What is an SBA 7(a) loan and is it right for your business?

As a business owner, you’ve probably heard of the Small Business Administration’s (SBA) 7(a) loan program—and for good reason. The SBA 7(a) loan is one of the most versatile and affordable business term loans available. 

Curious if the SBA 7(a) loan is right for your business? Below, we’re breaking down how the loan program works, what the qualifications are, and which factors you need to evaluate before making a decision. 

What is an SBA 7(a) loan? 

The SBA 7(a) loan is a term loan that gives qualified business owners up to $5 million for working capital, real estate purchases, and refinancing. As with other term loans, you’ll get a lump sum of money upfront, then pay back the loan with interest over time. 

Two of the biggest appeals of a 7(a) loan are the low interest rates and long repayment periods. Interest rates range from 5-11%, and repayment periods are between five and 25 years, depending on what you use your loan for. 

However, unlike bank loans or loans with an online lender, the SBA doesn’t give you funds directly. They partially back your loan, but ultimately rely on approved lenders to administer the money. The SBA’s policy is that they can guarantee up to 85% of loans up to $150,000 and 75% of loans greater than $150,000. 

What can you use an SBA 7(a) loan for? 

You can use an SBA 7(a) loan for a variety of different business purposes, including the following:

• Getting short or long-term working capital
• Purchasing real estate
• Constructing a new building 
• Renovating an existing space
• Refinancing business debt
• Purchasing equipment, machinery, furniture, fixture, and supplies
• Starting a new business
• Expanding an existing business 

At Funding Circle, most business owners use SBA loans to pay off existing business debt, hire new employees, and ramp up their marketing efforts.

How and when to use to an SBA 7(a) loan

If you have excellent credit and need working capital, refinancing help, or money to make a big purchase, an SBA 7(a) loan is a great solution. Here are just a handful of ways to use an SBA 7(a) loan:

• Upgrade your business: You can use the loan in a way that improves your business operations, workplace, or customers’ and employees’ lives. Think: building out your digital infrastructure, renovating your storefront, redesigning your business website, or making your office space environmentally friendly. 
• Grow your business: You can use 7(a) funds to open a second business location, hire more employees to handle higher demand, develop a new product, or move your building to a neighborhood with less competition. 
• Cover upfront costs: You may need to restock supplies, buy inventory in bulk to save money, or invest in a piece of equipment that will streamline operations. 
• Prepare for busy season: You can load up on inventory, invest in several different marketing campaigns, or purchase customer relationship management software.  
• Debt consolidation: You can refinance your existing loans to take advantage of lower interest rates and put your money toward other ventures. 
• Invest in long-term growth: You may want to purchase a piece of land, construct a new facility for your business, or buy a complementary business. 

When not to use an SBA 7(a) loan

Though the SBA 7(a) loan is flexible in nature, it’s not the best financing option for every situation. Here are a few times when you may not want to use an SBA 7(a) loan:

• If you have a temporary cash crunch: Because SBA loans have long repayment periods, they’re not the most helpful solution for short-term financing needs. If you’re in a situation where you need to bridge a temporary gap in cash flow—if you need to cover payroll until your client invoices come through at the end of the month, for example—a business line of credit might be better. 
• Purchases with no ROI potential: If you’re not sure your loan will contribute toward your business’s revenue or growth, you may be setting yourself up for a struggle when it comes to paying it off.
• Startup expenses: Though you can use SBA 7(a) loans to start a new business, you may not want to. That’s because many lenders require you to have proof of revenue and a history of operating for at least a couple of years. Using a 7(a) loan for startup expenses is more realistic if you’re already a successful business owner starting a second venture. 

How do you qualify for an SBA 7(a) loan?

Most small businesses are eligible for SBA 7(a) loans as long as they meet certain criteria. To apply, your business has to:

• Operate for profit
• Fall within the SBA’s small business size guidelines
• Be located in and operate in the United States
• Demonstrate a valid need for the loan
• Prove that you’ve invested your personal time and money into the business 
• Use the funds for an appropriate business purpose
• Have no existing debts to the US government

Certain types of businesses, like real estate investment firms and pyramid sales companies, aren’t eligible. If you’re unsure whether or not your business qualifies, you can fill out this eligibility questionnaire to learn more. 

Funding Circle eligibility requirements

To apply for an SBA 7(a) loan with Funding Circle, you have to:

• Have operated your business for at least two years
• Have a minimum annual revenue of at least $400,000
• Have no current federal tax liens
• Have a FICO credit score of at least 650

What are the advantages and disadvantages of SBA 7(a) loans?

Like every business loan, the SBA 7(a) has both benefits and drawbacks. Here are some to consider: 

Benefits

• Flexible use of funds: You can use the money in a variety of different ways, like preparing for busy season or buying a new office space.
• Wide-ranging loan amounts: You can get anywhere from $25,000 to $5 million in funds with the 7(a) loan. 
• Low interest rates: SBA interest rates are among the most affordable, compared to other lenders and loan types. Owing less in interest means you can put more of your business’s cash toward growth projects and immediate needs, instead of debt repayment.
• Long repayment terms: You don’t have to compromise your business goals or disrupt cash flow to pay off your loan in full. The long terms give you time to see a potentially significant return on your investment before paying off your debt. 
• Extra assistance: The SBA has small business development centers across the country. You can connect with mentors, ask questions, and get valuable business training on everything from securing capital and streamlining operations to managing personnel and improving marketing. 
• Predictable payments: With monthly payments, you can budget more easily for your loan. 

Drawbacks 

• Lengthy application process: Applying for an SBA loan usually requires a lot of paperwork. In addition to organizing your business’s various permits and financial records, you also have to provide personal financial documents and an updated business plan.  
• Long approval times: Depending on the SBA-approved lender you apply with, you could be waiting a while to receive a response from your loan application. With some lenders, the complete underwriting and approval process can take several months, which isn’t ideal if you need cash quickly. 
• High credit standards: The SBA doesn’t guarantee loans for business owners with poor credit. To qualify for the 7(a) program, you need to have great personal and business credit scores. 
• Personal guarantee requirement: The SBA requires you to provide a personal guarantee if you own 20% or more of your business. That means a lender can seize your personal assets (like your house or car) if you don’t make your business loan payments.  
• Down payment and collateral requirements: Depending on how you use your loan and the amount you receive, you may have to provide a down payment or collateral. If you’re using the money to start a new business, buy an existing business, buy out your business partner, or purchase real estate, you’ll likely have to pay 10-20% of your loan amount upfront. Loans of $25,000 or more may require collateral. 

How to decide if an SBA 7(a) loan is right for you

Before you begin gathering paperwork and researching lenders, it’s important to consider whether or not the SBA 7(a) loan is worth your time and energy. Take some time to clarify your goals and ask yourself three key questions:

1. What do I need funds for? If you need money for a major purchase or growth investment, an SBA 7(a) loan could help. However, if you need funding for ongoing expenses or a cash crunch, you may want to consider another type of financing. 
2. What’s my timeline? Consider how long you can wait for financing. If you need cash immediately to take advantage of a business opportunity or maintain operations, a 7(a) loan may not work. 
3. What do my business financials look like? Your business’s overall financial health is a good indicator of whether or not you can pay back your loan in full. Talk to your business accountant to go over your cash flow, balance sheet, sales forecasts, and debt service coverage ratio. 

How to apply for a 7(a) loan

If you’re ready to apply for an SBA 7(a) loan, take the following steps to get prepared. 

1. Clarify your business purpose and financing needs 

Once you identify your business purpose—whether it’s buying real estate or obtaining working capital—crunch some numbers to figure out exactly how much money you’ll need and what you’ll use it for. Doing the math is a useful exercise to understand how to best allocate your funds, but it’s also critical to your loan application. 

Lenders want to see that: 1) You have an appropriate business use for the loan and 2) you understand how to use the money to improve your business. For example, instead of saying you need $1 million to open a second location, you might say you need $650,000 to buy and set up a new property, $150,000 to stock up on inventory, and $200,000 to hire, train, and pay new staff. 

Need help? Try our SBA loan calculator. 

2. Organize your paperwork

If you haven’t updated your financial records in a while, now’s a good time to get organized. In addition to pulling out your income statement, balance sheet, and cash flow statement, it’s also crucial to gather your tax returns, recent business plan, history of debt, and business licenses. 

To apply for an SBA 7(a) loan with Funding Circle, you need:

• Three years of business tax returns
• The last year’s profit and loss statement
• Business debt schedule
• Three years of personal tax returns for each business owner who owns more than 20%
• Personal financial statement
• Authorization to pull credit

3. Identify sources of collateral

You may need to provide a personal guarantee or put up collateral to secure your loan, so it’s a good idea to think ahead about which assets you can use. Look over your personal and business assets, including accounts receivable, inventory, equipment, and buildings.  

4. Research lenders 

The final step is to find a lender to apply with. You can search for local SBA-approved lenders, reach out to your local business bank, ask fellow business owners for their input, or research online lenders. 

Get an SBA 7(a) loan with Funding Circle

At Funding Circle, we’re here to help make the SBA 7(a) loan application and approval processes as smooth as possible. We work directly with SBA lenders, so you can get decisions—and funds—faster. If you apply through our site, you can expect:

• Loans from $25,000 to $500,000
• Repayment periods of up to 10 years
• Interest rates of Prime+2.75%
• Personal help from a dedicated loan specialist

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