The SBA has helped over 44,000 small businesses secure more than $18 billion in funding as of 2018, thanks to its 7(a) lending program. This program was created to help small businesses access financing options with affordable rates.
Whether you own a new or existing small business, this is a financing option you should consider.
How Do 7(a) Loans Work?
The SBA doesn’t directly offer loans. Instead, the SBA teams up with certified or preferred lenders who offer small business loans that are partially guaranteed by the SBA. Small business owners can borrow up to $5 million through this program and get terms that vary from seven to 25 years, depending on the type of loan they apply for.
For instance, lenders typically offer loans with seven- or 10-year terms to finance working capital, equipment or inventory, while your loan term would be 25 years if you use the loan to purchase real estate.
The SBA can guarantee between 50 percent and 85 percent of your loan. This percentage goes up to 90 percent for certain types of loans, such as international trade loans. There is a large number of banks, credit unions and other financial institutions that offer 7(a) loans, which is why you need to compare different preferred or certified lenders to secure financing for your small business.
The Different Types Of SBA Backed Loans
The 7(a) program includes various kinds of loans.
- Standard 7(a) loan. You can apply for a standard 7(a) loan if you need working capital or want to purchase equipment. You can also use the funds to buy real estate or refinance debt. You can borrow up to $5 million and won’t need any collaterals if the loan amount doesn’t exceed $25,000. You would typically need a 10 percent down payment and can find loans with terms that vary from seven to 25 years. The interest rates are based on maximum rates set by the SBA and shouldn’t exceed 25 percent.
- 7(a) small loan. This type of loan is similar to standard loans but your personal credit, business credit and business finances will have a greater impact on the terms you can secure. You can borrow up to $350,000 with this type of loan.
- Express loan. You can apply for an express loan if you need an answer within three days. You can borrow up to $350,000, but the SBA will only back 50 percent of the loan amount, which means your APR might be higher than with other types of loans.
- Export loans. You can apply for an international trade loan or export loan to finance existing or new business activities linked to exporting goods. You can borrow up to $5 million with an export loan or apply for an export express loan if you need less than $500,000. In some cases, financial institutions will offer a line of credit with a repayment term of up to three years so you can finance exports.
- Other programs. The SBA offers other lending programs that might be a better match for your needs. The 504 loan program gives you access to financing with a maximum rate of 5 percent. You can use these loans to purchase land, finance construction projects or purchase long-term equipment. You can borrow up to $20 million with this program.
If your small business has been affected by a natural disaster, you can borrow up to $2 million to get back up on your feet with the SBA disaster loan program.
Who Can Qualify For An SBA Backed Loan?
There are a few requirements to meet in order to qualify for a 7(a) loan:
- Your business should be U.S.-based and generate a profit.
- You have to meet the SBA’s definition of a small business in terms of the number of employees and annual receipts. These requirements vary from one industry to another.
- You need to demonstrate that you have used other sources of financing before applying.
- Some industries don’t qualify for SBA backed loans, such as life insurance companies, businesses that offer lending services, speculative businesses, and others.
- Your personal and business credit scores will be taken into consideration.
- You need to have a solid business plan and demonstrate your ability to repay the loan.
- You and any owner of 20 percent or more of the business will need to sign a personal guarantee.
- In most cases, you will need to have a 10 percent down payment.
Look for certified or preferred lenders who have some experience with offering SBA backed loans in your industry and in the range you are interested in. Compare APRs, funding times and repayment terms since these will vary from one lender to another.
HJR Global has additional resources to help you navigate SBA-backed loans and other funding options. Contact a member of our team today for more information.
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