The SBA 7a loan is a common type of business loan. The loans are actually made by banks, but the Small Business Administration guarantees a portion of the 7a loans. Here’s how they work, who’s eligible, and how you go about getting one.
The SBA 7a loan program is the primary Small Business Administration program for providing business loans. The terms and conditions such as the guaranty percentage and dollar amount of the loans may vary by the type of 7(a) loan. This article will introduce you to the basics of the SBA 7a loan program, including how the loans are made, who is eligible, what the loans may be used for, and some characteristics of the loans themselves.
The Small Business Administration does not make the loans itself, nor does it direct lenders to make loans to specific borrowers. Rather, the SBA guarantees a portion of a qualified business loan made by a lender, which is structured according to SBA guidelines.
Types of SBA 7a Loans
There are 9 categories of SBA 7a loans. These include the standard 7a loan, which has a maximum loan amount of up to $5 million; the Small 7(a) loan, which has a maximum amount of up to $350,000; and the Express loan which has an amount of up to $350,000, a faster turnaround time, but a lower guaranteed amount. There are other specialized 7a loan programs for export businesses, international trade, and veterans. A complete list is available on the SBA website.
7a Loan Application
Since the SBA does not make loans directly, borrowers must approach a commercial lender to receive a loan. If a particular loan application from a business owner is weak, and the lender chooses not to make the loan internally, it may request a guarantee from the SBA in order to make the loan. The whole loan will not be guaranteed; the exact percentage guaranteed by the SBA depends on the type of loan and other criteria. The guarantee means that the lender will be repaid in the event that a borrower defaults on the loan, up to the amount of the guarantee. Most American banks participate in the 7(a) loan program as lenders, though none are required to. Additionally, some non-bank lenders also participate in the program.
The Small Business Administration publishes a list of the most active SBA 7a lenders. There’s also a list of other banks that are approved to offer various types of SBA loans.
SBA 7a Loan Requirements
In order to receive a 7(a) loan, a borrower must meet the eligibility requirements set by the SBA. Nearly all business are eligible for these loans. In order to receive a 7(a) loan, a business must:
- For-profit businesses
- Do business or plan to do business in the U.S. or its territories
- Have reasonable owner equity to invest
- Use alternative financial resources, including personal assets, before seeking financial assistance
In addition to the standard eligibility requirements, the SBA seeks borrowers with a demonstrated ability to repay the loan, good character, a record of sound business practices, and owners with significant equity in their businesses, among other factors.
Specific types of businesses not eligible include:
- Real estate investment firms, when the real property will be held for investment purposes
- Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade
- Rare coins and stamps dealers
- Firms involved in lending activities
- Pyramid sales plans
- Firms involved in illegal activities
- Gambling businesses
- Charitable, religious, or other non-profits, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives
Other ineligible businesses include those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole.
SBA 7(a) Size Standards
SBA size standards vary depending on industry, are calculated based on the average number of employees, or by the average sales volume over the last five years. In determining a concern’s number of employees, SBA counts all individuals employed on a full-time, part-time, or other basis. This includes employees obtained from a temporary employee agency, professional employee organization, or leasing concern.