What is an SBA 7A Loan?

SBA 7(a) loans are loans primarily backed by a guaranty from the SBA but issued by third-party partner banks to owners who aren’t able to obtain traditional funding. This is the best option when real estate is part of a business purchase, but it can also be used for:

• Short and Long-Term Working Capital
• Refinance Current Business Debt
• Purchase Equipment, Machinery, Furniture, Fixtures, Materials or Supplies
• Building Construction/Renovation

The maximum loan amount for a standard 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates.

An SBA 7A loan provides a guaranty on 75%-85% of a loan, so that if for whatever reason the loan were to default the SBA would cover the portion they guaranteed. This guaranty reduces the lender’s risk and therefore increases your chance of loan approval. For this reason, SBA 7A loans are the best option for business owners that are unable to obtain traditional funding from a bank.

Who is the SBA?

The SBA, short for the Small Business Administration, is an independent agency of the U.S. government established in 1953 that provides support to entrepreneurs and small businesses in the U.S. The SBA helps small businesses obtain funding by setting guidelines for loans and reducing the risk for lenders by providing eligible owners with a 75%-85% guarantee on their loan.

 Benefits of SBA 7A Loan

• Businesses not approved for traditional funding could qualify with the SBA guaranty. SBA loans includes SBA guarantees, which means the lender can recover a portion of the outstanding balance if you default on your loan. As a result, the risk for the lender is greatly reduced with an SBA guaranty so the chances of loan approval are increased.
• Favorable Terms: SBA-guaranteed loans generally have rates and fees that are comparable to non-guaranteed loans.
• Unique Benefits: Lower down payments, flexible overhead requirements, and no collateral needed for some loans.

 Are You Eligible For An SBA Loan?

While the vast majority of businesses are eligible for financial assistance from the SBA, some are not.

Eligible businesses must:

• Operate for profit
• Be engaged in, or propose 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

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.

Ineligible Businesses Include:

• Real estate investment firms, when the real property will be held for investment purposes as opposed to loans to otherwise eligible small business concerns for the purpose of occupying the real estate being acquired.
• Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business.
• Dealers of rare coins and stamps are not eligible.
• Firms involved in lending activities, such as banks, finance companies, factors, leasing companies, insurance companies (not agents), and any other firm whose stock in trade is money.
• Pyramid sales plans, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants.
• Firms involved in illegal activities that are against the law in the jurisdiction where the business is located.
• Gambling activities, including any business whose principal activity is gambling.
• Charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives.

SBA Interest Rates

Interest rates are negotiated between the borrower and the lender, but are subject to SBA maximums, which are pegged to the prime rate, the LIBOR rate, or an optional peg rate. Interest rates may be fixed or variable.

The interest rates for variable rate loans are as follows:

Variable rate loans may be pegged to the lowest prime rate, the LIBOR Rate, or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the Federal Register. The lender and the borrower negotiate the amount of the spread, which will be added to the base rate. An adjustment period is selected which will identify the frequency at which the note rate will change. It must not be more often than monthly and it must be consistent (e.g., monthly, quarterly, semiannually, annually, or any other defined period). The maximum rate for SBA Express and Export Express loans is Prime + 6.5 for loans of $50,000 or less. For loans of over $50,000, it is Prime + 4.5.

The interest rates for fixed rate loans are as follows:

SBA Loan Terms

SBA loan programs are generally intended to encourage longer-term small business financing. Loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed.

The maximum maturities for SBA loans are as follows:

• 25 Years for Real Estate
• 10 Years for Equipment
• 10 Years of Working Capital or Inventory Loan

The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets, in no instance to exceed 25 years. The 25-year maximum will generally apply to the acquisition and/or improvements of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.)

When loan proceeds will be used for a combination of purposes, the maximum maturity can be a blended maturity based on the use of proceeds or up to the maximum for the asset class comprising the largest percentage of the use of proceeds.

SBA Guaranty Fees

Note 1: The SBA specifies the amount of certain fees each fiscal year for all loans approved during that year.

Note 2: For example, the guaranty fee on a $100,000 loan with an 85% guaranty would be 2% of $85,000 or $1,700, of which the lender may retain $425.

Note 3: For example, the guaranty fee on a $5,000,000 loan with a 75% guaranty (3.75 million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) plus 3.75% of $2,750,000 ($103,125) with totals $138,125.

Guaranty Percentage

For most 7(a) loan programs, the SBA can guarantee up to 85 percent of loans of $150,000 or less, and up to 75 percent of loans above $150,000. However, SBA Express loans carry a maximum of 50 percent guaranty and Export Express loans carry a maximum 90 percent guaranty. The Export Working Capital loan program and International Trade loans carry a maximum of 90 percent guaranty, up to a guaranteed amount of $4.5 million.

Maximum Loan Amount & Guaranty

Most 7(a) loans have a maximum loan amount of $5 million. However, SBA Express loans have a maximum loan amount of $350,000. SBA Export Express loans have a maximum loan amount of $500,000.

The SBA’s maximum exposure is $3.75 million ($4.5 million under the International Trade loan). If a business receives an SBA-guaranteed loan for $5 million, the maximum guaranty to the lender will be $3.75 million, or 75 percent. The guaranty percentage varies depending on the loan amount and program type.

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