If you own a business and you need financing, the very best loan you can get is an SBA loan. They are low cost with flexible terms and they are guaranteed by the Small Business Administration (SBA). The SBA has been helping businesses obtain low-cost financing for more than 60 years. Although it doesn’t actually issue loans, the SBA acts as a guarantor, working with banks to ease the way for businesses to obtain financing that otherwise might not be available. The SBA sponsors a range of loan programs covering a variety of business financing needs. However, the SBA 7(a) loan is the most common for small- to mid-sized businesses.

How Does an SBA 7(a) Loan Guarantee Work?

SBA 7(a) loans are offered to businesses that are deemed to have a profitable outlook and they can be obtained through any lender that is SBA certified. As the guarantor of the loan, the SBA provides the lender with assurance that up to 90% of the loan amount will be backed by the federal government in the event of a default. Since the borrower is required to put up the remaining 10%, the risk to the lender is very low. The lower risk allows lenders to relax their lending requirements, making the loans available to a larger number of businesses.

The amount of the loan guaranteed by the SBA ranges from 75% on loans of more than $150,000 to as high as 85% for loan amounts up to $150,000. The maximum dollar amount guaranteed by the SBA is $3,750,000 for a $5 million loan. The minimum loan amount offered with an SBA guarantee is $30,000. In 2015, the average SBA 7(a) loan amount was $371,628.

For the loan guarantee, the SBA charges the lender a fee for the guaranteed portion of the loan, which the lender may choose to pass on to the borrower. For loan amounts of $150,000 to $700,000 the fee is 3%. Loans above $700,000 are charged 3.5%. Loans less than $150,000 are not charged a fee except if the maturity is less than one year for which a 0.25% fee is charged.

What are the Terms of an SBA 7(a) Loan?

The interest rates on an SBA 7(a) loan are determined in the same way as any bank loan, based primarily on the borrower’s credit score and the loan repayment terms. Current rates range from 5.75% to 8.25% and can be fixed or variable. The rates charged by lenders are limited by the SBA to 2.75% plus prime.

Loan maturity terms can vary depending on the purpose of the loan proceeds, ranging from seven to 10 years. Loan terms for real estate or commercial property purchases can extend to 25 years.

How Can an SBA 7(a) Loan Be Used?

Under SBA requirements, an SBA 7(a) loan may be used for a number of “sound business purposes”, including working capital, debt refinancing, equipment or real estate purchases, new construction, and business acquisitions. The SBA website provides a comprehensive list of SBA 7(a) loan uses.

How Does a Business Qualify for an SBA 7 (a) Loan?

To be considered for an SBA loan, businesses must meet certain eligibility requirements, including:

  • A small business with less than 500 employees
  • Less than $7.5 million in average annual revenue for the previous three years
  • Less than $5 million in average net income for previous three years
  • A net worth under $15 million
  • Operate as a for-profit business based and primarily located in the United States
  • Demonstrate a specific need for the loan
    Demonstrate that alternative financial resources, including personal assets have been deployed prior to applying for a loan

The SBA has also established specific financial and credit requirements:

  • Good to excellent credit
  • No recent bankruptcies foreclosures or tax liens
  • No defaults on prior SBA loans
  • Sufficient collateral

Improving Your Chances of Qualifying for an SBA 7(a) Loan

Although the whole purpose of the SBA guarantee is to make it possible for more businesses to qualify for a loan, the financial and credit requirements is still a high hurdle for many businesses. However, businesses can improve their chances of qualifying by focusing on some key elements of the SBA’s requirements. For example, the SBA wants to see that a business has been willing to invest its own resources to achieve its growth goals. Having skin in the game is a strong indication of a business’ commitment to success. Businesses that can offer more collateral, either business or personal, also stand a better chance of qualifying. Most importantly, the SBA wants to know that the business is stable enough to generate sufficient cash flow to meet its debt obligations. Businesses should have a solid business plan that includes a detailed cash flow projection to strengthen their case.

How to Apply for an SBA 7(a) Loan

The application and underwriting process is long and arduous, requiring familiarity with the SBA program to properly facilitate it. Businesses should only work with a bank that is a designated lender for the SBA. A qualified banker, experienced in SBA loan processing can help navigate the business owner through the many hoops of qualifying for a loan.