The Complete Guide to SBA 7(a) Loans in 2022

SBA 7(a) loans can be a game-changer for small businesses in need of financial assistance. With maximum loan amounts, low interest rates, and generous repayment terms, it's no wonder why the 7(a) loan is the Small Business Administration's most popular loan program.

Used to cover just about any business-related expense, 7(a) loans are one of the most flexible and affordable funding solutions on the market for small business owners. That's right-whether you need working capital, land, or a brand-new food truck, an SBA 7(a) loan could be just the resource you need to help take your business to the next level. 

Keep in mind that like many government-backed programs, Small Business Administration loans involve a fair share of paperwork, processes, and hula-hooping. So, to help you get started, we're sharing our complete guide to 7(a) loans.

Keep reading as we walk you through just about everything you need to know about navigating the SBA 7(a) loan.

• What are 7(a) loans?
• How can you use 7(a) loans?
• 7(a) loan overview: amounts, rates, and terms
• Pros and cons of 7(a) loans
• 7(a) loan fees
• Qualifications for 7(a) loans
• How to apply for an 7(a) loan
• Frequently Asked Questions (FAQs)

Let's dive right in!

What are SBA 7(a) loans?

The SBA 7(a) loan is a part of the Small Business Administration's government-backed flagship loan program. While the 7(a) loan provides small businesses with up to $5 million in financing, it isnt the Small Business Administration that does the actual lending. Instead, they partially guarantee up to 85% of the loan's total amount while the SBA lenders do the financial lending. 

This Small Business Administration guarantee lowers the risk for traditional banks and alternative lenders to offer large loan amounts with low interest rates.

 How can you use SBA 7(a) loans?

SBA 7(a) loans can be used to cover various business expenses ranging from purchasing inventory and refinancing debt to acquiring land or constructing buildings. In order to secure funding, business owners must demonstrate a legitimate need for the funds. 

Here's a list of popular SBA 7(a) loan uses:

• Working capital: Financing your long-term or short-term working capital needs.
• Revolving funds: Use a 7(a) loan structure like a business line of credit to receive ongoing funding.
• Equipment: Purchase equipment, furniture, machinery, fixtures, supplies, or materials.
• Real estate: Buy land and buildings.
• Construction: Build new buildings or renovate existing structures.
• Business establishment: Establish your new small business with capital for operations, expansions, or even acquisitions.
• Refinancing: Refinance your existing business debt.

SBA 7(a) loan overview: amounts, rates, and terms

SBA loans consist of a lot of moving parts. From maximum loan amounts and use of proceeds to repayment terms, guaraunty fees, interest rates, and more-here's a brief overview of the main characteristics of SBA 7(a) loans in 2022:

• Maximum loan amount: $5 million
• Repayment terms: Generally up to 7 years for working capital, 10 years for equipment, and 25 years for real estate.
• Interest rates: Loans less than 7 years: $0 - $25,000 Prime + 4.25%, $25,001 - $50,000 P + 3.25%, over $50,000 Prime + 2.25%; Loans 7 years or longer: 0 - $25,000 Prime + 4.75%, $25,001 - $50,000 P + 3.75%, over $50,000 Prime + 2.75%
• Percent of guaranty: 85% guaranty for loans of $150,000 or less; 75% guaranty for loans greater than $150,000
• Guaranty fee: $150,000 or less = 2%; $150,001-$700,000 = 3.0%; $700,000- $1,000,000 = 3.5%; plus 3.75% on guaranty portion over $1million*

*The guaranty fee is charged on the guaranteed portion of your loan-not the entirety of it.

Pros and cons of SBA 7(a) loans

Like any funding program, the SBA 7(a) loan has its own set of pros and cons which you'll need to understand in order to determine if its the right financial option for you. Below, we'll give you the down-to-earth facts about the upsides and downsides of 7(a) loans.

SBA 7(a) loan pros

An SBA 7(a) loan can be a fantastic tool for helping finance small business needs:

• Broad eligibility: Wide-spread businesses and those in underserved communities and geographical locations can qualify (and even be prioritized).
• Capped interest rates: A base rate plus the lender's rate is applied, but they're subject to SBA maximums-this keeps loans affordable for small business owners.
• Generous repayment terms: With loans up to 25 years long, your business won't have to stress about large monthly payments.
• Varying loan sizes: You can find loans for as little as $500 or as much as $5 million-and everything in between.
• Wide use cases: Your small business can use a 7(a) loan to fund just about every imaginable business expense.
• Resource centers: The SBA offers general business assistance, lending information, and other support to business owners in underserved communities. 

SBA 7(a) loan cons

While 7(a) loans are popular small business financing options, they're not all sunshine and roses. Let's take a quick look at the downsides to these government-backed loans:

• Down payment typically required: In general, you'll need to put down a 10% to 20% down payment on your 7(a) loan.
• Collateral could be required: Lenders often require collateral for loans of $350,000 or more.
• Personal liability: If you default on your loan, the lender can seize your collateral.
• Slow processes: SBA application processes can take more than two months. While working with a preferred lender may help accelerate this process, a 7(a) loan might not be your best option if you need funds fast. 
• SBA Forms: The government likes documentation and business financial statements, so you'll have to engage the entire file cabinet when applying for a 7(a) loan.
• Generally need decent credit: While the SBA strives to serve members of underserved communities, it's still challenging to get a 7(a) loan with a personal credit score of less than 650-it's possible but not easy.

SBA 7(a) loan fees

SBA 7(a) loans require you to pay additional fees beyond your typical interest rates on your payments. Here's a list of 7(a) loan fees to expect:

• SBA Guaranty Fee: A fee ranging from 2% to 3.75% of your loan's guaranteed amount to help fund the SBA program when borrowers default on loans.
• SBA Loan Packaging Fee: Fee charged by loan providers to organize your loan documents before submitting for SBA approval.
• SBA Loan Broker Fee: The SBA doesn't allow “broker fees,” but if a broker helped facilitate this loan, this fee might get bundled into the packaging fees.
• SBA Loan Service Fee: 7(a) loan lenders often charge an ongoing service fee to manage your loan. These fees cover the costs of billing, processing, and maintaining payment records.
• SBA Loan Closing Costs: 7(a) loan closing costs are a group of miscellaneous fees consisting of appraisal fees, business valuations, title fees, attorney costs, and more.
• SBA Loan Late-Payment Fee: You could be charged anywhere from 5% of the late payment to $100 (whichever is greater)
• SBA Loan Prepayment Fee: Paying off a long-term loan early typically results in a prepayment penalty.

SBA Loan 2022 COVID Update

There's still no relief program specifically for 7(a) loan borrowers. In addition, the existing COVID Economic Injury Disaster Loan (EIDL) program closed applications completely in early May 2022. It is now recommended that all small businesses looking for funding apply for traditional SBA loans like the 7(a) program.  

Qualifications for SBA 7(a) loans

SBA 7(a) loans aren't the easiest loans to qualify for. You'll need good credit, proven revenue, collateral, and a solid business plan to get approved.

Let's start with the essentials. Here are the fundamental requirements to get a 7(a) loan. You must:

• Be an officially registered for-profit business
• Meet the SBA's definition of a small business
• Be located in (and operate in) the US
• Have invested your personal time and money into the business
• Have adequate time in business

Next, here are the general eligibility requirements. These requirements have a little bit of wiggle room, but they're all fairly standard:

• Credit score of 650 or higher
• Revenue of at least $100K per year and proven profitability
• Debt service coverage ratio (DSCR) of at least 1.15
• A business plan showing your financial projections and how you plan to use the 7(a) loan
• Adequate collateral to secure the loan

Curious if you qualify? Check out the SBA's in-depth eligibility questionnaire to learn more.

How to apply for an SBA 7(a) loan

1. Identify a business purpose

Considering if a 7(a) loan is the best financing tool for your small business? If your expense falls under the allowable use cases, then there's a good chance it is-however, if time is of the essence, another loan may serve you better.

2. Calculate how much financing you'll need

Do your research to determine exactly how much financing you'll need and how much you can reasonably afford. The SBA will expect numbers like these in your business plan.

Try our handy-dandy SBA Loan Calculator to estimate your monthly payments based on predicted loan amounts and terms. We'll even show you your payments broken down. Keep in mind that you'll have other fees associated with your loan program-like the ones we mentioned in the SBA 7(a) loan fees section. These fees are variable, so we don't include them in this calculator.

3. Gather documents and business information

You'll need documentation to back up any of your financial claims. Organize your financial statements, update your cash flow projections, and complete all of your SBA application forms.

4. Choose your collateral

Loan program often require personal guarantees and collateral. Identify which business assets you can leverage to serve as default security. This could be equipment, buildings, accounts receivables, and even inventory. 

5. Find a lender

Different lenders will offer varying rates and loan amounts. Look around to find a trusted lender that provides the exact type of loan characteristics you need. 

6. Submit your application

Once you've identified your lender, it's time to submit your application. Each lender will have its own step-by-step process.