What is the SBA 7(a) Loan Program and How Can It Help Your Business?

The 7(a) loan program is the SBA’s most popular financing program. It provides working capital for small businesses that need working capital of up to $5 million. It’s also a guaranteed loan program. So essentially, small businesses work with traditional lenders, but the money is guaranteed by the SBA in order to support small business growth. Here are some of the details about the program so you can determine if it’s right for you.

What Is It?

Essentially, it’s a guaranteed loan program that’s made to help more small businesses get access to funding.

Robert Harrow, head of credit and loans at ValuePenguin, explained in a phone interview with Small Business Trends, “A great way of thinking about it is that 7(a) loans are for small businesses that would normally be a “maybe” from a bank. They’re not an immediate no. They meet all the minimum requirements. But this program helps to fill the gap for banks that are still on the fence about certain candidates to promote them and help them get funding.”

Who Is Eligible?

In order to qualify for the 7(a) loan program, you must fall within the SBA’s size standards, which vary by industry. You must also operate a for-profit business. It’s not restricted by industry, but you do have to try to use other types of financial resources, like personal equity, before applying for a loan.

What Can You Use 7(a) Money For?

You also need to have a specific purpose in mind for the funds you request. This can include money to fund startup costs, purchase equipment, purchase land, repair existing capital, fund growth opportunities, refinance debt, or purchase supplies.

How Much Can You Get Under a 7(a)?

Qualified small businesses can borrow up to $5 million. There is no minimum amount.

How Long Do I Get to Repay a 7(a) Loan?

The term of the loan will depend on your agreement with a specific SBA-approved lender. However, the terms are normally between five and ten years.

What’s the Interest Rate?

Again, the exact number will depend on the specific lender you work with, the amount you want to borrow, and what you qualify for. However, the SBA caps the interest rate at just below 10 percent. And according to Harrow, many of the rates fall between 6 and 8 percent.

Where Do I Apply?

You do not apply for a 7(a) loan directly with the SBA. Instead, you work with an SBA-approved lender. So it is similar to applying for a loan through your normal bank or any other financial institution.

How Do I Find an SBA 7(a) Lender?

You can check with your existing bank to see if they work with SBA loans or see a list of the most active 7(a) lenders online.

Harrow says, “I know a lot of small businesses tend to find success by working with their existing bank or financial institution because they’re already familiar with your finances and you have a relationship formed already. So that can make the process a whole lot easier.”

How Long Until I Get an Approval?

This part of the process depends on the lender you choose to work with and their experience with the 7(a) loan program. It can take up to ten days for your lender to get approval from the SBA for the guaranteed loan. They also need the time to process the reports associated with your loan application. So check with your specific lender to see what their standard timeline looks like.

Is There a Lot of Paperwork?

Again, the exact process can depend on the specific lender you choose to work with. However, the SBA forms 1919 and 1920 are required for all applications. Each of the forms are several pages in length.

What Are the Fees Involved?

The SBA charges a guarantee fee that varies depending on the amount of guaranteed money you receive. Usually, the percentage falls between 2 and 3.75 percent of the guaranteed portion of the loan. And the fees are due within 90 days of the loan approval. Individual lenders can also charge packaging fees in addition to those from the SBA, but those fees must be reasonable and consistent with the additional fees they would charge with other, non-SBA loans.

What Do I Do If I Get Rejected?

For those who don’t get approved on their first try, Harrow suggests getting some expert insights and trying again. Since the rates are capped and guaranteed by the SBA, it’s worth it for many businesses to give it another shot. So take advantage of the SBA’s workshops on creating a business plan and applying for loans and see if your local chapter can help you connect with a mentor who can guide your next application journey.

What Are the Alternatives If a 7(a) Loan Isn’t Possible?

If it’s absolutely not possible for you to take advantage of the program, you can check into the SBA’s other lending options to see if any of them might be a better fit. There are also plenty of alternative and online lenders that you can consider.

Harrow says, “Expand your options. If it’s a situation where you’re fighting for survival, shop around and look for other types of lenders. There are some companies that have popped up online lately, such as Kabbage. So you can see whether any of those lenders are willing to give loans at reasonable rates. Just make sure you compare rates and ask about all of the fees involved.”

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