What You Need to Know Before Applying for a SBA 7(a) Loan
Before applying for a loan from the Small Business Administration (SBA), it is important to consider the various pros and cons of each type of SBA product. Generally, there are two types of SBA Loans: the 504 Loan and the 7(a) Loan. Each loan has different benefits that can help small business owners grow and maintain their business. In this post, we will examine the 7(a) Loan.
If you can demonstrate a need for funds and have a sound business purpose in mind, you’re on the right track. To be considered eligible for an SBA Loan, your business must meet SBA’s size standards and be considered small within your particular industry, operate for profit, and you must have reasonable equity to invest. 7(a) Loans are not available for passive real estate investments, pyramid sale distribution plans, businesses deriving more than one-third of gross annual revenue from legal gambling activities, or businesses engaged in any illegal activity.
The SBA does not make 7(a) loans directly to the Borrower. 7(a) Loans are made directly through authorized banking institutions where the SBA serves as a guarantor of the loan. 7(a) Loans offers flexibility, longer terms, and lower down payments than conventional or SBA 504 Loans. SBA 7(a) is an option for when Borrowers are looking for access to working capital, purchase new land, furniture, fixtures or inventory, or make leasehold improvements.
For loans in excess of $350,000, the SBA requires that the Lender collateralize the loan to the maximum extent possible up to the loan amount. This may include a lien on your personal real estate (residential and investment), or an assignment on a life insurance policy. The maximum amount that may be loaned to a Borrower through a 7(a) Loan is $5 million.
Personal guaranties of principal owners of the business attempting to secure a loan are required, if an individual owns 20% or more of the business. The term of an 7(a) loan is usually 20 years for a loan for a real estate purchase or 10 years for a loan for the purchase of equipment. The SBA usually requires the borrowers contribute a down payment equal to 10-20% of the purchase price.
One of the key aspects that borrowers need to consider in seeking a 7(a) loan are the loan fees associated with taking out an SBA loan. The SBA charges a fee in exchange for its guaranty of the loan. This fee is passed along to the borrower and is usually financed and built into the loan amount. The SBA guarantee fee will be typically between 2-3.5% based on the amount of the loan (a 3.5% guarantee fee is usually owed for loans above $700,000.00). Another fee to be wary of is the pre-payment penalty. An SBA loan with a period of 15 years will usually include language prohibiting any kind of pre-payment within the first three years of the loan with a reduction in the penalty as the loan matures.