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SBA 7(a) Loans: How Do They Work?

Business Finance

SBA 7(a) Loans: How Do They Work?

Updated: August 3rd, 2023

SBA 7(a) Loans: How do they work?

The United States depends on small businesses to drive the economy and create jobs for close to 50% of the entire private workforce. But starting a business isn’t easy—it takes time and money.

However, if small businesses can’t overcome startup hurdles, the whole country will suffer. The federal government launched the U.S. Small Business Administration (SBA) in 1953 to strengthen the overall economy by providing aid and counsel to small businesses. The agency focuses on providing financial support to underrepresented business owners and those hit hard by economic disasters, like business victims of the COVID-19 pandemic.

One of the program’s most coveted loan programs is the much-sought-after 7(a) loan. It’s one of the best loans small businesses can find, making it competitive and somewhat elusive.

Below, we’ll dive deeper into what a 7(a) loan is and how it works.

What Is a 7(a) Loan?

7(a) loans are the SBA’s most popular financing method. If you ever hear the term “SBA loan” alone, it’s usually safe to assume it’s referring to a 7(a) loan.

However, the SBA doesn’t actually do any of the lending on these loans. Instead, they partner with their network of SBA-certified banks and lenders around the country. The SBA guarantees a large percentage of these loans, while the banks do the actual lending.

The SBA’s guarantee lowers risk for lenders, making the banks more likely to lend to less-than-perfect applicants who qualify.

Here’s why small businesses compete for 7(a) loans:

  • Low interest rates: Lenders will set the rate for 7(a) loans, but it can be as low as the market prime rate plus 2.25% and no higher than the SBA’s maximum limits.
  • Generous repayment terms: Loans terms can be as long as 25 years.
  • Flexible spending: 7(a) loans can be used to acquire land, purchase a business, cover construction costs, refinance your debt, or buy equipment and supplies.
  • Large loan amounts: Loans can be up to $5 million.
  • Predictable payments: You’ll usually make predictable, once-monthly payments on your 7(a) loan.
  • No prepayment penalties: Pay off your loan early without any penalties.

Estimate your monthly payments for a 7(a) loan with our handy-dandy calculator.

How Do 7(a) Loans Work?

7(a) loans function like most small business loans. First, you’ll need to find an SBA-certified lender. Here’s a list of the SBA’s most active 7(a) lenders.

Once you find a lender, you’ll need to start the application process. This is an application for a government-backed loan, so you can expect lots of paperwork and documentation.

Funding Circles works with a select network of SBA lenders to offer in-house approval and expedited processing to accelerate your time to answers and closings—we’ll connect you with the best-of-the-best lenders.

Some lenders will help with your application more than others, so don’t settle for any ol’ application process.

The SBA doesn’t require lenders to take collateral if the loans are under $25,000—but anything over that will require the same collateral policies that the lender would demand for non-SBA loans.

The approval process takes around 5 to 10 days. Once you’ve been approved for a 7(a) loan, you’ll typically receive funds in the next 1 to 2 months. However, this varies by lender. For example, you can get funds as soon as 3 days after your accept your offer through Funding Circle.

After that, you can use the funds to expand your business or cover working capital costs. You’ll start making monthly payments on your loan with no prepayment penalties.

Who Qualifies for an SBA 7(a) Loan?

7(a) loans are notoriously difficult to qualify for. Eligibility requirements vary from lender to lender, but here are the general expectations:

  • Top-notch business plan: You’ll need to provide a business plan that shows your financial projects and how you intend on using the loans.
  • Proven track record: Your business needs to be in operations for 2 years or longer.
  • Excellent credit score: You’ll typically need a minimum 650 credit score.
  • Substantial collateral: The SBA usually requires your lender to ask for the maximum amount of collateral to mitigate risk in case you default.
  • Minimum revenue: Lender requirements vary, but you’ll typically need at least $100K to $400K in annual income.
  • Profitable business: Your business will need to be profitable (exceptions can be made if you have super strong credit).

You’ll also need to make sure your business doesn’t fall under the SBA’s ineligible industries:

  • Gambling businesses
  • Speculative real estate
  • Nonprofits
  • Marijuana dispensaries
  • Weapons manufacturers
  • Pyramid schemes
  • Pornography

Secure Your 7(a) Loan

SBA 7(a) loans are one of the best loans available to small businesses. If you need funding for business expansion, working capital, or long-term development, make a 7(a) loan your first choice—you’re not likely going to find a more affordable loan anywhere else.

Start your application with Funding Circle now to get the ball rolling. Fill out our 6-minute form, and a dedicated loan specialist will reach out to get to know you and your business before helping you complete your SBA 7(a) loan application. For further information read more about SBA 7(a) Loans in 2021.

The entire process can take 1 to 2 months, so don’t wait to get started!

SBA 7(a) Loan Frequently Asked Questions (FAQs)
7(a) loans are amortized loans that have monthly payments and set end date. Loans shorter than 15 years won’t have prepayment penalties.

In some situations, you could qualify to make interest-only payments for your initial funding period. If you’re financing a new business or need the loan to expand the business to make revenue, this repayment structure could work for you.
You may need a 10% to 20% down payment if you’re using a 7(a) loan to buy real estate, start a business, or acquire an existing business. This down payment is also referred to as an equity injection.
The SBA offers a Microloan program for loans less than $50K. These loans are practically identical to 7(a) loans, except they’re smaller and have shorter repayment periods. Instead of working with a bank, you’ll work with SBA-designated intermediary lenders, which are nonprofit community-based organizations. Visit the SBA’s website for more information.


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