SBA 7(a) Loans: Types, Requirements, and How to Apply

SBA 7(a) loans are the most popular type of SBA loan, issued by lending partners and partially guaranteed by the U.S. Small Business Administration (SBA). These small business loans can be used for a wide range of purposes, including working capital, business expansions, real estate purchases, equipment purchases, and more.

SBA 7(a) loans offer low interest rates and long terms, making them an ideal form of financing for those who can qualify.

SBA 7(a) loans are business loans available in amounts up to $5 million with term lengths up to 25 years. Interest rates can come in as low as the market prime rate plus 2.25%.

These SBA loans are issued by certified lending partners—typically banks and credit unions—and partially guaranteed by the SBA. The partial guarantee ranges from 50% to 90% of the loan amount depending on the type of 7(a) loan, size of the loan, and the borrower’s qualifications.

The government guarantee makes lending to a small business less risky for banks or credit unions who might not otherwise lend to these borrowers. If the business defaults on the loan, the SBA guarantee ensures that the lender will get 50% to 90% of the loan back.

Although the guarantee incentives lenders to work with small businesses, it can still be hard to qualify for SBA 7(a) loans. Lenders generally require a good personal credit score (690+), two or more years in business, and strong annual revenue for 7(a) loan applications.

Although “SBA 7(a) loan” is often used as a catch-all term, the program actually encompasses multiple loan types. The main differences among the types of 7(a) loans are the maximum loan amounts, maximum SBA guarantee, application turnaround time, and intended use of funds.

Regardless of the type of 7(a) loan, the SBA sets standard rates and terms that lenders must follow.

Overall, the interest rates you receive on your SBA 7(a) loan will vary based on the size of your loan, the loan term, as well as your business’s qualifications.

That said, the maximum SBA loan rates are set based on the market prime rate, or MPR, which is a benchmark interest rate that affects the cost of home loans, student loans, and other types of consumer loans.

Here are the maximum SBA 7(a) loan rates:

As of May 2021, the market prime rate is 3.25%.

When evaluating the total cost of a 7(a) loan, it’s important to keep in mind that fees are not included in the maximum rates set by the SBA.

Common SBA 7(a) loan fees include:

• Guarantee fee
• Credit check fees
• Packaging fees
• Closing costs
• Appraisal fees (if the loan is to buy real estate)
• Late payment fees
• Prepayment fees (Also called prepayment penalties, these fees apply to loans with terms of 15 years or greater, if prepaid within the first three years)

Although some fees will vary based on your lender, you’ll likely have to pay the SBA guarantee fee. This is the fee that the SBA charges your lender to guarantee the loan, which is typically passed on to the borrower.

The guarantee fee ranges from 0.25% to 3.75% depending on the size and term of the loan. The key thing to remember is that the fee is calculated on the guaranteed loan amount, not on the total loan amount. Due to the COVID-19 pandemic, the SBA is currently waiving all guarantee fees through September 30, 2021.

The term lengths you’ll receive for an SBA 7(a) loan will depend on what you plan on using the funding for. Similar to 7(a) interest rates, the SBA sets maximum terms that lenders must abide by:

• Up to 25 years for real estate
• Up to 10 years for equipment
• Up to 10 years for working capital or inventory loans

SBA CAPLines of credit have different guidelines for term lengths. These lines of credit have maximum terms of 10 years and the Builders line of credit has a maximum term of five years.

Your SBA 7(a) lender will determine your specific repayment schedule, but in most cases, you’ll pay back your loan with a fully amortized monthly payment schedule.

If your loan has fixed interest rates, then the monthly installments will remain the same throughout the life of the loan. If your loan has variable interest rates, on the other hand,  the monthly payments will change as market rates change.

To qualify for an SBA 7(a) loan, you’ll have to meet requirements from the SBA and your lender. Although some requirements vary from lender to lender, there are general eligibility criteria that apply across the board:

• Your business needs to be officially registered as a for-profit business.
• Your business needs to meet the SBA’s definition of a small business.
• Your business needs to be located in and operating in the U.S.
• You, as the business owner, need to have invested your own time and/or money into the business.

In addition to these standard SBA requirements, there are also common criteria that lenders use to evaluate your ability to repay a loan:

• Personal credit score: Although there’s no specific score minimum required for an SBA 7(a) loan, lenders usually want to see a FICO score of at least 690.
• Revenue/profitability: You should have solid business revenue (at least $100,000 per year) and ideally be profitable, although the SBA might make exceptions for new businesses with strong credit.
• Existing debt: If you have existing debt, you need to be able to show that you can take on additional financing. For loans over $350,000, the SBA requires the debt service coverage ratio (DSCR) to be at least 1.15.
• Business plan: You’ll need to submit a business plan showing three to five years of financial projections and a clear understanding of your market and competitors in the same space.
• Collateral: The more valuable assets you have that you can put down as security, the stronger your application will be.
• Time in business: Many lenders require that you have two or more years in business in order to qualify.

Use our guide to learn more about SBA loan requirements.

The competitive rates and terms of SBA 7(a) loans make them one of the best options for small business financing. If you think you can qualify for a 7(a) loan, you can follow these steps to apply:

The SBA 7(a) loan program offers some of the best rates and terms for small business financing.

If you need funding for long-term development or business expansion, and have the qualifications and time needed to secure an SBA 7(a) loan, then our advice is to go for it.

Of course, not all businesses will be able to qualify for SBA financing—so if you want or need to explore alternative options, you might start with our guide to online business loans.