This is the most common of all the SBA’s loan programs. It can be used for a variety of business purposes, including short- and long-term working capital, purchasing real estate or machinery, business start-up and growth, and buying a business, to name just a few.

It’s because of its flexibility and wide range of business reasons that this loan is the most popular. A business can borrow up to $5million dollars from their bank (an approved SBA lender), and the SBA will guarantee up to 85% of it. The actual dollar amount that’s guaranteed varies from loan to loan and is negotiated between the SBA and the bank, but 75% – 85% is common.

It’s important to remember that you’re not borrowing from the SBA itself. The funds are still coming from your bank, but the SBA will guarantee a certain amount of the loan so the bank doesn’t lose out totally if you fail to make the repayments.

Eligibility

Many businesses and start-ups qualify for a 7(a) loan program. The key factors are based on what your business does to make money, the character of the business ownership and where it’s located. In general terms, your business needs to be based in the US.

Although the SBA will look at each business on a case-by-case basis, and given that you still need to meet your bank’s requirements for a SBA-guaranteed loan, there are some elements that are common for all applicants, and they include:

  • The business must operate for profit.
  • Be defined as “small” by the SBA.
  • Have a reasonable equity invested.
  • Using alternatives to borrowing, such as personal assets.
  • Demonstrating a legitimate need for the funds – it has to be for what the SBA deems a sound business purpose.

Reasons for the loan

The SBA is going to look for some basic reasons they deem legitimate for the loan. And it’s important that you can demonstrate what they are. Short- and long-term working capital needs are among the most common, as well as:

  • Financing an entry into the export market.
  • Purchasing machinery, equipment, real estate, buildings, or another business.
  • Start-up funds.

Because the SBA has specific purposes in mind, they also have some that mean you won’t qualify for the loan. For example, you won’t qualify if you’re planning to refinance the kind of debt that means the SBA would be in a position to take on that debt if you fail.

You also can’t use the funds to repay delinquent state or federal taxes – or any other kind of delinquent government debt for that matter.

In other words, if the reason for the loan is not for a sound business reason, you won’t qualify. This is where your bank comes in. As an approved SBA lender, they’ll be able to explain what constitutes a sound business reason. In all likelihood, if they don’t think your business is eligible, they’ll recommend not going through the application process in the first place.

Ineligible businesses

There are certain kinds of businesses that the SBA views as ineligible for their 7(a) loan program. For instance, if you’re in the business of lending money yourself – like a pawn shop – then you won’t qualify for a SBA loan. The same is true if your business is focused on religion or politics, or if you as the owner are currently incarcerated, on parole or probation, or have been named as the defendant in criminal proceedings.

The SBA takes a very dim view of those with criminal histories, and anyone who’s habitually delinquent with debts or who’s been repeatedly turned down for loans in the past. If this sounds like you, your chances of obtaining a SBA loan are pretty slim.

The credit check

One of the first things they’re going to check is your credit rating. So it’s vital that you’re already aware of what it is. You’re aiming to do two main things:

  • Look for blemishes on your personal and business credit report and do what you can to fix them.
  • Identify any inaccuracies and get them cleared up.

The SBA and your bank are going to want to know that you’re fully prepared to explain your credit rating.

The application process

There’s no getting around it – you need to be prepared for a great deal of paperwork and red tape. Although the SBA is working on streamlining their application process, it’s still legendary in just how many hoops you’ll have to jump through.

What you want to do is work through the process with your bank. As an approved SBA lender, they’ll understand the process and help to make it smoother.

There’s a fair amount of documentation you’ll need to provide. In order to be as prepared as possible, the SBA have put together a checklist. It’s vital that you review this and gather all the documentation required, then go through the checklist with your bank to make sure you haven’t missed anything.

The documentation also includes several forms you’ll need to fill out. Mostly what they’re looking for are details around your personal background and financial statements. When it comes to the latter, it’s a good idea to fill those forms out with your bank manager or accountant.

Repayment terms

The idea behind the 7(a) loan is to encourage longer term small business financing. But what the SBA will do is work with your bank to determine when the loan will mature. In other words, they’ll look at your ability to repay and what you’re using the funds for.

Depending on what the loan is for, there are some maximum maturities:

  • Real estate – 25 years.
  • Equipment – 10 years.
  • Working capital – 7 years.

Like most bank loans, you make repayments on the principal and interest on a monthly basis. You may be able to negotiate interest-only terms during your business’s start-up and expansion phases.

Collateral

The expectation is that every 7(a) loan is fully secured, but the SBA won’t necessarily turn you down if you don’t have enough collateral. If all other aspects of your application are in order, they’ll generally ask that you pledge all the collateral you have available.

Summary

So the spectrum of what businesses are eligible, and what they can use the loan for, is quite wide, which means that many small businesses qualify. It’s also why it’s the most commonly used loan program, and it functions very much along the same lines as a traditional loan.

If you’re looking for a loan to help you finance start-up or expansion, or you’re looking to increase your working capital, purchase real estate or equipment, then the 7(a) loan is your best bet. Confirm this with your bank – they’ll probably have steered you in that direction to start with – and work with through your eligibility and the application process with them.

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