The U.S. Small Business Administration backs a variety of loan programs to help small businesses start up and expand. One of the most popular programs is the SBA 7(a) loan program, which is a general purpose loan. On average, business owners borrow about $370,000 per loan through the 7(a) program. Below, we take an in-depth look at the 7(a) loan program and what it takes to apply.
What is an SBA 7(a) Loan?
When someone says they are getting an SBA loan, they usually mean an SBA 7(a) loan. A 7(a) loan is a general purpose loan that is backed by the SBA for up to 85% of the loan’s value. The SBA does not lend directly to small businesses, but rather banks and other lenders will provide the funds for the loans and the SBA guarantees a part of the loan. Because of the guarantee, there is less risk to the bank making the loan. This means that the loan can have a competitive interest rate but may also be slightly easier to qualify for than a traditional bank loan.
When you take out a 7(a) loan, you will be able to use it for the following purposes:
- Working capital
- Furniture and fixtures
- Machinery and equipment
- Real estate (except investment real estate)
- Business acquisition
- Debt refinancing
With a 7(a) loan, you can borrow up to $5 million with loan terms up to 10 or 25 years (depending on what you use the money for). Beyond the standard 7(a) loan, there are a few other types for different purposes. Two of the most popular types after the standard 7(a) loan are the Express Loan program and the CAPLines program.
While you can only borrow up to $350,000 with an Express loan, you will receive an expedited loan approval decision. Typically, the SBA will respond to your Express loan application within 36 hours. Compared to a standard 7(a) loan that can take a few weeks to process, this is pretty fast. The other program, CAPLines, is actually a line of credit with the same terms as the 7(a) loan. Instead of receiving a lump-sum, you’ll be able to draw on your line of credit as needed, making it a good option for working capital or seasonal needs.
|SBA 7(a) Loan Program||Maximum Loan Amount||Maximum Loan Term|
|Standard 7(a) Loan||$5 million||10 or 25 years|
|SBA 7(a) Express Loans||$350,000||7, 10 or 25 years|
|SBA 7(a) CAPLines||$5 million||10 years|
|SBA 7(a) Export Express Loans||$500,000||7, 10 or 25 years|
|SBA Export Working Capital Loan||$5 million||3 years|
|SBA International Trade Loans||$5 million||10 or 25 years|
The last three loan programs listed in the table above are intended to help small businesses start or expand their export activities. The Export Express loan, similar to the Express 7(a) loan, will get you a loan approval decision from the SBA within 36 hours or less. The Export Working Capital Loan is designed to help businesses meet export demands, while the International Trade Loan is intended for businesses expanding or starting exporting or businesses that have been negatively affected by import competition.
SBA 7(a) Loan Rates
The SBA sets the maximum interest rate that a lender can charge on a 7(a) loan. These interest rates are calculated using a prime rate plus a spread of two to four percentage points. This prime rate can be either the Wall Street Journal (WSJ) Prime Rate, the LIBOR (London Interbank Offered Rate) Base Rate or the SBA Optional Peg Rate. Most lenders will quote you an interest rate based on the WSJ Prime Rate.
Because the interest rates are tied to a prime rate, it helps keep the loans competitive in the market. The actual maximum interest rates are determined by the loan amount and the repayment term. Longer repayment terms and lower loan amounts will translate to higher interest rates. You can also opt for a variable interest rate or a combination of a fixed and variable interest rate (e.g., a fixed interest rate on the guaranteed portion of the loan and a variable rate on the unguaranteed portion).
|SBA 7(a) Loan Amount||Less Than 7 Year Repayment Term||7 Year or More Repayment Term|
|$25,000 or less||8.75%||9.25%|
|$25,000 - $50,000||7.75%||8.25%|
|More than $50,000||6.75%||7.25%|
Interest rates for the Express, CAPLines and Export Express loans are also based on the prime rate plus an additional spread. You’ll notice that the interest rates for both Express loans are higher than for the standard 7(a) loan. This is because the loan amounts are lower and the SBA gives an expedited decision for this programs. Another important thing to note is that the SBA doesn’t set maximum interest rates for the Export Working Capital Program, so lenders are free to charge what they like.
|SBA 7(a) Loan Program||Maximum Interest Rates|
|SBA 7(a) Express Loans||9.00% - 11.00%|
|SBA 7(a) CAPLines*||6.75% - 9.25%|
|SBA 7(a) Export Express Loans||9.00% - 11.00%|
|SBA Export Working Capital Loan||None|
*SBA 7(a) CAPLines has the same interest rates as a standard 7(a) loan
Depending on the size of your loan, the SBA will guarantee a different percentage of the loan’s value. The maximum guarantee percentages in the table below don’t mean that is the amount the SBA will guarantee for your loan. Guarantees will vary by loan. For each loan, there is also a guarantee fee that is assessed on the guarantee amount of the loan (not the total loan amount). This fee ranges from 0% to 3.75% based on the amount guaranteed. For loans of $150,000 or less, there is no guarantee fee.
|SBA 7(a) Loan Amount||Maximum Guarantee||Guarantee Fee|
|$150,000 or less||85%||0%|
|$150,000 - $700,000||75%||3.00%*|
|$700,000 - $5 million||75%||3.50-3.75%*|
*For loans with terms of one year or less, the guarantee fee is 0.25%
SBA 7(a) Loan Requirements
The SBA only defines a set of minimum requirements that businesses must meet to be eligible for a 7(a) loan. The bank that is actually providing the funds can set additional requirements, such credit score, revenue or business age minimums. Many banks will prefer to lend to borrowers with “strong” qualifications, meaning a good to excellent credit score (typically any FICO score above 680), high annual revenue, good profitability or cash flow and an established business (more than two years in business).
Below is a list of the minimum requirements outlined by the SBA for a standard 7(a) loan:
- For-profit, operating business in U.S.
- Meet small business size requirements
- Demonstrate need for loan
- Have invested equity in business
- Ability to put up collateral for the loan
- Use other funding sources, including personal sources, before seeking financial assistance
- Use of funds for approved purposes
- Not delinquent on any debt obligations to the government
- Demonstrated ability to repay loan
- Good character of owners
- Good personal and/or business credit
- Relevant management expertise of owners
- Feasible business plan
Eligibility requirements for special 7(a) loans will include additional criteria. If you’re interested in a special type of 7(a) loan, be sure to check the eligibility criteria first:
You’ll need to apply for a 7(a) loan through a bank or other lender. Thankfully, the SBA has a tool that can connect you with lenders in your area that offer SBA loans. Using the tool, you’ll be able to hear from lenders within two business days. To apply, the SBA asks for the following documents and information (your lender may require additional information):
- Personal background and financial statements
- Business financial statements, including profit and loss statements and projected financials
- Ownership and affiliate information
- Business certificate or license
- Loan application history
- Personal and business income tax returns for previous three years
- Personal resume for the business owner(s)
- Business overview and history
- Commercial lease agreement
Once you apply for an SBA loan, it can a few weeks to process your loan application and receive funds. If you need money more quickly, you should consider the 7(a) Express program, as you can get funds within a week or so. However, the tradeoff here is that you can only borrow up to $350,000 instead of $5 million. If you need more money, you may also want to consider a loan from a bank as some are now offering online applications with quick approval times.