SBA 7(a) loan program: How it works

SBA 7(a) loan basics

The U.S. Small Business Administration (SBA)'s 7(a) loans offer low-cost financing small businesses that can't qualify for a bank loan. It's the most popular SBA loan program — you can use the loan proceeds for almost any business expense.

But it can be hard for some businesses to qualify for an SBA 7(a) loan. Only 65% of small businesses that applied for an SBA loan were approved in 2020, according to the Federal Reserve, and only 58% in 2019. Most lenders require good credit and at least two years in business, on top of the SBA's eligibility criteria.

What is an SBA 7(a) loan?

An SBA 7(a) loan is a government-guaranteed business loan for working capital, large purchases, debt refinancing and real estate expenses. These aren't available directly through the government, but through participating SBA lenders, like a bank or a credit union. Here's how it works:

• The SBA guarantees up to 85% on loans of $150,000 or less, and up to 75% on loans over $150,000.
• Businesses are also required to provide collateral on loans greater than $25,000.
• The SBA sets maximum interest rates and fees that a lender can charge on a 7(a) loan.
• Most 7(a) loans come with monthly repayments on the interest and principal.
• It can take at least 30 days to receive the funds, thanks to the extensive document requirements and SBA approval.

6 types of SBA 7(a) loans

While the standard 7(a) loan is the most common, there are several different types of SBA loans technically fall under the umbrella of SBA loans.

SBA 7(a) pilot programs

The SBA also often runs pilot programs to test out new lending strategies. These are often available for a couple of years through community lenders.

The only 7(a) pilot currently available is the Community Advantage (CA) loan program. CA offers microloans to small businesses in underserved markets that are easier to qualify for than most 7(a) loans. This program is set to expire on September 30, 2022, unless it gets renewed.

Past pilot loan programs include SBA Veteran's Advantage loans and the SBA Express Bridge loan program.

SBA 7(a) loan rates, fees and terms

While the lender ultimately sets your interest rates, fees and terms, the SBA has limits to how much you can charge.

Rates

SBA 7(a) loans can come with fixed or variable interest rates. Generally, these are based on the Wall Street Journal Prime rate. The Prime rate is 3.25% as of October 2021.

In most cases SBA 7(a) loan interest rate maximums range from Prime + 2.25% to 4.75%, based on the loan amount and term. But for some loans, interest rates are capped at Prime + 4.5% to 6%. SBA 7(a) loans over $50,000 with terms under seven years qualify for the lowest available rates.

Learn more about how SBA loan rates work.

Fees

In addition to the interest rate, the SBA charges a guarantee fee — also known as a guaranty fee — of 0.25% to 3.75% of the loan amount. Like the maximum interest rate, the SBA maximum guarantee fee is based on your loan amount and term.

Loans with a term of less than 12 months qualify for the lowest guarantee fee. On longer terms, loans under $150,000 qualify for the lowest guarantee fee.

On top of this, lenders can request to be reimbursed for any expenses associated with your application, including:

This does not include the cost of any software your lender used to prepare your application — or that of going to an outside loan packager, if needed.

Learn more about the fees to expect on a 7(a) loan.

Terms

The maximum loan term of an SBA 7 (a) loan depends on how you spend the funds. Real estate loans come with a maximum term of 25 years, including real estate debt refinancing. Working capital, inventory and equipment purchases come with a maximum term of 10 years.

In addition to your loan purpose, the loan term your business receives is based on factors like your cash flow and the useful life of any assets you want to finance with the loan.

How to qualify

You must meet the following SBA guidelines at a minimum to qualify for an SBA 7(a) loan:

Lender requirements

SBA lenders are also allowed to set additional criteria for SBA 7(a) loans. Typically, lenders require a personal credit score of at least 660. And many have a minimum business credit score requirement, based on the FICO Small Business Scoring Service, or SBSS. Typically you need an SBSS Score of at least 130 for most SBA loan programs.

Other factors like your time in business, annual revenue, cash flow and financial projections will also affect whether you qualify.

Collateral requirements

The SBA also often requires small businesses to provide collateral to fully back the loan — though it depends on the lender's collateral policies and your loan amount. Business owners may also responsible for making a personal guarantee and making an equity injection into the project.

Collateral

How much collateral you need to provide depends on your loan amount.

If you can’t meet these requirements with your business assets alone, you can also use publicly traded assets or your personal real estate as collateral.

Personal guarantee

On top of collateral, the SBA requires a personal guarantee from the following people and entities:

• All owners with more than a 20% stake in the company
• All spouses of owners with more than a 5% stake in the company
• All corporations and other entities with more than a 20% stake in the company

This applies to everyone who’s had more than a 20% ownership stake in the past six months. The personal guarantee also often includes an additional mortgage on the guarantor's primary residence.

Equity injection

Your lender might also require you to cover part of the cost of the project you’re funding with an equity injection — similar to a down payment.

How much you have to inject can vary depending on your business type, management experience and competition in your business’s market. If you have a startup, you’re required to make an equity injection of at least 10%.

Your business generally needs to have this money up front — you can’t take out another loan to cover the down payment.

How to use an SBA 7(a) loan

You can use the loan proceeds from an SBA 7(a) loan in the following ways:

Where to get a 7(a) loan

You can get an SBA 7(a) loan from a bank, credit union or another SBA-approved lender. SBA-preferred lenders are often the best option — they have the authority to approve 7(a) loans without submitting the application to the SBA first.

For startups and businesses with fewer than 10 employees, microlenders and community development financial institutions (CDFIs) are often the best option. These nonprofit lenders are built to serve smaller businesses and may have more flexible requirements than your typical bank or credit union.

You can also use a connection service like SmartBiz or Lendio to help you find the right SBA lender. But these providers might charge a referral or packaging fee.

Top SBA 7(a) lenders

When picking these top SBA 7(a) lenders, we considered factors like requirements, turnaround time, preferred status, types of 7(a) loans available and the volume of 7(a) applications they approve each year.

How to apply

You can apply for an SBA loan by comparing lenders, prequalifying and filling out the application. Getting an SBA loan is time-consuming — it can take several months from start to finish.

Figure out how much money you want to borrow and get a solid grasp of your business’s assets before you start comparing lenders. Also, consider your priorities: Would you be willing to pay a little extra to get help with your application? Or do you want the least expensive SBA loan possible?

Once you find the right lender for your business, you’ll need to complete the application as well as the following forms — and possibly others:

• SBA Form 1919: Borrower information
• SBA Form 159: Fee disclosure
• SBA Form 413: Personal financial statement
• SBA Form 912: Statement of personal history

After you submit all required forms and documents, your lender either sends your application to the SBA for a decision or underwrites it itself if it’s a preferred lender. Typically, it takes the SBA between five and 10 business days to come to a decision. Preferred lenders often have a shorter turnaround time. Once you accept and sign your loan documents, your lender disburses your funds.

Learn more about the SBA loan application process.

Bottom line

The SBA 7(a) program is the most popular and open-ended option for government-backed business loans. This can be great for some small businesses, but others might benefit more from the SBA’s more specialized programs. Check out your other government-backed options with our guide to SBA loans.