SBA 7(a) Loans: Program Details, and How to Apply

U.S. Small Business Administration (SBA) 7(a) loans are the primary loan type that the SBA uses to provide guaranteed loans to small businesses. Working through an approved lender, eligible small businesses can get up to $5 million in financing for up to 25 years, at rates ranging from about 5.5% to 9.75%.

What is an SBA 7(a) loan?

SBA 7(a) loans are the most basic type of SBA loan. They're called 7(a) loans because they're provided under Section 7(a) of the Small Business Investment Act of 1958. These loans are provided by private lenders – usually banks – that are approved by the SBA. Once issued, loans are then partially guaranteed by the SBA (up to 85%). 

There are several types of SBA 7(a) loans. Standard 7(a) loans can provide businesses with up to $5 million in financing for up to 10 or 25 years (10 years for fixed assets like equipment, 25 for real estate) at rates starting as low as prime plus 2.25%. 

How do SBA 7(a) loans work?

If you're unfamiliar with government loan programs, the SBA 7(a) program can seem daunting, but it's actually fairly simple. The program is used by small business owners who can't get funding through other sources. 

To participate, a business owner works with a private lender to secure a loan. The SBA then guarantees part of the loan in exchange for a guaranty fee. The lender charges a packaging fee upfront and services the loan while the business owner makes payments. 

Every 7(a) loan has three parts:

• The equity injection: This is what the SBA calls a down payment. The SBA typically wants to see borrowers contribute at least 10% for any project it's lending on.
  
  
• The SBA-guaranteed portion of the loan: Once the loan is issued, the SBA guarantees up to 85% of the loan or $3.75 million (whichever is less). Depending on the loan, the borrower, the project and the industry, the SBA may not be willing to guarantee as much of the loan.
  
  
• The bank loan: This is the portion of the loan that the SBA doesn't guarantee. It may be a small fraction of the loan amount, but the SBA wants individual lenders to have capital at risk for any loan. 

In addition to having a down payment, there are several criteria that borrowers must meet in order to qualify for a 7(a) loan. For example, the business applying for the loan needs to be for-profit and it needs to meet the SBA's definition of a small business. Other eligibility criteria are outlined below.

Types of 7(a) loans

There are several different types of loans offered through the SBA's 7(a) program. Not all loans work the same, and eligibility criteria vary, so just because you're eligible for one does not mean you're eligible for all. 

Many types of 7(a) loans are niche loans for borrowers with specific needs, like veteran-owned businesses or those that do a lot of business internationally. 

Some of the loan types include: 

• Standard 7(a) loan 

• 7(a) Small Loan 

• SBA Express 

• Export Express 

• Export Working Capital 

• International Trade 

• Preferred Lenders 

• Veterans Advantage 

• CAPLines 

These are the loans that are offered under normal circumstances. More recently, the SBA started offering additional loans in response to the coronavirus pandemic, including the Paycheck Protection Program (PPP). The PPP is a special 7(a) loan designed to help qualifying small business owners to avoid layoffs. 

Under the PPP, the SBA offers 7(a) loans that are for 2.5 times a business's monthly payroll cost. These funds can be used to pay payroll and cover other fixed costs like rent, utilities, and payments on long-term debt. What's more, these loans can be forgiven after 10 weeks if they're used for qualifying purposes.

SBA 7(a) loan eligibility

To utilize a loan through the SBA's 7(a) program, you need to meet the qualifying criteria. However, the requirements to participate in the 7(a) program are actually less stringent than many other SBA programs: 

• The business must operate in the United States, or be planning to do so 

• It must be a for-profit business 

• It needs to fit the SBA's definition of a small business, which requires that it have no more than 250 to 1,500 employees, depending on the industry 

• The company can't be borrowing to engage in speculation 

• The owners need to be able to make an adequate down payment – usually 10% 

• The business owners need to have tried to secure financing from another source 

Unlike some other SBA loan programs, there are no job-creation or retention requirements for the 7(a) program. In fact, the criteria to qualify for a loan through the 7(a) program are far broader than many other programs.

What can an SBA 7(a) loan be used for?

The SBA is designed to be a lender of last resort; not a first-choice lender. Before applying for a loan, businesses should have looked elsewhere for funding. But, once you get a loan through the 7(a) program, you can use the proceeds for lots of different business-related expenses – many more purposes than some other SBA programs.

Eligible uses for 7(a) loan funds

SBA 7(a) loans can be used for many more things than some other programs. Some of the ways you can use a 7(a) loan include: 

• Buying land or facilities 

• Improving, renovating or expanding facilities your business already owns 

• Building new facilities 

• Buying and installing fixed assets like equipment 

• Purchasing inventory 

• Buying supplies and materials 

• Acquiring another business 

• Starting a business 

• Improving property that you lease 

• Refinancing outstanding debt (in some circumstances)

What businesses can use SBA 7(a) loans?

To qualify for a 7(a) loan, a business must meet the SBA's definition of a small business (having less than 250 to 1,500 employees, depending on the industry your business is in). Your company must also be run for-profit, do business in the U.S. and have a sound business plan. The business needs to have a good business credit score (140 or higher), or the owners need to have personal credit scores of 640 or higher. 

In addition, the business can't operate in one of the SBA's prohibited industries. These include: 

• Casinos and other gambling operations 

• Churches and other religious institutions 

• Coin and stamp dealers 

• Cooperatives 

• Government agencies 

• Illicit businesses 

• Lenders 

• Multilevel marketing companies 

• Real estate investment companies 

• Businesses engaged in speculation

SBA 7(a) loan rates and fees

Like any other business loan, 7(a) loans aren't free – under normal circumstances anyway. Right now, the SBA has special provisions in place to make cheap, forgivable loans to small businesses in response to the coronavirus. But, under normal circumstances, there are charges to get 7(a) loans in the form of both interest rates and fees.

7(a) loan rates

Both fixed and variable interest rates are available through the 7(a) program. Rates are set by individual lenders, but can't exceed limits set by the SBA. In most cases, rates start as low as prime plus 2.25%. 

Maximum rates vary by loan amount and term:

Loan fees

The SBA charges three standard fees for business owners who get 7(a) loans: 

• Upfront guaranty fee: This fee is paid at closing and can be up to 3.75% of the guaranteed amount, depending on the type, size, and term of the loan. 

• Annual guarantee fee: This is set at closing. The SBA's portion of the fee is about 0.55 per year. 

• Prepayment penalties: This is a fee charged for paying the loan back early. It only applies on loans with maturities of 15 years or longer and only if you pay the loan back in the first three years.

In addition to these fees, your lender may charge packaging fees, but the SBA requires that these be reasonable. Some lenders charge other fees as well, like application fees or payment processing fees, but borrowers should be hesitant if they encounter a lender who charges numerous extra fees.

7(a) loan repayment terms

How long 7(a) loans last depends on the type of loan you're using and the purpose of your loan. However, most SBA 7(a) loans last 

• Up to 25 years for real estate 

• Up to 10 years for equipment and other fixed assets 

• Up to 10 years for credit lines (working capital or inventory loans) 

In addition to these maximum loan terms, there are also shorter terms available. In some cases, terms could be less than 12 months.

SBA 7(a) loan application process

While there are a few moving parts, the process for applying for an SBA 7(a) loan is relatively straightforward. All you need to do is worked through an approved SBA lender, and your lender can coordinate with the SBA. In this sense, the 7(a) application process is actually far simpler than some other SBA loans, like 504 loans, that require you to work with an SBA-approved lender and a certified development company. 

Here are the steps for securing a 7(a) loan:

1. Identify a need.

The first thing any small business owner should do before applying for an SBA loan is to decide what they need to borrow for. The reason for taking a loan will determine how much they need to borrow, for how long and the terms of their loan. The reasons for a business taking a loan will also need to be consistent with its overall business plan.

2. Gather your documentation.

Before you complete a loan application, it's a good idea to gather certain records. Your lender is going to need to review numerous business and financial documents, including business tax returns, a balance sheet, and the ownership breakdown. They'll also need to review your business – regardless of how long you've been in business. 

When you apply for an SBA loan, the SBA will also require personal guarantees from all anyone who owns more than 20% of the business. So, in addition to company records, the lender will also need to review some personal financial records, like personal tax returns.

3. Find a lender.

If you have an existing banking relationship with an approved SBA lender – a commercial bank, for example – contact them first to see if they can help you apply. 

If you don't already have a relationship with an SBA-approved lender, consider checking the SBA's list of most active lenders. All of these lenders are extremely familiar with the application process and may increase your odds of getting approved.

4. Complete the application.

Once you have all of your records together and have chosen a lender, you'll need to complete your formal loan application. Be ready for some back-and-forth with your lender, as they'll likely ask for clarification or more detailed records. 

Be aware, too, that your lender may charge an application fee when you're ready to formally apply. Not all lenders charge this fee; be wary if your lender charges hefty application fees with no guarantee of success.

5. Close on the loan.

After you file your loan application, you can expect your loan to take 60 to 90 days before you get formal approval. If you apply through a preferred lender – typically small community banks – you may be approved much faster. 

When you close on your loan is also when you'll have to pay several fees, including the SBA upfront guaranty fee and (probably) a lender packaging fee. These fees are typically deducted from the proceeds of your loans. But, once paid, you can get access to the funds from your loan and start investing in your business.

Top SBA 7(a) lenders

Top alternatives to 7(a) loans

The 7(a) program isn't for everyone, and the SBA isn't designed to be the first stop for financing. If you haven't looked elsewhere for funding or the 7(a) program isn't for you, consider other potential sources of business financing, including: 

• A business line of credit
• Conventional term loan
• Government grants
• Home equity lines of credit