Founded in 1953, the SBA is an independent U.S. government organization.
It provides support, guidance, protection, and assistance to small companies.
It seeks to maintain open competition, create and promote robust enterprises, and bolster the national economy.
Definition
A private lender provides SBA 7(a) loan, which the U.S. Small Business Administration partially guarantees for small businesses.
Getting approval for one of these loans may be challenging.
Small businesses often apply for these loans as they come with long repayment terms and low-interest rates.
They also allow businesses to employ the funds for various uses, including working capital, equipment, and business expansions.
Types of SBA 7 (a) Loan
The 7(a) loan is SBA's primary financial assistance to small enterprises.
Small businesses may apply depending on the type of loan and other details, such as the loan amount and the proportion of the guaranteed loan.
1. Standard
Standard 7(a) loans have a $5 million loan limit. The SBA insures up to 85% of loans under $150,000 and 75% exceeding that amount.
The borrower and lender negotiate the interest rate without crossing the SBA ceiling.
The loan amount determines the collateral requirements, and the SBA determines eligibility and credit.
It has an SBA turnaround time of five-ten days.
2. Small Loan
The maximum loan amount for this type is $350,000, and the maximum SBA guarantee is 85% for loans under $150,000 and 75% for loans exceeding that amount.
The SBA has a cap on the interest rate, which can be negotiated. The SBA decides on credit and eligibility, with a five to ten business days turnaround time.
For loans over $25,000, collateral policies must be followed, and the lender must take a first lien on all funded assets and a lien on all fixed assets, such as real estate.
The delegated ability to make credit decisions without SBA scrutiny may be granted to some qualifying lenders.
3. Express Loan
With a response time of up to 36 hours, the SBA Express program offers a quicker SBA evaluation.
The program provides a $500,000 maximum loan size and a 50% SBA guarantee. It permits revolving lines of credit up to ten years.
The lender decides on creditworthiness and eligibility. For loans under $25,000, collateral is not required.
For loans beyond $25,000 and up to $350,000, lenders are free to abide by their own collateral policies.
The lender may also request an expedited SBA purchase on small loans or when liquidation may be delayed.
4. Export Express
Exporters and lenders can quickly get SBA-backed financing up to $500,000 under the Export Express program.
Lenders utilize their own loan documentation and make their own credit determinations.
Applications receive a response from the SBA within 24 hours. SBA guarantees 90% of loans under $350,000 and 75% over that amount.
The interest rate is negotiable between lenders and borrowers but is limited to the SBA cap.
Revolving credit lines are only available for a maximum of seven years.
Lenders adhere to their own set of specified collateral regulations and processes for loans that aren't SBA-guaranteed.
The lender makes the credit decision.
5. Export Working Capital
This loan provides additional working capital to businesses generating export sales. Lenders grant requests and forward them to the relevant US Export Assistance Centre.
$5 million is the maximum loan amount, and a 90% SBA guarantee is provided. Without an SBA cap, the interest rate is agreed upon by both the lenders and the borrowers.
The SBA makes credit judgments, which take five to ten business days.
6. International Trade
Loans under international trade finance offer long-term funding for companies negatively impacted by imports or increasing export sales.
Loans may be utilized for working capital and fixed assets in export deals. $5 million is the maximum loan amount, and a 90% SBA guarantee is provided.
The interest rate is negotiable between borrowers and lenders but cannot exceed the SBA cap.
The SBA makes decisions about credit and eligibility, with a five to ten business days turnaround time.
The loan maturity period for working capital and machinery is ten years; for real estate, it is 25 years.
7. Preferred Lenders
The preferred lenders’ program gives some lenders more authority over the processing, closing, servicing, and liquidating of SBA-guaranteed loans.
Lenders might ask to be recommended by a local SBA field office or to be considered for preferred status.
When evaluating whether to offer preferred status, the SBA considers a lender's ability to process loans, create and analyze loan packages, and deliver adequate performance.
Loan Requirements for SBA 7 (a) Loan
Borrowers are not required to provide collateral for loans up to $25,000.
For loans exceeding $350,000, the lender must maximize collateralization up to the loan amount.
The lender may use the business owner's personal real estate equity and trading assets as collateral.
This is when the company's fixed assets are insufficient to secure the loan properly.
Disqualifications for Getting the Loan
Businesses might not be eligible for an SBA loan for several reasons, including new business status, poor credit, insufficient collateral, high debt levels, or failure to demonstrate the ability to repay the loan.
Easiest SBA 7 (a) Loan To Get
SBA Express is the easiest to get. The line of credit or term loan presents a simplified SBA loan application process, with quicker approval times and flexible terms.
It also offers lower down payment requirements than traditional loans and fixed and variable SBA loan rates.
Uses of SBA 7 (a) Loan
The 7(a) loan can be used for multiple core purposes, including:
Provision of both long and short-term working capital.
Based on the value of the current inventory and receivables, the loan provides revolving money.
Applied to purchasing tools, machinery, furnishings, decor, supplies, or materials.
Buying real estate, which includes land and structures.
Construction of a new structure or refurbishing an existing one are two further uses for the loan.
Useful for starting a new company or financing the purchase, operation, or growth of an existing one.
Refinance existing corporate debt.
FICO Score Used by SBA
The SBA uses the FICO Small Business Scoring Service (SBSS) rather than a personal credit score to evaluate applications for 7(a) loans.
This system calculates a score between 0 and 300.
It is calculated by analyzing the business owner's financials, credit bureau information, and other factors.
The credit score required for this loan is between 620 and 680.
Loan Forgiveness
To be fully forgiven, eligible borrowers must fulfill some requirements for their First Draw Paycheck Protection Program (PPP) loans.
This should be fulfilled during the 8–24 week covered period that follows loan disbursement.
These requirements include maintaining employee and compensation levels, using loan proceeds for eligible expenses, and allocating at least 60% of the loan amount to payroll costs.
SBA 7 (a) Loan Guarantee
The SBA loan guarantee is an alternative for the required security. It gives the lender enough security to support the loan.
The lender has the right to recoup the loan's guaranteed amount from the SBA if the borrower cannot repay the loan.
How to Apply for an SBA 7 (a) Loan
Businesses will collaborate with an SBA lending institution, such as a trade finance company or bank, to apply for an SBA 7(a) loan.
The lender will submit the application package to the SBA for a loan guarantee.
This is done so that if the business defaults on the loan, the SBA will reimburse the lender the guaranteed amount.
To complete the SBA 7(a) loan application procedure, businesses should:
Locate an SBA 7(a) lender by contacting a trade finance company or bank they are affiliated with.
Businesses can also use the SBA lender match tool to discover a lender in their area.
Compile the necessary paperwork and submit a completed SBA 7(a) loan application to the lender.
This should include SBA Form 1919, the Borrower Information Form, personal and business financial statements, business certificates or licenses, loan application histories, income tax returns, resumes for each business owner, an overview and history of the company, and a lease for the company.
- Wait 60–90 days for the lender or the SBA to approve the application after submission. If accepted, the lender will start the closing procedure. This includes gathering collateral and creating loan documentation before paying the money.
Throughout the loan, businesses have to pay back the loan in regular monthly installments.
20% Rule for SBA 7 (a) The rule states that individuals who possess more than 20% of a small business must give unlimited guarantee personally.
Can a Sole Proprietor get SBA 7 (a) Loan
All privately held businesses, in a vast majority, are eligible for the loan. This includes sole proprietors.
Are SBA 7 (a) Loans Variable or Fixed They can be fixed and variable.
Can Business Get 7(a) and 504 at the Same Time
Getting 7 (a) and 504 can give a business owner double the benefits.
SBA 504 has a lower interest rate than other business loans and offers up to $5 million.
It is more favorable as it provides less strict borrower requirements.