Your Guide to the SBA’s General 7(a) Business Loan

The 7(a) loan is the most common of all the SBA’s loan programs as it can be used for a variety of business purposes, including short- and long-term working capital, purchasing real estate or machinery, business start-up and growth and buying a business, to name just a few.

It’s because of its flexibility and wide range of business reasons that this loan is the most popular. A business can borrow up to $5 million and the SBA will guarantee up to 85% to the lender.

It's important to remember that you're not borrowing from the SBA itself. The funds are still coming from your financial institution, but the SBA will guarantee a certain amount of the loan to the lender.

Eligibility

The key factors are based on what your business does to make money, the character of the business ownership and where it’s located.

Although the SBA will look at each business on a case-by-case basis, and given that you still need to meet your financial institution's requirements for an SBA-guaranteed loan, there are some elements that are common for all applicants that include:

• The business must operate for profit

• Be defined as “small” by the SBA

• Have reasonable equity invested

• Have used alternatives to borrowing, such as personal assets

• Demonstrated a legitimate need for the funds

Reasons for the loan

Short and long-term working capital needs are among the most common, including:

• Acquiring, refinancing or improving real estate and buildings.

• Refinancing current business debt.

• Purchasing and installing machinery and equipment, including AI-related expenses.

• Purchasing furniture, fixtures and supplies.

• Changes of ownership (complete or partial).

DID YOU KNOW?

Heritage Bank is an SBA preferred lender allowing for additional assistance and timelier financing for businesses.

The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history and where the business operates. Your lender will help you figure out which type of loan is best suited for your needs.

Because the SBA has specific purposes in mind, they also have some that mean you won’t qualify for the loan. For example, if you're planning to refinance an existing loan, the restrictions and requirements are strict.

Ineligible businesses

There are certain kinds of businesses that the SBA views as ineligible for their 7(a) loan program. For instance, if you’re in the business of lending money yourself like a pawn shop then you won’t qualify for an SBA loan. The same is true if your business is focused on religion or politics, or if you as the owner are currently incarcerated, on parole or probation or have been named as the defendant in criminal proceedings.

The SBA takes a very dim view of those with criminal histories and anyone who’s habitually delinquent with debts or who’s been repeatedly turned down for loans in the past.

The application process

There’s no getting around it—you need to be prepared for paperwork. Although the SBA is streamlining their application process, it can still take some time.

There’s a fair amount of documentation you’ll need to provide. In order to be as prepared as possible, the SBA has put together a checklist, which you can access on their website. It’s vital that you review this and gather all the documentation required, then go through the checklist with your bank to make sure you haven’t missed anything. The documentation also includes several forms you’ll need to fill out. Mostly what they’re looking for are details around your personal background and financial statements. When it comes to the latter, it’s a good idea to fill those forms out with your banker or accountant.

Repayment terms

Depending on what the loan is for, there are some maximum maturities:

• Real estate: 25 years

• Equipment: 10 years

• Working capital: 7 years

Like most bank loans, you make repayments on the principal and interest monthly. You may be able to negotiate interest-only terms during your business’s start-up and expansion phases.

The expectation is that every 7(a) loan is fully secured, but the SBA won’t necessarily turn you down if you don’t have enough collateral. If all other aspects of your application are in order, they’ll generally ask that you pledge all the collateral you have available.

Next steps

If you’re looking for a loan to help you finance start-up or expansion or to increase your working capital, purchase real estate or equipment, then the 7(a) loan is your best bet. Confirm this with your lender and work through your eligibility and the application process with them. Visit the SBA’s website at sba.gov to compare their various loan options and explore resources. Then, contact one of our SBA experts. We are a preferred SBA lender, which means we can help borrowers get the funds they need faster than a bank that does not have that classification. Our experts will spend time with you and help you understand the right solution for your business. It’s true, the SBA can be a long process, but to help your dream come true, it’s well worth the time.

CONTRIBUTOR: AUSTIN PATJENS

Austin has been in banking since 2005 and joined Heritage in 2015. Prior to his current position, Austin has held positions in retail banking, merchant card services, special assets and commercial lending. Austin is the SBA lender for Heritage Bank’s Washington footprint, where he seeks to help educate and advocate for small businesses and SBA lending programs.