the US government.

Once you get the SBA loan approvals, nothing can stop you from exploring your business opportunities to grow and succeed!

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