Your Guide to SBA 7(a) Loan Requirements

by Kieran Daly
August 8, 2023
Your Guide to SBA 7(a) Loan Requirements

For some companies, getting access to business financing is difficult. They find that traditional loan options provided by banks and credit unions are not available to them because they may not have been in business long enough or their personal credit score is not high enough.

Many owners seeking a small business loan apply for an SBA 7(a) loan after they’ve been turned down by mainstream lenders. SBA 7(a) loans offer all the benefits of a standard business loan but without the hard-to-meet eligibility requirements.

In this article, we cover:

  • What SBA 7(a) loans are

  • The different types of SBA 7(a) loans

  • The SBA 7(a) loan requirements

  • What documents you need to apply for an SBA 7(a) loan

  • How to improve your chances of being approved for an SBA 7(a) loan

What Are SBA 7(a) Loans?

SBA 7(a) loans are part of a larger package of financing options provided by the U.S. Small Business Administration. 

The SBA 7(a) loan program provides loans to small businesses for a wide variety of purposes, including working capital, inventory or equipment purchases, and commercial real estate projects. You can also use the loan proceeds to refinance existing business debt.

The SBA doesn’t itself lend the money for SBA 7(a) loans to small business owners. Instead, the loans come from commercial lenders, community development organizations, and micro-lending institutions that the SBA has partnered with.

These financial institutions benefit from the SBA guarantee, which says they’ll repay part of the loan should a borrower fall into default or be unable to repay in full. This guarantee can cover as much as 85% of the loan amount.

That’s why many businesses find it easier to receive an SBA 7(a) loan. Lenders are more likely to say yes because of the SBA guarantee that greatly reduces their risk.

The Different Types of SBA 7(a) Loans

There are different types of SBA 7(a) loans available.

The type of SBA 7(a) loan you apply for determines what you can use it for, how much you can borrow, the repayment terms (or how long you have to pay it back), how long the application process is, and how big of a deposit you need to put down.

Here are the types of loans offered through this program:

  • Standard 7(a) Loans

  • 7(a) Small Loans

  • SBA Express Loans

  • CAPLines

  • Export Working Capital Loans

  • International Trade Loans

  • Export Express Loans

What Are the SBA 7(a) Loan Requirements?

Based on the current SBA 7(a) loan requirements, you’ll need to meet the following:

  • Line of business: SBA 7(a) loans are only available to for-profit businesses, which means nonprofit organizations cannot apply for this type of loan. Certain types of for-profit businesses are also ineligible, including rare coin dealers, gambling businesses, lending and loan packaging companies, and multi-level marketing schemes.

  • Size and location of business: To meet current SBA 7(a) loan requirements, your business must be a small business operating in the United States. The SBA’s classification of what a small business is varies based on industry. In general, companies are assessed by the number of employees they have or their average annual receipts. SBA 7(a) loans are available to both startups and existing businesses. Please note, however, that some lenders may prefer to work with existing businesses that have operated for two or more years.

  • Collateral: Whether you need to offer up collateral can depend on the type of 7(a) loan you receive, the amount of the loan, and your lender. For example, the SBA doesn’t require lenders to take collateral for Standard, Small, or SBA Express loans of $25,000 or less. And with an Export Express loan, the SBA leaves it to the lender to determine the collateral policies.

  • Down payment: Business owners need to put down a deposit on their loan, similar to the deposit you have when you take out a mortgage. Lenders will expect a deposit of 10% to 30% depending on the collateral you offer and the strength of your cash flows. So, if you approach a lender with a project requiring $1 million of funding, they’ll expect you to have between $100,000 and $300,000 as a contribution to the project.

  • Ability to repay from profit: A core SBA 7(a) loan requirement is the ability to make monthly repayments. This is why having a credible business plan (covered later in this article) is so important when making your application.

  • Ability to manage debt: If you have other sources of financing, you should expect to be asked to show how well you’re managing them as part of your application, especially if you want to use your SBA 7(a) loan for refinancing purposes.

  • Good credit score: Although there is no SBA-determined range for your personal or business credit score, your application will be more favorably looked at by a lender if you have a good score.

What Documentation Do You Need to Supply With Your Application?

Now that you know the SBA (7)a loan requirements you need to meet, it’s time to proceed with your application.

Get the following documents ready before you apply:

  • Personal financial statements: Your lender will want to see detailed personal and business tax returns for the last 2-3 years to assess how financially responsible you are. This gives them an overview of your personal financial situation, including your assets, liabilities, and net worth. They’ll need this information from anyone owning 20% or more of the business.

  • Resumes: You should prepare a resume for each principal in the business so that lenders can understand your collective level of management and industry experience.

  • Business financials: Get your accountant to prepare a profit and loss statement, balance sheet, cash flow statements, business tax returns, statements on accounts receivable and payable, your debt schedule, and projected financial statements.

  • Business plan: Last but not least, your lender will need a detailed plan outlining your business strategy, detailed market analysis, information about your product or services, and more. They need to see how the business will make money and, most importantly to them, where the cash will come from to make the repayments.

You’ll also need to fill out an SBA loan application, known as SBA Form 1919 (or the SBA 7a Borrower Information Form). On the application, you will include information such as how much you want to borrow and the business purpose of the loan.

How to Improve Your Chances of Being Approved for Your SBA (7)a Loan

Here are some ways you can improve your chances of meeting SBA 7(a) loan requirements.

Research Different Lenders

Start by researching the different SBA lenders available to you. Each lender may have additional borrowing criteria, and you may find you get a more competitive interest rate with one over the others. Some SBA partner banks, credit unions, and financial institutions may also specialize in lending to companies in your sector.

Improve Your Credit

For some lenders, a key SBA 7(a) loan requirement is an excellent personal credit score. Make sure that your credit history is as positive as possible before you make your applications, and take any steps you need to improve it further.

Get a Professional Involved

Think about getting an accountant or loan packager to prepare your application. Each lending institution likes information to be presented in a particular way and working with a professional will not only speed up your application but improve your chances of being accepted too.

Get them to thoroughly review your business plan, paying particular attention to the job opportunities the funding could lead to. SBA loans are given out to stimulate employment and local economies, so if you can prove that, the SBA will likely be more willing to underwrite your loan.

Consider an Alternative to an SBA 7(a) Loan

SBA 7(a) loans are a popular form of funding for U.S. small businesses, and they unlock opportunities for many that are not eligible under traditional bank lending criteria. Before you apply, make sure you meet the SBA 7(a) loan requirements.

If an SBA 7(a) loan isn’t right for you, Backd offers you two alternatives: a business line of credit offering between $50,000 and $750,000 in financing or a working capital advance that offers between $25,000 and $2 million in funding.

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