SBA 7(a) Financing Explained
The Small Business Administration offers loan guarantee programs to small businesses that meet the SBA eligibility. The loan guarantee programs are run by the SBA, but the funding actually comes from banks and other commercial lenders. With the programs, the lendesr (large banks, small banks, community banks or credit union) provide businesses with financing, and the U.S. government agrees to cover a large portion of the lender’s losses should the small business fail to fully-repay their loan. The purpose of the loan guarantee program is to help encourage lenders to finance small businesses who may not be able to obtain financing without the loan guarantee, and to help reduce bank rates offered to small businesses.
Since the SBA is willing to cover much of the lenders’ losses, it reduces the overall financial risk to the institution, thereby pricing that reduced risk into a lower rate to the borrower. The largest of the SBA loan programs is the 7(a) general small business loan. SBA 7(a) business loans is responsible for nearly 85% of total dollars loaned through all Small Business Administration programs. Through July 2016, the SBA 7(a) had provided a over $19 billion in financing to small businesses throughout the United States, with an average loan size $366,823. This program uses both term loans and lines of credit to provide financing to small businesses.
|Business Loan Types||Rates||Terms|
|General 7(a)||5-6.5%||3-25 years|
|SBA Express||6-8%||up to 7 years|
|Export Express||6-8%||7 years|
|Export Working Capital||5-8%||1 year|
|International Trade||6.25%||7-25 years|
|Small Loan Advantage||6-8%||7 years|
SBA 7(a) Eligibility
The SBA doesn’t explicitly lay-out which businesses are eligible (in fact, they only explain what businesses and business activity would be ineligible). With that having been said, there are some basic requirements that all applicants should meet, to be able to meet the SBA eligibility requirements, including:
- Be for-profit
- Meet SBA business size standards
- Do business with in the U.S.
- Owner must have equity in business
- Must exhaust all other financing resources
- Have a need for financing
- Money will be used for sound business uses
- Are not delinquent on other debt to the government
What Businesses are Ineligible for SBA 7(a) Financing?
- Financial companies that lend to businesses
- Investment real estate companies
- Life insurance companies
- Business located outside the U.S.
- Pyramid sale distribution plans
- Businesses that gross 1/3 of revenue from gambling
- Most private clubs that limit membership
- Government-owned entities
- Businesses involved in teaching and education
- Consumer and marketing coops
- Business and personal loan packaging companies
- Lobbying companies
Use of 7(a) Loan Proceeds
SBA 7(a) program has a wide variety of uses. In fact, there are very few restrictions on a 7(a) general small business loan use of proceeds, including:
- Long-term working capital
- Short-term working capital
- Revolving lines-of-credit based on inventory and receivables
- Equipment and machinery purchase
- Purchase commercial real estate
- Construction of new commercial real estate
- Renovation and upgrades of existing commercial real estate
- Start-up or acquisition financing
- Refinance business debt
Documents needed for an SBA 7(a) Loan?
To apply for an SBA loan, you need to have specific documents to provide to the lender who is working within the SBA’s guidelines. Here is the SBA 7(a) loan application checklist of documents that will be needed:
- SBA Loan Application
- Business tax returns
- Income statements
- Balance sheets
- Schedule of liabilities
- A/R and A/P aging schedules
- Personal financial statement
- Statement of personal history
- Ownership and affiliates
- Business license
General Use 7(a) Rates, Terms and Fees
SBA 7(a) loans don’t have a minimum loan amount and have a maximum business amount of $5 million. The SBA guarantees up to 85% on loans $150,000 or less, and will guarantee up to 75% on loans up to $5 million. Therefore, under the SBA 7(a) program, the maximum exposure on an SBA-enhanced facility is $3.75 million.
Rates are negotiated between the SBA lender and borrower, but the SBA loan rate is composed of two parts: based rate and allowable spread. The base rates is based upon either the WSJ prime rate, London Interbank One Month Prime plus 3% or SBA peg rate). Terms for an SBA loan range from 7 years for working capital, to 10 years for equipment or machinery finance, and 25 years for the purchase or refinancing of real estate. If there is a mix use for the facility, the term and be constructed using a combination.
Any loan over $150,000 in which an SBA guarantee is used, is assessed an SBA fee. The lender usually pays this fee upfront, but may pass off the fee to the borrower. On loans over $150,000, fees can range from 0.25% up to 3.75%.
The SBA Express loan program is designed with an accelerated turnaround to provide quick financing. After a borrower has completed the loan application with the lender, the SBA will provide a response to the application with 36 hours. The maximum loan amount using the SBA Express loan program is $350,000. Rates are negotiated between the lender and borrower, but must not exceed prime plus 6.5% on loans under $50,000, and 4.5% on SBA Express loans over $50,000. The maximum term of an SBA Express loan is 7 years.
The Export Express loan program provides term loans and lines of credit up to $500,000 for exporters. The program is streamlined by allowing SBA lenders to make their own credit decisions and to use their own SBA-approved loan documentation. The SBA provides an quick review in which a response is provided within 24 hours. The SBA maximum loan guarantee for the Export Express program is 90% on loans less than $350,000, and 75% on loan greater than $350,000. Rates are negotiated between lender and borrower, but rates may not be higher than general SBA rate guidelines. Maximum term using the Export Express program is 7 years.
Export Working Capital
The SBA Export Working Capital Program provides up to $5 million for companies that generate export sales and need working capital. The program provides revolving lines of credit, with up to 12 month terms. Rates are negotiated between the borrower and lender, and the rate can be fixed or variable. The maximum guarantee by the SBA for an Export Working Capital loan is 90%, with the SBA having a response time of 5-10 days. The program relies on export-related inventory and receivables as collateral, and also requires a personal guarantee of all owners of the company.
The SBA CAPLines program relates to a short-term lending program to help small business meet their financing needs. Financing in this program is offered through revolving and non-revolving facilities. Options available under the CAPLines program include the Seasonal Line, Contract Line, Builders Line, Standard Asset-Based Line, and the Small Asset-Based Line. Maximum loan amount using this program is $200,000 and the lines of credit have a maximum maturity of up to five years.
For small businesses looking to start a businesses exporting, or for an existing business that has been adversely affected by imports, the SBA offers the International Trade Loan Program. Use-of-funds can be used for debt refinance, purchase of long-term asset, and working capital. To be eligible a small business need to be in a position to expand to export markets. The maximum loan amount for a international trade loan is $5 million with the SBA willing to guarantee up to 95% of the loan. Interest rates may be up to 2.75 over prime rate, with a maximum term of 10 years for working capital, 10 years on machinery and equipment, and 25 years on commercial real estate.
Small Loan Advantage
In an effort to provide capital access to small business in underserved areas, the SBA created the Small Loan Advantage and Community Advantage initiatives. The maximum loan size is $350,000, in which the SBA will guarantee up to 85% on loans under $150,000 and 75% on loans above $150,000. Most small loan advantage loans can be approved within minutes of submission.