If you’re starting a business, you’re going to need some money to get it off the ground. That’s where small business loans come in. These loans provide financial assistance to upstart companies. The most common among them is the 7(a) loan for small businesses.
Below, we’ll cover everything you need to know about a 7(a) loan, including:
- What is a 7(a) loan?
- Types of 7(a) loans?
- Who qualifies for 7(a) loans?
- Details of a 7(a) loan
- Loan resources
What Is a 7(a) Loan?
When it comes to starting a business, the 7(a) loan provided by the Small Business Administration (SBA) is the most common type of loan available. It’s a guaranteed loan that’s government-backed and available for short-term or long-term expenditures. Businesses can get up to $5 million through a 7(a) loan.
The 7(a) loan is among the most popular options made available to businesses in need of capital as it can be used for many purposes. Approval is relatively fast and often has a lower barrier of entry for applicants, requiring minimal paperwork and review. Businesses can use it for necessary expenses to build or expand, refinance debt, acquire land or make other large purchases like equipment. In 2020 alone, the SBA offered nearly 42,000 7(a) loans, lending out more than $22 billion to businesses in need of working capital.
While there are several different types of 7(a) loans, most of them offer similar terms. Interest rates are often favorable and can be repaid over the course of 10 to 25 years, depending on the type of loan.
Types of 7(a) Loans
There are eight types of 7(a) loans available to small business owners. Each one has a specific set of requirements and is made available for different kinds of needs and opportunities.
- 7(a) standard loan: The most common 7(a) loan is available to most small businesses. A 7(a) standard loan maxes out at $5 million. The government will guarantee up to 85% of the loan up to $150,000 and 75% of loans greater than $150,000. This loan is typically approved in five to 10 days.
- 7(a) small loan: The 7(a) small loan is similar to the standard loan with a much lower cap. This loan is for up to $350,000, with the same guarantees and approval time as the standard loan.
- SBA Express Loan: The SBA express loan is similar to the 7(a) small loan, but you can get access to it much quicker. You can get access to the express loan in just 36 hours. However, it’ll only be 50% guaranteed, so you’ll be assuming more risk.
- SBA 504 Loan: An SBA 504 loan can only be used for economic development like real estate purchases or equipment. It cannot be used for the working capital of inventory. Because of this, it typically requires a lower down payment and has lower fees.
- SBA CAPLine Loans: Unlike the 504 loan, the SBA CAPLine loan is a line of credit that can be used for short-term needs. It’s an ongoing line of credit that can be available for up to five years. There are four types of CAPLine loans:
- Seasonal: A seasonal CAPLine loan is available for seasonal needs, like hiring more staff or purchasing inventory during busy periods like holidays.
- Contract: A contract CAPLine loan helps businesses in need of capital to pay for an influx of contract workers or resources.
- Builders: A builders CAPLine loan is made for covering the costs of building materials and labor. It’s available for up to five years.
- Working: The Working CAPLine loan is available for short-term needs, and cyclical growth.
- SBA Export Working Capital Loan: An SBA export working capital loan is available for working capital needed to support export sales. It can be available for up to $5 million, with 90 percent guaranteed. The line of credit is available for up to one year.
- Export Express Loan: Similar to the export working capital loan, the export express loan is available for up to $500,000 and can be approved as soon as 24 hours. The loan will be 90 percent guaranteed up to $350,000 and 75 percent guaranteed beyond that.
- SBA Veterans Advantage Loan: The SBA Veterans Advantage loan is available for any business that a veteran owns at least 51 percent of. It offers lower fees than standard 7(a) loans.
Who Qualifies for 7(a) Loans?
Many small businesses qualify for a 7(a) loan, but there are requirements that you’ll have to meet to apply.
What Is Needed to Qualify for a 7(a) Loan
Primary among the things that you need is you must have enough cash flow to pay back the loan. This is the primary piece of information that the SBA will review when deciding whether to approve your loan. If your business doesn’t have the cash flow to suggest that you’ll be able to repay the loan in a timely manner, then the SBA may decline your application for a 7(a) loan.
There are many other requirements that you’ll need to meet to get approved for a 7(a) loan. You must be operating a for-profit business within the United States and meet the SBA’s standard for a small business. This varies by the industry in which you’re operating, and you can use the SBA’s tool for determining if you’re a small business.
You also may only be eligible for a 7(a) loan if you’re unable to qualify for credit through other financial institutions. Your business cannot have caused prior loss to the government, such as defaulting on a loan or having tax debt.
A majority of your business, 51 percent or more, must be owned by a U.S. citizen or permanent resident to qualify. Additionally, any person holding at least 20 percent ownership in the business must not have any criminal history or have engaged in other prohibited activities.
Assuming you meet all of these requirements — and some of the other finer details that you’ll have to navigate when you get into the small print — then you’ll likely be able to qualify for a 7(a) loan.
Details of a 7(a) Loan
While there are many different types of 7(a) loans, they share many similarities in terms of what they offer and what will be needed to apply for them. You’ll also need to understand the term of the loan so you’ll know how much you’re eligible to receive and what it can be used on.
To apply for a 7(a) loan, you’ll need to find an SBA lending partner. Many banks and credit unions offer SBA 7(a) loans, including national banks like Bank of America and Chase. If you have an existing connection with a bank or credit union, start there and see if they can help you.
Once you’ve found a lender, you’ll have to submit your application. This will require filling out some forms depending on the type of 7(a) loan that you’re applying for. You’ll also have to submit some documents about your business. Typically, you’ll need to include the following documents:
- SBA Form 1919, Borrower Information Form
- (SBA Forms 912 and 413, personal background and financial statement
- Business financial statements, such as balance sheets, profit and loss (P&L) statements, and projected financial statements
- Business certificate or license
- Loan application history
- Income tax returns
Once you have submitted your application, you’ll have to wait to be approved. This process can take as little as 24 hours to as long as 10 days, depending on the type of loan that you apply for. Some financial institutions have SBA Preferred Lender status, which may result in an expedited approval process.
Once your loan is approved, you’ll go through the closing process — securing collateral, finalizing the paperwork, and finally having your funds disbursed to you. The loan terms will depend on what kind of loan type you apply for and what you agree to, but in general, most SBA 7(a) loans are low-interest offerings for between $150,000 to up to $5 million, typically made available as a line of credit for up to a year, although it can extend for up to five years.
These loans are often expected to be paid back in between 10 to 25 years, and the SBA will guarantee the majority of most 7(a) loans, meaning if you default on them, the SBA will pay the lender the guarantee.
7(a) Loan Resources
There are many resources available to potential borrowers looking for an SBA 7(a) loan to expand or improve their business operations. The Small Business Administration offers extensive information about these loans, including tools for determining which one is right for your business. Similarly, Benefits.gov, a website operated by the U.S. federal government, provides resources and contact information for prospective borrowers to get more information.
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SBA 7(a) loans are popular and accessible loans for small business owners that offer agreeable terms, a significant line of credit, and opportunities to expand or address the needs of your business. While they may seem intimidating, once you understand how they work, they are approachable, easy to understand, and accessible for your business needs.
What To Do Next
Find the most convenient and practical SBA lending partner, this can be a bank or credit union, to complete your 7 (a) loan application. To receive a loan guarantee, your lending partner will help you gather your documents to prepare and submit a completed 7(a) loan application to the SBA. You can check out SBA’s lender match tool on its website, it gets you connected with a lender in your area.
Your lender will begin the closing process once your loan has been accepted, which involves securing collateral, drafting loan documentation, and meeting any other authorization requirements. Subsequently, your lending partner will distribute your funds, and you will return the loan over the term in monthly payments. The estimated approval time of a 7 (a) loan application from the SBA is around 5 to 10 business days.