The SBA 7(a) Loan is a loan program the U.S. Small Business Administration (SBA) provides to help small businesses access capital. It is the most popular loan program the SBA offers and provides long-term financing for various business needs.
It can be used as working capital in machinery, equipment, land, and buildings. SBA Loan 7(a) can also be used for debt refinancing and to purchase an existing business. But what should borrowers understand about it? Here are some ideas.
1. Fund Use
The SBA 7(a) loan can be used for various purposes, including working capital, debt refinancing, and purchasing an existing business. The funds can buy inventory, real estate, machinery, equipment, furniture, fixtures, and supplies.
When applying for a 7(a) loan, knowing what you need the money for and how you plan to use it is essential. The SBA has specific rules and regulations that must be followed to qualify for the loan. Therefore, consider the fund use early on for better chances of approval.
2. Loan Amount
The maximum loan amount for an SBA 7(a) loan is $5 million. However, the amount you can borrow depends on several factors, including your credit history, business size, and the purpose of the loan. Additionally, the SBA will consider the amount of collateral you have available to secure the loan.
The loan amount you receive may also be subject to a cap. This cap is based on the loan’s purpose and the type of collateral you have available. For example, the SBA may limit the amount you can borrow for working capital to $350,000 or less.
3. Interest Rates
The interest rate for an SBA 7(a) loan is typically the WSJ Prime Rate plus 2.5% or 3%. The Prime Rate is the rate banks lend to their most creditworthy customers. The borrower’s creditworthiness and the loan’s purpose determine the margin.
Consider the rates before taking out a loan, as it can drastically affect the business and its monthly responsibilities.
4. Loan Terms
The loan terms for SBA 7(a) loans vary depending on the purpose of the loan. Loan terms can range from seven to 25 years for real estate loans and up to 10 years for equipment loans.
The loan terms can also be affected by the size of the loan. Smaller loans are typically for shorter periods, while larger loans can be for longer times. Consider the loan term before taking out a loan, as it can drastically affect the business and its repayment schedule.
5. Eligibility and Requirements
To be eligible for an SBA 7(a) loan, businesses must meet specific criteria. A company must be for-profit, be located in the United States, and have a reasonable amount of owner’s equity. The company must also have a sound business plan and demonstrate the ability to repay the loan.
In addition, businesses must meet the size requirements of the program. Companies must have 500 or fewer employees to qualify, and the loan amount must be less than $5 million. Companies must also be in good standing with the IRS and have a good credit score.
Conclusion
The U.S. Small Business Administration’s 7(a) loan program is an excellent option for small businesses seeking financing. It offers a variety of loan products and is typically easier to qualify for than a traditional bank loan. The program is also designed to help businesses with expansion, acquisition, and other projects.
504 Advisors is a consulting and advising company dedicated to helping clients in the SBA and real estate industry. Through our combined years of experience, we get the guidance needed through the financing and loan application process. Learn to loan to acquire a business by browsing our website today.