June 07, 2021

Our Guide to the SBA 7(a) Small Loan

The greatest benefits of this type of loan is that the SBA guarantees a portion of the amount you borrow, places caps on interest rates, and keeps fees to a minimum. If you're seeking business financing, it can be a viable option to consider. In this post, we'll explain what the SBA 7(a) Small Loan is so you can decide if it makes sense for your business.

What is the SBA 7(a) Small Loan?

You can use a SBA 7(a) Small Loan to pay for business-related expenses such as:
  • Real estate
  • Working capital
  • Equipment
  • Inventory.
With this loan, you can improve cash flow or grow your venture through expansion opportunities. While you’ll work with a lender to take one out, the SBA will play a role by guaranteeing a portion of the loan amount.  This guarantee can help you obtain the funds you need, even if you wouldn’t be able to qualify for a small business loan otherwise.  It’s important to note that you’ll need to pay an SBA guarantee fee that usually ranges from 0.25% to 3.75% and depends on the size and term of your loan.

How Does the SBA 7(a) Small Loan Work?

According to the SBA, 7(a) small loans are intended to encourage SBA lenders to offer fair loans to businesses that “might not otherwise be able to obtain funding on reasonable terms and conditions.”  To take out this type of SBA loan, you’ll need to find an SBA-approved lender who will look at your credit score, existing debt, profitability, and business plan. The maximum loan amount that you’ll be able to borrow is $350,000 and your term will depend on what you plan to use the money for. The SBA states that maximum term lengths are 10 years for working capital, inventory, and equipment loans. If you need financing for real estate costs, the maximum term is 25 years.  In most cases, you’ll repay your loan via fixed monthly payments. Although the SBA caps a maximum interest rate based on the prime rate, loan size, and loan maturity, you and your lender may negotiate within that limit.  You can expect the SBA to guarantee 85% of your loan you borrow up to $150,000. In the event you receive more than $150,000, they’ll guarantee 75%. If you decide to pay back your loan early within the first three years, you may be on the hook for a prepayment penalty.  Unlike with Standard 7(a) loans, you won’t have to wait long to get approved and receive your funding with the 7(a) loan. While every case is unique, the majority of SBA 7(a) loans come with a turnaround time of five to 10 business days. If you need the funds sooner than that, there is an SBA Express loan, which offers an expedited turnaround time of 36 hours. 

Who Qualifies for a 7(a) Small Loan?

The SBA 7(a) small loan isn’t available to every business. To be eligible, you must meet these requirements.
  • Be considered a small business by the SBA. Your industry as well as the number of employees you have or how much you earn in average annual revenue will play a role.
  • Operate for profit in the U.S. or its territories.
  • Have resources to invest your assets in your business.
  • Prove the loan will be used for business purposes.
  • Have taken advantage of other financial resources prior to applying for a 7(a) small loan. 
If you run a non-profit organization, participate in illegal activities, multi-sales distribution, rare coins, or gambling, small loans by the SBA are not an option to you. 

Business Financing Alternatives

If you’re ineligible for the 7(a) small loan or prefer a different financing option, consider the following.

1. Business Credit Cards

Business cards work similarly to personal credit cards; you can borrow as much or as little as you’d like up to a set credit limit. Most business credit cards come with perks that can help you save money on office supplies, business travel, and other related expenses.

2. Traditional Business Loans

You can get a traditional business loan from a bank, credit union, or online lender. Loan terms and rates vary depending on the financial institution that you decide to work with. You may need to show your credit score as well as a business plan and other documents to take one out. The benefit of a traditional business loan, however, is that you may be able to secure more than $350,000 in funding.  New call-to-action

3. Lines of Credit

While business lines of credit are similar to business credit cards, they usually allow you to borrow  a lot more money. You’ll repay the amount you borrow plus interest during the repayment period. This is a great option if you’re not sure how much money you need and would like some flexibility. 

Conclusion: Consider the SBA 7(a) Small Loan for Your Small Business

A 7(a) small loan can be a great option for small business owners seeking financing with some of the best rates and terms. However, it isn't the right funding option for everyone, so it's important to weigh all of your options. If you don't qualify, there are plenty of other business financing options that you can choose from.