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The Complete Guide to SBA 7(a) Loans in 2021

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The Complete Guide to SBA 7(a) Loans in 2021

Updated: August 30th, 2021

The Complete Guide to SBA 7(a) Loans in 2021

SBA 7(a) loans can be a game-changer for small businesses in need of big financing. With large maximum loan amounts, low interest rates, and generous repayment terms, it’s no wonder the 7(a) loan is the SBA’s most popular loan program.

Whether you need working capital, land, or a brand-new food truck, you can count on an SBA 7(a) loan. These loans can be used to cover just about any business-related expense, making them one of the most flexible, affordable loans on the market for small businesses.

However, like many things with the government, SBA loans require lots of paperwork, processes, and hula-hooping—we’re here to walk you through all of it. This complete guide to SBA 7(a) loans will provide everything you need to know to navigate these government-backed loans in 2021. 

Here’s an outline of what we’ll cover:

  • What are SBA 7(a) loans?
  • How can you use SBA 7(a) loans?
  • SBA 7(a) loan overview: amounts, rates, and terms
  • Pros and cons of SBA 7(a) loans
  • SBA 7(a) loan fees
  • Qualifications for SBA 7(a) loans
  • How to apply for an SBA 7(a) loan
  • Securing an SBA 7(a) loan from Funding Circle
  • Frequently Asked Questions (FAQs)

Let’s dive right in!

What are SBA 7(a) loans?

SBA 7(a) loans are part of the SBA’s flagship loan program. These loans provide small businesses with up to $5 million in financing. 

However, the SBA isn’t doing the actual lending—they just partially guarantee the loans. The SBA will guarantee up to 85% of the loan’s total amount, but an SBA-approved lender will be doing the financial lending.

This SBA guarantee lowers the risk for traditional banks and alternative lenders to offer large loan amounts with low interest rates.

How can you use SBA 7(a) loans?

Your business can use SBA 7(a) loans to cover various business expenses. The 7(a) program can get you a working capital loan for uses like purchasing inventory or refinancing debt, or they can get you loans for acquiring land or constructing buildings.

Here’s a list of popular SBA 7(a) loan uses:

  • Working capital: Financing your long-term or short-term working capital needs.
  • Revolving funds: Use a 7(a) loan structure like a business line of credit to receive ongoing funding.
  • Equipment: Purchase equipment, furniture, machinery, fixtures, supplies, or materials.
  • Real estate: Buy land and buildings.
  • Construction: Build new buildings or renovate existing structures.
  • Business establishment: Establish your new business with capital for operations, expansions, or even acquisitions.
  • Refinancing: Refinance your existing business debt.

SBA 7(a) loan overview: amounts, rates, and terms

There’s a lot of parts to SBA loans. You have maximum loan amounts, use of proceeds, repayment terms, guaranty fees, interest rates, and much more.

Here’s a brief overview of the main characteristics of SBA 7(a) loans in 2021:

  • Maximum loan amount: $5 million
  • Repayment terms: Generally up to 7 years for working capital, 10 years for equipment, and 25 years for real estate.
  • Interest rates: Loans less than 7 years: $0 – $25,000 Prime + 4.25%, $25,001 – $50,000 P + 3.25%, over $50,000 Prime + 2.25%; Loans 7 years or longer: 0 – $25,000 Prime + 4.75%, $25,001 – $50,000 P + 3.75%, over $50,000 Prime + 2.75%
  • Percent of guaranty: 85% guaranty for loans of $150,000 or less; 75% guaranty for loans greater than $150,000
  • Guaranty fee: $150,000 or less = 2%; $150,001-$700,000 = 3.0%; $700,000- $1,000,000 = 3.5%; plus 3.75% on guaranty portion over $1million*

*The guaranty fee is charged on the guaranteed portion of your loan—not the entirety of it.

Pros and cons of SBA 7(a) loans

Like with any financing method, SBA 7(a) loans have their good and bad sides. You’ll need to understand the pros and the cons to determine if they’re the right financial option for your business. Below, we’ll give you the down-to-earth facts about the upsides and downsides of SBA 7(a) loans.

SBA 7(a) loan pros

SBA 7(a) loans have a lot going for them. Here’s what makes them fantastic tools to finance small business needs:

  • Broad eligibility: Wide-spread businesses and those in underserved communities and geographical locations can qualify (and even be prioritized).
  • Capped interest rates: A base rate plus the lender’s rate is applied, but they’re subject to SBA maximums—this keeps loans affordable for small business owners.
  • Generous repayment terms: With loans up to 25 years long, your business won’t have to stress about large monthly payments.
  • Varying loan sizes: You can find loans for as little as $500 or as much as $5 million—and everything in between.
  • Wide use cases: Your business can use an SBA 7(a) loan to fund just about every imaginable business expense.
  • Resource centers: The SBA offers general business assistance, lending information, and other support to business owners in underserved communities.

SBA 7(a) loan cons

While SBA 7(a) loans are popular business financing options, they’re not all sunshine and roses. Let’s take a quick look at the downsides to these government-backed loans:

  • Down payment typically required: You’ll normally need to provide a 10% to 20% down payment on your SBA loan.
  • Collateral could be required: Lenders often require collateral for loans of $350,000 or more.
  • Personal liability: If your default on your loan, the lender can seize your collateral.
  • Slow processes: SBA application processes can take more than two months. This time can be reduced dramatically by working with a preferred lender. Still, if you need money quickly, don’t go for an SBA loan.
  • Paperwork intensive: The government likes documentation, so you’ll have to engage the entire file cabinet when applying for an SBA loan.
  • Generally need decent credit: While the SBA strives to serve members of underserved communities, it’s still challenging to get an SBA loan with a credit score of less than 650—it’s possible but not easy.

SBA 7(a) loan fees

You’ll need to pay additional fees beyond your typical interest rates on your monthly payments. Here’s a list of SBA 7(a) loan fees to expect:

  • SBA Guaranty Fee: Fee ranging from 2% to 3.75% of your loan’s guaranteed amount. This fee helps fund the SBA program when borrowers default on loans.
  • SBA Loan Packaging Fee: Fee charged by loan providers to organize your loan documents before submitting for SBA approval.
  • SBA Loan Broker Fee: The SBA doesn’t allow “broker fees,” but if a broker helped facilitate this loan, this fee might get bundled into the packaging fees.
  • SBA Loan Service Fee: SBA loan lenders often charge an ongoing service fee to manage your loan. These fees cover the costs of billing, processing, and maintaining payment records.
  • SBA Loan Closing Costs: SBA loan closing costs are a group of miscellaneous fees lumped together. These include appraisal fees, business valuations, title fees, attorney costs, and more.
  • SBA Loan Late-Payment Fee: You could be charged anywhere from 5% of the late payment to $100 (whichever is greater) for making a late payment.
  • SBA Loan Prepayment Fee: You’ll typically face prepayment penalties if you pay off a long-term loan early.

Qualifications for SBA 7(a) loans

SBA 7(a) loans aren’t the easiest loans to qualify for. You’ll need good credit, proven revenue, collateral, and a solid business plan to get approved.

Let’s start with the essentials. Here are the fundamental requirements to get an SBA 7(a) loan. You must:

  • Be an official registered for-profit business
  • Meet the SBA’s definition of a small business
  • Be located in (and operate in) the US
  • Have invested your personal time and money into the business
  • Have adequate time in business

Next, here are the general eligibility requirements. These requirements have a little bit of wiggle room, but they’re all fairly standard:

  • Credit score of 650 or higher
  • Revenue of at least $100K per year and proven profitability
  • Debt service coverage ratio (DSCR) of at least 1.15
  • A business plan showing your financial projections and how you plan to use the SBA 7(a) loan
  • Adequate collateral to secure the loan

Curious if you qualify? Check out the SBA’s in-depth eligibility questionnaire to learn more.

How to apply for an SBA 7(a) loan

1. Identify a business purpose

Consider if an SBA 7(a) loan is the best financing tool for your business purpose. If your expense falls under the allowable use cases, then there’s a good chance it is—however, if time is of the essence, another loan may serve you better.

2. Calculate how much financing you’ll need

Do your research to determine exactly how much financing you’ll need and how much you can reasonably afford. The SBA will expect numbers like these in your business plan.

Try our handy-dandy SBA Loan Calculator. It’ll help you calculate your monthly payments based on predicted loan amounts and terms. We’ll even show you your monthly payments broken down. However, keep in mind that you’ll have other fees associated with your SBA loan—like the fees we mentioned in the SBA 7(a) loan fees section. These fees are variable, so we don’t include them in this calculator.

3. Gather documents and business information

You’ll need documentation to back up any of your financial claims. Organize your financial statements, update your cash flow projections, and complete all of your SBA application forms.

4. Choose your collateral

SBA loans often require personal guarantees and collateral. Identify which business assets you can leverage to serve as default security. This could be equipment, buildings, accounts receivables, and even inventory. 

5. Find a lender

Different lenders will offer varying rates and loan amounts. Look around to find a trusted lender that provides the exact type of loan characteristics you need. 

6. Submit your application

Once you’ve identified your lender, it’s time to submit your application. Each lender will have its own step-by-step process. However, you could use a lending platform like Funding Circle to submit one application to several SBA designated “Preferred Lenders.” This expedites the application process and improves your chances of approval.

Securing an SBA 7(a) loan from Funding Circle

We’re here to help you navigate the confusing SBA 7(a) loan process. Submit your application through Funding Circle to get hands-on help from a loan specialist who’ll help you prepare and complete an approval-friendly application. Plus, we work with a network of SBA preferred lenders to offer you in-house approvals, accelerated processing, and faster closings.

Here is the kind of SBA 7(a) loans you can secure through Funding Circle:

  • Loan amounts: From $25K to $500K
  • Terms: Up to 10 years
  • Interest rate: Rate of Prime+2.75% (Currently 6%)

And here are the typical eligibility requirements:

  • 2 or more years in business
  • $400,000 or more in annual revenue
  • No current federal tax liens
  • 650 or higher FICO score

Start your loan application online now—it takes only about 6 minutes and will have no effect on your credit score.

FAQs
It can take one to two months to complete your loan application and receive funding. The process could take longer if you struggle to gather and submit the necessary documents.
SBA 7(a) loans have an amortization schedule with monthly payments and set payoff date. There are no prepayment penalties for loans less than 15 years.
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