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SBA 7(a) Loans -- What They Are and How to Qualify

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Matt Frankel, CFP®
Author: Matt Frankel, CFP®
Matt Frankel, CFP®
Matt Frankel, CFP®
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Matt is a Certified Financial Planner™ and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for Motley Fool Money and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column for the Motley Fool ("Ask a Fool") that is syndicated in USA Today, and his work with Motley Fool Money has also been syndicated to MSN and Yahoo! Finance. He has been regularly featured on Fox Business and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.

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Eric McWhinnie
Fact Checked: Eric McWhinnie
Eric McWhinnie
Eric McWhinnie

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The Small Business Administration, or SBA, doesn't make business loans directly, but it provides a guarantee for lenders that do. Several SBA loan programs exist, but the largest is the SBA 7(a) loan, which can provide up to $5 million in funding for small businesses.

In this article, we'll take a closer look at how SBA 7(a) loans work, the requirements that need to be met to get one, and the other important information you need to know.

What is an SBA 7(a) loan?

The SBA 7(a) loan is the most common loan type guaranteed by the Small Business Administration. It is designed to provide working capital for businesses, or to allow businesses to acquire assets (or even entire businesses).

With SBA loans, the Small Business Administration guarantees a certain percentage of the loan, thereby limiting the loss exposure for the lender in the event that the borrower cannot pay it back. With most 7(a) loan programs, the SBA guarantees from 50%-85% of the loan amount.

This is significant because it dramatically reduces the risk to the lender. Think of it this way -- if you obtain a $1 million SBA 7(a) loan and the SBA guarantees 75% of it, the maximum your lender could lose is $250,000 if you don't pay it. Meanwhile, it gets to collect the payments and interest on the entire $1 million balance. This encourages lenders to extend credit to small businesses that otherwise might have trouble obtaining funding.

Most SBA 7(a) loans are installment loans, meaning that borrowers will make monthly payments for a certain amount of time, at which point the loan will be fully repaid. Terms can be as long as 10 years in most cases, but if the loan is used to purchase or refinance real estate, it can be up to 25 years.

Borrowers typically have to pay an upfront fee (the SBA guarantee fee) to the Small Business Administration. Interest rates are subject to maximums set by the SBA, but otherwise can be negotiated between the lender and borrower.

Qualification requirements for an SBA 7(a) loan

There are several key requirements to be eligible for an SBA 7(a) loan. The business must be currently operating, it must be a for-profit company, and it must be located in the U.S. The business must have good credit, but also must be unable to obtain a loan on "reasonable terms" from other sources.

The business also must meet SBA size requirements -- after all, these are small business loans. And there are certain industries that don't qualify for SBA financing, including lending businesses, life insurance, gambling establishments, private clubs, and adult entertainment businesses, just to name a few.

SBA 7(a) loans don't have a specific down payment requirement for most purposes and can provide as much as 100% financing in many cases. The exceptions are loans for startup businesses and business acquisitions, which require a 10% down payment. However, depending on the circumstances of your loan, the lender might require you to have some skin in the game beyond the SBA's minimum requirements.

Plus, SBA 7(a) loan funds must be used for a qualifying purpose, which can be:

  • Acquiring real estate or improving real estate the business already owns. (Note: This doesn't mean investment properties -- SBA loans can generally only be used for real estate the business will operate in on a continuous basis.)
  • Purchasing machinery, equipment, furniture, fixtures, or supplies.
  • Acquiring an existing business in its entirety.
  • Working capital (short or long-term).
  • Refinancing existing business debt.

How much can you borrow with an SBA 7(a) loan?

The short answer is that SBA 7(a) loans can have a maximum loan amount of $5 million. However, the amount your business can qualify for depends on a few factors. These include (but are not limited to) your personal and business credit history, the industry and geographical location of your business, how much revenue and profit your business generates, and more.

Types of SBA 7(a) loans

There are several subtypes of loans that are part of the SBA 7(a) program. Here's a quick rundown of the three main varieties:

Standard 7(a): Standard SBA 7(a) loans are made in amounts from $500,000 to $5 million. The SBA guarantees at least 75% of the loan amount, and these loans can be processed in five to 10 days.

7(a) Small: A SBA 7(a) Small loan is a term loan that is made for $500,000 or less. These have looser collateral requirements than Standard 7(a) loans, and can often be processed faster, with a turnaround time of as little as two days.

SBA Express: SBA Express loans are streamlined loans designed to provide faster funding than the other types of 7(a) loans. SBA Express Loans can be made in amounts up to $500,000 and can also be originated as lines of credit in addition to traditional term loans. However, if you need a rather small amount of money and can pay it back fairly quickly, a business credit card could be worth a closer look.

Where can you apply for an SBA 7(a) loan?

One popular misconception is that you apply for SBA loans directly through the Small Business Administration. However, this isn't how it works. SBA 7(a) loans work similarly to FHA mortgages -- they are guaranteed by a government agency but aren't originated by the government. The government guarantee makes them less risky to lenders, and this opens financing up to small businesses who otherwise might not qualify.

You can apply for SBA loans through authorized SBA lenders, which include many financial institutions you're probably familiar with, as well as some that specialize in small business lending and banking. The best course of action is to explore some of the small business lenders that offer SBA loans to decide which could be the best fit for you. The SBA maintains a Lender Match tool to help find some good choices for you.

Is an SBA 7(a) loan right for you?

There are several types of SBA 7(a) loans, so if you meet the definition of a small business and operate in an industry that is eligible for SBA financing, it might be worth a closer look for your business' funding needs.

FAQs

  • SBA 7(a) loans have a 10% down payment requirement if they're used to acquire an existing business, or if they are used to start a new business. SBA loans used for most other purposes don't have an official down payment requirement, but the lender may want you to put some of your own capital in, depending on your circumstances.

  • The SBA will look at your personal credit score, as well as your business credit score (if you have one), when applying for SBA 7(a) loans. On the personal side, there is no official minimum score set by the SBA, but in practice, lenders will likely want to see a FICO® Score in the mid-600s at a minimum. For a business credit score, it's a little more complicated, but it's wise to expect the SBA to want to see good credit and an absence of things like collections and charge-offs on your business' history.

  • Yes, SBA 7(a) loans can be used to acquire an existing business. Generally, the SBA wants to see that the business has been operational for at least two years and has the financial records to prove it. But buying a business is a fairly common use of SBA 7(a) loans.