7a SBA Business Loan Program


Business Loans, more specifically the SBA 7a business loan, its benefits, its drawbacks, how to properly apply for a 7a SBA loan, and how to construct a business plan that is appropriate for Small Business Administration loans. When you are seeking SBA business loan financing, it is important to note that there are several things that you are going to need when preparing your SBA business loan package, developing your SBA appropriate business plan, and providing both the Small Business Administration and the SBA lending bank with appropriate credit information and your tax returns from the last three to five years. In this article, we will also discuss alternatives to SBA loans including the usage of angel investors, venture capital, private lenders, and other funding sources that can assist you with raising capital if you are unable to secure a SBA backed business loan. The most important aspect to obtaining a 7a SBA Loan is that you have collateral to secure the loan (either business collateral that you will acquire with the loan funds or personal collateral that can be used for hypothecation purposes). The following factors should be considered when you are planning to potentially acquire a 7a SBA loan:

  • First, what type of business am I starting and will this business have the proper collateral to secure the loan?
  • Second, do I have the appropriate credit score and credit history length in order to be considered a worthy credit risk for an SBA loan?
  • If I default on the loan, will the business collateral, personal collateral, and personal income that I have be able to ensure that I am able to repay both the principal and interest?
  • Is there a risk that I may go into bankruptcy if the business fails?
  • Do I have a well written business plan in order to secure the SBA 7(a) loan that I am seeking?

The 7a SBA loan was developed by the Small Business Administration to provide entrepreneurs with a government backed guarantee so that business people could obtain loans for a broad scope of business purposes. These loans can be used by both new businesses and established businesses. In regards to established businesses, it is often easier to obtain a 7a SBA loan as an established company inherently carries less risk than a loan that has been extended to a new business. In regards to who is and who is not eligible to apply for the SBA 7(a) loan – the requirements are actually quite simple. Foremost you are required to be a United States citizen that has a clean record. People that have committed felonies in the past are not eligible for Small Business Administration backed loans.


One of the common questions regarding the SBA 7(a) loan is how much can be borrowed through this program. Typically, the upper limit for a Small Business Administration backed loan is $2,000,000. However, certain extensions do apply for companies that need multiple forms of financing for very large tangible equipment or real estate purchases. One of the issues that you should be immediately aware of is that it is not the Small Business Administration that provides loans. Instead, the SBA provides a guarantee that can be presented to a bank, financial institution, or other lender that will ultimately provide you with the SBA 7a loan financing that you are seeking. Only in highly limited circumstances does the Federal Government (via the Small Business Administration or other government entities) extend credit directly to individual borrowers or businesses.

One of the best things about 7a SBA loans is that the length of the maturity terms that can be applied to these business loans. In most instances, a SBA 7a loan can have a repayment period of up to 25 years. The maturity for these business loans range from 10 years to 25 years, and most important certain parts of the loan can mature quicker than other parts of the loan. For instance, if you are buying a piece of equipment and a piece of real estate you can have the maturity of the loan for the equipment portion mature in ten years while the real estate portion of the loan can mature over a much longer period. This flexibility of the SBA 7a loan allows entrepreneurs to have a wide range of usage of the debt funds.


As we just stated, there is a significant amount of uses for SBA 7(a) loan. The most common uses for the 7a SBA loan include:


  • Business Development
  • Owner-Occupied Business Real Estate
  • Equipment Acquisitions
  • Business Acquisitions
  • Working Capital purposes
  • Inventory Purchases


However, there are many other uses for this type of financing facility. We encourage you to visit the Small Business Administration website if you want to see the full list of applicable uses of the 7a SBA loan.


The fees related to SBA 7(a) loans are minimal compared to other traditional business loan sources. At closing, there is usually a two point closing cost associated with SBA loans that have a $150,000 face value or less. For each subsequent $100,000 borrowed (after the $150,000 threshold), there is a three point five percent fee levied against the loan. In addition to SBA 7a loan closing costs, there can be other costs incurred with obtaining this loan. These fees include certified public accountant costs, business planning costs, and possibly fees that may go to a SBA loan packaging firm that has assisted you with your loan application. In regards to the latter, there are companies out there that can assist you with developing your SBA 7a loan application. These businesses are called SBA loan packagers. The typical upper limit to their fees is $2,500 although the fees can be hired if you require a substantial amount of capital or your business has a substantial amount of complexity in regards to your business operations. It should be immediately noted that the laws regarding Small Business Administration loans specifically prohibit these firms from receiving compensation if your loan is placed. They can only charge fees for services rendered to applying for a 7a SBA loan. As such, any firm that states that they are entitled to a success fee fro you for placing a SBA 7a loan is incorrect. When working with a SBA loan packaging firm you should request references from past clients, understand the success rate of the firm, and make sure that they are licensed to business with the Small Business Administration and its associated banks.


One of the other common questions that we receive regarding SBA 7a loans is the turnaround time regarding the lender’s credit decision. In most instances you will receive your answer in 45 days or less unless you have a substantially complicated loan application or business. Some SBA programs are designed to provide business owners with much faster credit decisions (in as little as 72 hours). However, these programs (especially as it pertains to 7a SBA loans) are primarily geared towards small businesses that are seeking less than $100,000. There is even a specialized truncated application that can be used for some SBA loan programs where the borrower is seeking less than $100,000 ($50,000 for other SBA loan programs).


Often times, due to credit issues, lack of collateral, or having a bad credit score can prevent you from properly obtaining a business loan via the SBA. As such, you may want to look to other sources of capital to get the financing you need to expand or launch your business operations. If you are already an existing business then one of the common alternatives to the 7a SBA loan is to find private investors that can directly provide you with equity capital for your business expansion. Private investors can also be used for startup businesses that do not qualify for the SBA 7a loan. However, you should be aware that in most circumstances the private investor is not going to want to extend you a loan. Rather they are going to want a percentage of your business in exchange for the capital they will be putting in your business. This also means that you will need to cede a certain level of control to your business’ investor. Prior to working with an investor (if you have not been able to obtain a SBA 7(a) loan), you should hire an attorney that can advise you on all of the different matters pertaining to this issue. 


First, let’s focus on the factors that the bank will look at most closely when they are pondering their credit decision regarding your 7a SBA loan. Factor one is the collateral that you currently have, how much money you owe to other creditors, and what assets that you will be purchasing with the 7a SBA loan funds that you are seeking. When a bank examines your financial life, they will focus on all aspects of your financial background. The most important collateral that you have is any and all real estate assets that you hold as well as any securities that you may have in non-retirement accounts. Once you have calculated your assets, you need to subtract any liabilities that you have against these assets. This is your tangible net worth. This is an important calculation that will be used when determining how much, if any, funds you can borrow through a 7a SBA loan.


Second, a bank as well as the Small Business Administration will look at your past credit history when looking to provide you with a SBA 7(a) loan. If you are applying for a business loan in today’s lending environment then you should have a FICO score of 700 or higher. You can find out your FICO score by pulling your credit report from any of the three major credit bureaus. The most popular credit bureau among banks that extend SBA 7(s) loans is Experian although Equifax is also commonly used to determine your credit quality. If you have outstanding issues with your credit report then you may want to contact your certified public accountant or credit counselor. If you have not yet hired a certified public accountant, you should do so as soon as possible. They will help you immensely as you progress through the SBA 7(a) loan application process.


One of the most common questions asked among entrepreneurs when seeking a 7a SBA loan, is whether or not a past bankruptcy would affect an individual’s ability to obtain this type of financing. The answer to this question is yes. Unless there are extraordinary circumstances surrounding the bankruptcy, the chances of you obtaining a Small Business Administration backed credit facility is limited if you have had a bankruptcy over the past seven years.


Now that we have discussed credit and personal collateral, it is time to focus on business collateral. These assets are what you intend to do with the financing that you may be receiving through your 7a SBA loan. It is extremely important to document what you intend to do with the funds both within your business plan and in a stand alone document that showcases exactly what you are purchasing. If you are using the funds from the 7a SBA loan to acquire tangible equipment or real estate then you should submit formal appraisal reports or invoices that indicated what type of equipment you may be purchasing (brand names, models, prices, etc.), as well as formal property appraisals for any property that you may be purchasing with the loan proceeds. If you are intending to purchase owner-occupied real estate with your SBA 7a business loan then you should make sure that the individual completing the appraisal is properly licensed within your state to provided qualified appraisals. You should also make sure that your lending institution accepts appraisals from the individual or property appraisal firm that will be completing the work for you. A typical property appraisal costs around $500 although the costs can be much higher if you are seeking to purchase a very large property. The business collateral that you are purchasing is an extremely important part of a SBA lending bank’s view of whether or not to extend a loan to a borrower.


Now that we have focused on the nature of the business collateral that you are seeking, it is time to make preparations in regards to your business plan. Your business plan, as we have discussed many times throughout this website, should be used to as a tool to show your bank exactly what you intend to do with you SBA 7(a) loan, what service or product your business will offer to the general public, how many people you will be hiring from the onset of operations, and the profitability of your business during the first three to five years of operations. Although many banks only require three year financial statements, it very important that you provide your SBA 7a loan lender with as much information as possible (sometimes beyond what is required). In regards to the financial statements you will be required to prepare - you will need to have properly formatted profit and loss statements, a cash flow analysis, a balance sheet, a breakeven analysis, and a business ratios page that showcases all applicable lending benchmarks. There are several different ways that you can format your business plan, but your plan will need to have the following components:


  • An Executive Summary – This section of the business plan will provide the reader with a roadmap for the rest of the business plan. In this section you should focus on how much money you are seeking, your background in the industry that you intend to work within, the products or services that you intend to offer once you receive funds from the 7a SBA loan program. You can also put a small overview of the anticipated profit and loss statements for your business within this section of the business plan.
  • Products and Services – This section of the business should provide a concise overview of the operations of your business, the products or services that you will be providing or distributing, and any pertinent information that relates to your business.
  • Market Research – This section is the most overlooked part of the business plan by people that are writing plans specifically for obtaining SBA 7a loans. In this section you should provide an overview of the general economy and how certain factors can impact your business, an discussion regarding the industry that you will be working in, a demographic analysis, and the competition that you will face in the markets that you will be developing your business operations.
  • Marketing Plan – This section should have a specific focus on how you intend to market your services or products the general public. You should list specific sources regarding of where you will put advertisements or marketing campaigns. If you intend to hire a public relations or marketing firm to assist you in your marketing operations – their name and address should be listed in the business plan.
  • Personnel Summary – In this chapter of the business plan you should list how many employees you will be hiring (including yourself) and how much each employee will be paid. In this section you should also provide a full resume of yourself, any other owners of the business, and any key employees.
  • Financial Plan – In this section you should provide the fully certified financial statements as discussed earlier in this article. Again, this section should have monthly and quarterly profit and loss statements, balance sheet, common size income statement, business ratios, and breakeven analysis.
  • SWOT Analysis and Critical Risks and Problems – In these two sections of the business plan you should focus on the risks that you business may face, problems with your business operations, and how you intend to grow the business over the next three to five years of operations.


Now that you have assembled your SBA 7(a) loan business plan and completed your loan application – it is now time to visit the bank. Many people often ask us, in regards to 7a SBA loans, whether it is better to approach a small bank or large bank when seeking business financing. The answer is that it depends on the scale of your business. SBA loans are made by community banks, credit unions, and large money center banks that have thousands of branches around the country. If you are not applying for a 7a SBA loan then it may be in your best interest to go to a smaller bank as they will have a better understanding of your local industry, local economy, and they are more likely to lend to small businesses that operate within your area. For an SBA loan, large banks very much extending this type of credit to borrowers. This primarily due to the fact that in the event that your business fails, Uncle Sam will reimburse the bank with up to 90% of the capital that they lost on the transaction. However, you will still be required to make good on the loan and you will be required to give the SBA 7a loan lender your personal guarantee. This means that in the event of a credit default, your personal assets can be seized by the bank in order for them to recoup their investment. There is a certain level of limitation as to what assets the SBA can take from you in regards to recouping a bad loan investment. However, you should always consult with a financial advisor prior to obtaining a 7a SBA loan when you are seeking to determine which assets could potentially be repossessed by a lending bank. One of the other reasons why it may be advantageous to apply to a large bank for a SBA 7a loan is that these organizations often make an additional profit by reselling pools of SBA loans (based on credit quality and maturity) to third parties such as insurance companies, mutual funds, hedge funds, and pensions that need to generate income from ongoing debt investments. This practice was very common prior to the credit default crisis that began in 2008. However, since securitization laws regarding SBA 7(a) loans have increased in the wake of the crisis this practice has diminished significantly. New legislation is seeking to provide a more transparent method of securitizing SBA 7a loans and other Small Business Administration backed credit facilities in order to provide a greater amount of lending services to small businesses.


Finally, the overall key to obtaining a 7a SBA loan or any other type of credit facility is to be prepared and to have the proper counsel in place to guide you through this process. If at any point you do not understand the terms of your loan, the language of the SBA 7a loan contract, or how to properly present your case to the SBA then it may be in your best interest to hire a qualified attorney, CPA, business advisor, or financial advisor to assist you with the process. In future discussions, we will discuss more thoroughly the people that can assist you when obtaining 7a SBA loans.