SBA 7a Loan Explained – A Quick Guide for Small Businesses

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  2. SBA 7a Loan Explained – A Quick Guide for Small Businesses

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SBA 7a Loan

If you’re looking to get the SBA 7a loan, then you’re in luck. There are many lending companies and online loan marketplaces, such as OnDeck, Lendio, and Credibly, offering this type of loan to small businesses like you. Finding and applying for one is easy–the only thing you need to worry about is how you can qualify. Here are some of the basic loan requirements for SBA 7a loan:

  1. Business must have been active for at least two years
  2. No specific credit score required (but don’t go less than 680)
  3. Healthy debt-to-income ratio
  4. Healthy cash flow

Compared with other loan requirements, this two-year business establishment criterion may seem excessive. However, you have to consider that this loan is government-backed, and a part of SBA’s task is to ensure businesses with high growth potential get the support they need.

Purpose of the SBA 7a loan

The purpose of SBA 7a loans is to encourage lenders to provide reasonable loans to small businesses. While the SBA helps small businesses get the funding they need from lenders, they are also assuming a part of the risk by guaranteeing a portion of those loans. 

The SBA guarantees up to 75 percent of loans worth more than $150,000 and 85 percent of loans below $150,000. In 2019, the SBA approved around 52,000 SBA 7a loans with a combined total of over $23 billion. In 2020, it approved a little over 42,300 SBA 7a loans worth nearly $22.6 billion.

How does SBA 7a loan work? 

As previously mentioned, this SBA 7a loan’s main feature is SBA’s guaranteed portion of the loan. The SBA does not directly loan money to applicants. Instead, it authorizes banks and financial institutions to offer this loan to their clients. This arrangement is also beneficial to lenders because it allows them to provide business loans of up to $5 million with an SBA guarantee of up to 75 percent. Many lenders find this condition appealing, in effect, allowing many small businesses access to fair loans. 

Because the SBA is backing the larger portion of the loan, it assumes control over the interest rates, fees, and term lengths. They can limit these features depending on the applicant’s qualifications. However, the lender has the final say on whether an applicant qualifies for an SBA 7a loan or not.

Types of SBA 7a Loans 

SMEs apply for SBA 7a loans for a wide range of reasons. Some need it to purchase inventory or new equipment, while others need it to fund construction work. Due to this diversity in the loan’s purpose, the SBA classified it into nine different types, each designed to meet a specific set of needs.

Standard 7(a). Most small businesses will qualify for this loan. It maxes out at $5 million and guarantees the standard portion of loans more or less than $150,000.

7(a) Small Loan. In case you need a loan worth no more than $350,000, you can opt for the small loan. This type has the same guarantee as that of the standard type.

SBA Express. If you need the loan in a few days, consider applying for SBA Express. For this loan type, the SBA will only guarantee 50 percent of the loan, but you can use it for a revolving credit line that lasts seven years. 

Export Express and Export Working Capital. These cater to exporters.The Export Express program is for exporters in need of a $500,000 line of credit, while the Export Working Capital loan is for exporters needing additional working capital. 

International Trade. In case an export company needs an upgrade to regain its competitive edge, it can apply for the 7a loan type called International Trade. 

Veterans Advantage. This allows small businesses that are over 50 percent veteran-owned and controlled to apply for a loan. 

Preferred Lenders. Under this program, the SBA gives select lenders more authority to process, service, close, and liquidate SBA-guaranteed loans.

CAPLines. This program is aimed at helping small businesses meet their short-term and cyclical working-capital needs.

Current rates for an SBA 7a loan vary according to the loan amount and term length. Loans worth $25,000 and payable within seven years and below have a 7.50% interest, and 8% if payable in more than seven years. If you apply for loans worth between $25,000 and $50,000, your interest will be 6.50% to 7%, depending on your preferred term length. Loans more than $50,000 may have an interest rate of no more than 6%. 

Financial advisors such as LendingBuilder provide a complete guide not just on SBA loans but also on all other alternative business loans you will need when raising capital. Learn more about SBA 7a loans by reading our other articles, so you can decide on the right loan provider.

Not sure where to go for a business loan? Read these quick & helpful guides:
Check out our preferred marketplace lenders.

Lender Minimum Revenue Time in Business Minimum Credit Next Steps
$100K/year 1 year 600+ See if you qualify
$10,000/mo 3 mo. n/a See if you qualify
$10,000/mo 3 mo. n/a See if you qualify
$75,000/yr 24 mo. 620+ Request Intro
Varies Varies 560+ See if you qualify

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