How an SBA-7(a) Loan Works – The Motley Fool | Region & Cash

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For many small business owners, finding finance can become frustrating. One place you shouldn’t overlook for financing opportunities is the Small Business Administration’s 7(a) loan program.

Running a small business is not always easy. As rewarding as it often is, there are times when you need extra cash to buy new gear, expand your shop, or replenish your inventory.

However, finding credit can sometimes be difficult, especially if you are a new or non-traditional business owner. This can hamper your efforts to obtain small business loans through traditional financial institutions.

To ease the path, the Small Business Administration (SBA) has created various loan programs for small business owners. The most popular is the SBA 7(a) loan program.

If you’re a small business owner trying to secure a small business loan — from a microloan to millions of dollars — keep this one on your radar. Here’s what you need to know.

Overview: What is an SBA 7(a) loan?

The SBA 7(a) loan is the administration’s most popular loan program. There isn’t just one type of SBA 7(a) loan; Eight different loans are available within the program, designed to cover a variety of needs.

What makes this SBA loan so popular with small business owners is that between 50% and 85% of the loans are guaranteed. For more traditional lenders, such as banks and credit unions, having a government guarantee to back a loan helps reduce the risk of lending to people who would not normally be approved.

Who is Eligible for an SBA 7(a) Loan?

SBA loan programs often target small business owners who may struggle to obtain traditional financing. However, that doesn’t mean you don’t have to meet some SBA loan requirements in order to qualify.

profit oriented

The SBA requires that you operate a for-profit business.

Located in the United States

Your business must also be located in and do business in the United States (or territories), but that doesn’t mean you can’t sell goods or services outside of the United States.

Own equity

As a small business owner, the SBA wants you to invest your time and money in the business.

Other funding applied for

The SBA doesn’t want it to be your first choice for funding. It assumes you have already used your own funds or applied for other sources of funds before coming to them.

While most small businesses qualify for an SBA 7(a) loan, certain types of businesses are not eligible.

A document from listing companies that are ineligible for SBA 7(a) loans.

A list of companies that are ineligible for SBA 7(a) loans. Image source: author

How an SBA 7(a) loan works

As with the other loan programs on offer, the SBA does not provide direct funding to small business owners. Instead, the SBA works with pre-approved lenders to facilitate the process.

For you, the process is relatively straightforward. If you qualify, you must first find a pre-approved lender. Lenders range from traditional banks to credit unions and private lenders, offering a range of options.

Once you have identified your lender, you can begin working on your SBA loan application.

A table from showing interest rates for SBA 7(a) fixed rate loans.

A list of interest rates for SBA 7(a) fixed rate loans. Image source: author

The SBA loan terms, including funding limits, interest rates, fees, and how the funds can be used are preset.

In general, you can use the funds to:

Once approved, the funding processing time is quick, typically between five and ten business days. For SBA 7(a) express loans, you can get financing in as little as 36 hours. Depending on the type of loan, the terms are usually between 10 and 25 years.

The 8 Types of SBA 7(a) Loans

You may not know that the 7(a) loan program is an umbrella term for eight different types of loans. You may find that your needs are best met with one type of loan over another, so research the loans available before engaging in the process.

1. Standard 7(a)

This is the most common loan. Many small businesses qualify for the Standard 7(a) loan, and it covers a wide variety of needs. It allows you to borrow up to $5 million and can be used to fund a variety of needs, from real estate to start-up expenses.

2. 7(a) Small Credit

The small business loan offers the same features as the standard loan, except that the maximum loan limit is $350,000. Lenders also pre-screen these loans based on your company’s financial documents. If you pass, your application will be expedited.

3. SBA Express

If you need a quick settlement, consider the express loan. You have a decision within 36 hours. The maximum loan is $350,000. The SBA only guarantees up to 50% of this loan, the lowest of the 7(a) program.

4. Export express

This loan provides a line of credit of up to $500,000 for export companies. As with the standard express loan, it also offers fast processing of the financing.

5. Export working capital

The Export Working Capital Loan is another for export companies. With this loan, the SBA allows companies to borrow up to $5 million in working capital to enable more export sales.

6. International trade

The international trade loan is a long-term loan for companies trying to improve to compete with foreign organizations. The maximum loan is $5 million.

7. Veteran Benefit

The VA Small Business Loan is for businesses with at least 51% Veteran ownership. An Eligible Business can apply for any SBA 7(a) loan and apply Veteran Advantage benefits, including lower fees.

8. CAP lines

The CAPLines program offers up to $5 million in credit lines to qualifying small businesses. It is designed to meet short-term, seasonal or cyclical needs.

Tips for getting an SBA 7(a) loan

If you are considering applying for an SBA 7(a) loan, consider these tips before you begin. You can help improve your chances.

1. Make sure you qualify

While you must meet the key requirements set by the SBA, you should also review the specifications set by your lender. Lenders will check some basic criteria, including your credit history, tax projections, business plan, and income. Some may also ask for supporting materials that can help improve your application.

2. Start with your current lender

If you already bank with a financial institution, it’s a good idea to find out if you can get an SBA through them. Discuss your needs with the small business loan department. Your relationship may be able to help you during the application process as the bank is already familiar with you and your business. This can help smooth the way if your application encounters bumps along the way.

3. Get your documents in order

Before applying for an SBA loan, have all the required documentation ready. Many lenders require a lot of paperwork to complete your loan, from formal financial statements to your business plan and document inclusion. Prepare this in advance to keep the process going.

Explore your options with SBA 7(a) loans

As a small business owner, you’re probably already familiar with the ups and downs of running your business. If at some point you need additional help or the funds to keep your business growing, don’t forget to explore SBA’s options. You might find a 7(a) loan that fits your business’s exact needs.

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