FAQ - SBA Loans
What is the SBA loan program?
The U.S. Small Business Administration (SBA) runs several business loan programs, including the 7(a), 8(a), 504, microloan, and disaster loan programs. These programs can help entrepreneurs start small businesses and help existing businesses with working capital, expanding, and during emergencies.
The SBA doesn’t lend money directly. Instead, it partners with approved lenders and guarantees 40% to 85% of the loan, depending on the loan program and loan amount. The guarantee allows lenders to offer larger loans and more favorable terms to small businesses, knowing that they’ll at least get a portion of the loan back from the SBA if the business is unable to repay the loan.
While you’ll apply for an SBA loan through a lender, the SBA has set guidelines for the minimum qualifications, loan amounts, terms, and interest rates. The SBA may also make the final lending decision, although it also delegates the processing and servicing to the lender.
What is an SBA 7(a) Small Loan?
An SBA 7(a) Small Loan is a type of 7(a) loan and is identical to the 7(a) standard loan in many ways. The main difference is that the loan maximum is $350,000 rather than $5 million and there are no collateral requirements for loans of $25,000 or less.
The SBA 7(a) small loan application process may be easier than a full standard SBA loan application if you pass the SBA’s credit prescreen. The result can depend on your personal and business’ credit and finances. Failing the prescreen doesn’t mean you can’t get approved, but you’ll need to complete and submit a full SBA 7(a) standard loan application.
What is an SBA 7(a) loan?
The 7(a) program is the SBA’s general small business loan program and one of the most popular loan options.
There are several types of 7(a) loans, including standard, small, and express loans, as well as loans for export and international trade businesses. These loans can be used for a variety of purposes, including buying inventory, equipment, working capital, and refinancing other business loans.
The loan amount and term will depend on the type of 7(a) loan and how you plan to use the proceeds. The SBA will guarantee 50% to 90% of the loan, depending on the type of 7(a) loan.
What is an SBA standard 7(a) loan?
An SBA standard 7(a) loan is a term loan for up to $5 million that borrowers can use for almost any business purpose. The SBA will guarantee up to 75% of the loan amount, or up to 85% for loans of $150,000 or less. Standard 7(a) loans generally have a five to 10–year term. Although, the term may be up to 25 years if you use the proceeds for real estate or to purchase equipment that has a useful life of over 10 years.
The SBA sets the maximum interest rate, but your rate could vary depending on the lender, your loan amount, your creditworthiness, and whether you’re looking for a fixed or variable rate. There may also be an SBA guaranty fee based on the portion of the loan that the SBA is guaranteeing, and lenders are allowed to charge a reasonable packing fee.
Why should I apply for an SBA 7(a) loan?
With an SBA 7(a) loan, you may be able to get approved for a larger loan amount, lower interest rate, and lower down payment than you could from a non-government-backed loan. SBA loans also have long repayment terms, which can decrease your monthly payment and limit the impact on your cash flow.
Additionally, SBA 7(a) loans have a fixed maturity, no balloon payments, and no prepayment penalties for loans with a term under 15 years.
How much can I qualify for with an SBA 7(a) loan?
The loan amount will depend on what type of SBA loan you’re applying for and the lender. For Standard 7(a) SBA loans, the maximum amount is $5 million. For Small Loan 7(a) SBA loans, the maximum amount is $350,000. The SBA doesn’t set a minimum loan amount, but many SBA lenders have their own minimums, such as $25,000 or $30,000.
In 2019, the average 7(a) loan was for $446,487, and a little over a third of all 7(a) loans were for more than $2 million.
At Funding Circle, our network of SBA partners offers 7(a) loans between $25,000 and $500,000 (as of December 10, 2020).
How can I use SBA 7(a) loan proceeds?
You can use the loan proceeds from an SBA 7(a) loan for most legal business purposes. These include starting a business, buying equipment or inventory, working capital, refinancing debt, and buying out a business partner.
SBA lenders may offer 7(a) loans for limited purposes. For example, Funding Circle’s network of partner lenders offers 7(a) standard and small loans for almost any activity, but we’re not currently offering loans for real estate purchases and industries listed here.
How will I repay an SBA 7(a) loan?
Standard and small 7(a) loans are amortized loans that have monthly payments and a set payoff date. There are no prepayment penalties for loans with a term shorter than 15 years.
For loans with a fixed interest rate, your monthly payment will remain the same during repayment – there are no balloon payments. For loans with a variable interest rate, your monthly payment may change, but the repayment period will not.
In some cases, you may be able to make interest–only payments when you first take out the loan, and then full payments after the initial period. This repayment structure could be beneficial if you’re starting a new business or using the funds to expand your business, but won’t earn extra revenue until the expansion is complete. In this way, worries around what happens if you default on an SBA loan are eased slightly.
How long will it take to apply for an SBA 7(a) loan?
Generally, it can take one to two months to complete the SBA 7(a) loan application process and receive funding. The process may be delayed for startups that have trouble forming a business entity, or if business owners aren’t able to quickly gather and submit the required documents.
What are the SBA 7(a) loan collateral requirements?
SBA 7(a) loans for $25,000 or less do not require a down payment or collateral.
Loans of $25,000 to $350,000 may require a first lien on assets that you finance with the loan, plus a lien on your business’ fixed assets. Lenders that require other forms of collateral on their similarly sized non–SBA loans may ask for that type of collateral on their SBA loans as well.
For loans above $350,000, the lender is required to ”fully secure” the loan. You may be able to do this using your business’s assets as collateral. However, if they’re not worth enough, lenders may also ask you to use your personal residence or investment real estate as collateral.
If you don’t have enough business and personal assets to offer in order to meet the SBA 7(a) loan collateral requirements, you may still be able to get a 7(a) loan. On its own, lack of collateral won’t be a reason for your application to be denied.
What is the minimum FICO score for an SBA loan?
The SBA uses the FICO® Small Business Scoring Service℠ (SBSS) to score and prescreen businesses that apply for an SBA 7(a) loan of $350,000 or less – an SBA 7(a) Small loan.
The score ranges from 0 to 300, and can factor in your personal and business credit. You’ll need an SBA minimum credit score of 140 or higher to be approved by the prescreening. If your score is below that, you may need to submit a full standard 7(a) application for review.
Some lenders may have a higher minimum than the SBA’s requirement, such as an SBSS score of 160. SBA lenders may also set minimum FICO Scores for business owners who are applying for an SBA loan. For 7(a) SBA loans: Different lenders may use different FICO requirements to determine eligibility. Typically, you’ll see minimum credit score requirements of at least 640 to 680.
For example, at Funding Circle, each personal guarantor must have a minimum FICO score of at least 630.5