Before evaluating if an SBA 7(a) loan is right for your business, we want to be sure you have all of the information. SBA 7(a) loan conditions and rates, as well as loan amounts and maturity dates, are all included on this page. If you’re creating an SBA loan checklist, here is where you’ll find everything you’ll need. Here’s a short review of all the loan terms, with more detailed explanations later below. If you’re in a hurry, have a peek at the loan terms information page below.
Eligibility for a 7(a) Loan from the Small Business Administration
The great majority of small businesses are eligible for an SBA 7(a) loan. There are, however, a few outliers. Listed below are a handful of them:
- Applicants who have not been categorized by the Small Business Administration as a small business. There are varied size constraints depending on the industry.
- The bank would be able to lend the money to the firm on reasonable terms without the SBA guarantee.
- According to the corporation, the money would be used to pay off unsecured creditors.
- The business is run on a non-profit basis.
- The company’s businesses include lending, renting real estate, investing, and speculating.
If your business isn’t eligible for an SBA loan, you don’t have to worry about running out of cash. If you’re prepared to check into alternative lenders, banks aren’t your only choice for funding. You might be able to work with a small business financing company that will buy your future credit card receipts in exchange for a cash advance; you get the cash advance, and the financing company deducts a certain percentage of your credit card receipts daily until the loan is paid off; you get the cash advance, and the financing company deducts a certain percentage of your credit card receipts daily until the loan is paid off; you get the cash advance, and the financing company deducts a certain percentage of your credit
Minimum Credit Scores
When you apply for an SBA 7(a) loan, the lender will consider the following aspects in determining your creditworthiness:
- You must show that the company’s earnings will cover your business expenses, a personal draw, and the loan repayment. The lender will want to see sales numbers from the previous year as well as cash flow projections.
- If you’re launching a business, the lender will want to know about your prior job experience and education to ensure you have what it takes to manage the kind of business you want to open.
- Business owners must invest a significant amount of money in their own company before they may seek outside funding. The lender will need at least $1 of the owner’s money to be invested for every $3 in loan capital. The lender wants a debt-to-net-worth ratio of no more than $4 to $1 for a well-established company.
- The lender will look into your personal and business credit histories. You are more likely to get approved if your credit report shows that you have a track record of meeting your credit obligations on time. If your credit reports include any mistakes, be prepared to explain them in detail to the lender.
An SBA 7(a) loan requires collateral.
Collateral refers to the assets that a borrower is willing to put up as security for a loan. To reduce the risk of lending money, lenders encourage borrowers to pledge assets as collateral. If the loan is not repaid, the lender knows it has something valuable to seize and sell.
For this kind of loan, the SBA has two requirements for collateral:
- Once the loan is approved, all available corporate assets are expected to be made available as collateral. If the value of the firm’s assets is inadequate to offer sufficient security for the loan, the SBA may place liens on personal assets such as your home or other real estate holdings.
- Don’t worry if you don’t have enough collateral to qualify for the loan; the SBA will not reject your application if you meet all other standards.
SBA 7(a) Loans Amounts
An SBA 7(a) loan may be used for any amount up to $5 million. Small enterprises benefit from the lack of a minimum borrowing amount. (A small firm in eastern Missouri got a $5,000 SBA 7(a) loan in 2010.) If you require a smaller loan, however, the SBA’s other lending programs, such as the 7(a) Small Loan or the Express Loan, could be a better fit. If you require a loan for greater than $5 million, the SBA 504 program or another loan may be a better option.
Maturity of the SBA 7(a) Loan Terms
The kind of loan you acquire will decide the payment duration, or maturity, of your SBA 7(a) loan. An SBA 7(a) loan has a maximum maturity of 25 years, regardless of the purpose or amount. A loan used to buy real estate or land might have a period of up to 25 years. Equipment loans, as well as working capital and inventory loans, may have payment durations of up to 10 years.
Loans backed by guarantees
The guarantee is another SBA 7(a) loan term; lenders may guarantee up to $3.75 million on a $5 million loan. The amount of the government’s guarantee varies depending on the size of the loan and the kind of program. The guarantee amount for loans of up to $150,000 is up to 85%. Loans of more than $150,000 are subject to a lesser guarantee of up to 75%
Fees and Interest Rates
Your lender may not believe so if you were able to pay off your corporate loan fast after signing the contract. Prepayment fees are included to your loan agreement to prevent you from paying off your loan early since lenders earn from the interest paid on the loans they make to companies. They feel that prepayment penalties are a method for them to ensure that if a borrower pays off all (or part) of a loan soon, they will be adequately paid. Prepayment penalties are imposed by the SBA on SBA 7(a) loans having maturities of greater than 15 years. However, examine the following facts:
- The penalty is only valid for the first three years and starts at 5% of the outstanding amount.
- With each passing year, the penalty decreases: in the second year, the penalty is 3%; in the third year, it is 1%.
In addition, an SBA guarantee fee will be applied to your loan. As of 2017, the SBA now imposes guarantor costs on loans above $150,000:
- For loans between $150,000 and $700,000, the guarantee charge is 3%.
- On loans between $700,000 and $1 million, a 3.5 percent guarantee fee is charged.
- The cost of the loan guarantee is 3.5 percent of the amount above $1 million, up to a maximum of $5 million, plus an extra 0.25 percent for the component over $1 million.
A 0.52 percent yearly service charge is applied on the whole outstanding loan amount. A breakdown of interest rates by loan amount and term can be seen in the chart below
Fees that are not permitted
Fortunately, lenders are prohibited from charging exorbitant fees by the Small Business Administration (SBA). It’s a good thing, since otherwise, both lending banks and the Small Company Administration might slap business owners with hefty fees!
According to the paper, lenders may charge borrowers service fees and costs for out-of-pocket expenditures. Late payment fees are also permitted. SBA lenders, on the other hand, prohibit the following fees:
- As a condition of receiving an SBA loan, fees for services such as insurance must be paid.
- interest in addition to that
- Unless the lender is paid on an hourly basis for services done, legal fees will be incurred.
- Commissions, incentives, broker or referral fees are all possible forms of compensation.
Any premium earned from the sale of an SBA loan cannot be shared with any loan referral source.
Lenders that have a proven track record of issuing and servicing insured loans may use the Certified Lender Program to expedite the lending process. Certified lenders may use their own forms (as long as they’ve been authorized by the SBA), and the SBA just has to go over a small amount of data. About 10% of SBA loan guarantees are guaranteed by Certified Lenders.
The lender files a comprehensive application to the SBA as part of the Certified Lender program, and the SBA confirms the lender’s credit assessment on the loan. This procedure takes three business days on average. It’s a fantastic approach for companies to receive loan money rapidly.
Under the SBA Preferred Lender program, the SBA has given chosen lenders unilateral approval discretion. Credit unions, savings and loan institutions, and banks may be awarded preferred status. Once permitted, a lender must adhere to the same SBA 7(a) lending rules as all other lenders. Every two years, the SBA will conduct its own evaluation of the lender’s portfolio, and this authority will be revisited every two years. Preferred lenders make up around 18 percent of SBA loans. A Preferred Lender may react to your application in as little as 24 hours in certain situations.