SBA 7A Loans

If you’re thinking about applying for an SBA 7A Loan, you’re in good company – the 7A is one of the SBA’s most popular programs. When you feel like you’re being held back without access to capital or other lending sources, the SBA offers small business owners (like you!) support when you haven’t been able to find funding elsewhere. 

Just because you’re lacking cash flow history or a pristine credit score doesn’t mean you must automatically give up on your dreams! If you apply and are approved, the SBA will guarantee (like co-signing) a loan from an SBA-approved lender for up to 75% percent of your loan amount – quite a sweet deal for startups, small businesses, or growing companies if you’re looking to make a leap in your growth.

SBA 7A Loans

A bank funds the entire loan amount and the SBA guarantees 75% of the loan amount (and in the case of International Trade Loans the SBA guarantees 90% of the loan amount). Because the Bank is getting a government guarantee on a majority of the loan, the Bank will get comfortable doing higher risk transactions. In most circumstances the loan is approved by a Bank with Preferred Lender Provider status (known as “PLP”), so once the lender approves the loan it is automatically approved by the SBA and must just go through a quick authorization to verify you are not exceeding available government debt. In some circumstances a loan might need to be submitted directly to the SBA for final approval.

SBA 504 Loans

A bank funds 90% of cost for the project (for special-use properties the bank funds 80 to 85% of cost) and borrower equity comes in at time of closing. If construction is involved the bank manages the construction loan.

Borrower required equity is typically 10% of cost (for special-use properties it can be 15 to 20% of cost).

Roughly 60 days after purchase or project completion, the SBA comes in and takes out the SBA portion of the loan. On new debt the SBA is usually 40% of cost except if the property is special-use, then they are 30 to 35%. For refinances the SBA can be as high as 50% of the refinanced debt amount.

The bank’s 50% portion of the loan stays in place with the Bank.

SBA 7A loan terms

If the loan is used for business assets or equipment, the standard term is a 10-year fully amortizing term loan, although for certain types of equipment and leasehold improvements the term can get extended to 15-years. For loans primarily made up of real estate, the standard term is 25-years. If there is a mix of uses for the loan, if more than 50% of the source of funds goes towards real estate, the entire debt can be amortized over 25-years. If real estate is involved but 50% or less of the debt is for non-real estate purposes, then you can get a blended amortization based on the percentage of real estate use versus business use between 10-years and 17.5-years. This will usually create a 5 to 15% cash flow savings over doing separate SBA 7A loans for each piece of the debt due to extending the amortization for the business portion of the debt.

Loans with a construction component are typically interest-only for 6 to 18 months on the front-end and then convert to an amortizing term loan over the remaining loan term. The SBA also offers various lines of credit that are interest only where funds can be drawn, repaid, and redrawn over the term.

95% of SBA 7A loans are variable rate with the interest rate between the Prime Rate to the Prime Rate + 3.00%. The rate typically adjusts monthly or quarterly and payments are typically recalculated on a quarterly or annual basis depending on the lender. In some cases fixed rates are available, and the terms may vary where it is fixed for a time period and then adjusts or it could be fixed for the entire loan term.

For loan terms for 10 years or less, there is no prepayment penalty. For loan terms greater than 10 years, there is a three-year prepayment penalty that is 5% in Year 1, 3% in Year 2, and 1% in Year 3. After Year 3 there is no longer a prepayment penalty.

SBA 504 loan terms

The SBA 504 offers a fixed interest rate of 10 years for equipment and either 20 or 25 years for real estate (borrower choice) on their portion of the debt (from 30% to 50% of total cost depending on loan type). SBA fixed interest rates tend to be below standard 5 and 10 year bank interest rates and are fixed for the entire term where Bank interest rates tend to be fixed for a shorter time period.

The interest rate on SBA 504 loans is set at the time the SBA takes their portion out, which is typically within 60 days after either purchase or project completion if it is a construction project. Because of that the SBA 504 rate is not known at time of initial closing with the Bank, but we can provide guidance to the range the rate will likely be in based on historical data. SBA 504 loans are funded on the first Tuesday of every month and the interest rate is set at time of funding for that month.

The bank must offer at least a 10-year loan term on their portion of the debt. The rate is typically fixed for 5-years and then reprices, or is fixed for the first 10-years. After 10 years the bank loan typically balloons. Some lenders will offer a matching fixed rate term to the SBA loan term. Lenders will typically have a prepayment penalty in place on their portion of the loan, and that penalty can vary from lender to lender. Sometimes it is only a refinance penalty. Usually the penalty expires after the first 5 years.

The SBA portion of the debt has a 10 year pre-payment penalty based on the interest rate, which declines by 10% each year through year 10. Because of this you typically do not want to do an SBA 504 loan if you plan to pay the loan off quickly.

SBA 7A loans

In some cases there are some unique qualifications you need to be aware of:

• You cannot refinance an SBA 504 loan with an SBA 7A loan.

• Only in limited circumstances can you refinance an SBA 7A loan with another SBA 7A loan, and that refinance must be approved by the SBA directly.

• If the business has existing SBA debt with a lender, that lender must provide a denial letter before that business could secure additional SBA financing with another lender.

• If you finance a business acquisition with seller debt, there is a two-year holding period before you can refinance that seller debt into an SBA 7A loan.

• The SBA Guarantee limit is $5 million. Every dollar of an SBA 7A loan counts against an individual’s guarantee limit. Any owner with a 20% or greater ownership in the business has every dollar of the SBA 7A loan count against their guarantee limit.

• You cannot qualify for SBA financing if you have defaulted on SBA debt in the past unless you have cured any loss the SBA has received.

• You cannot qualify for SBA financing if your business is past due on payroll taxes.

SBA 504 loans

In some cases there are some unique qualifications you need to be aware of:

• The SBA Guarantee limit is $5 million. Only the SBA 504 portion of the loan counts against your SBA guarantee limit. Based on $5 million in government guarantee availability, you can do an SBA 504 project up to $12.5 million and still have 40% of the project in an SBA 504 loan. However, you can do SBA 504 loans for less than 40% of the project cost. Any owner with a 20% or greater ownership in the business or property has every dollar of the SBA 504 loan count against their $5 million guarantee limit.

• You cannot qualify for SBA financing if you have defaulted on SBA debt in the past unless you have cured any loss the SBA has received.

• You cannot qualify for SBA financing if your business is past due on payroll taxes.

• You must have been in business for two years with the exception of some start-up businesses.

For loans to refinance existing debt, especially previously government guaranteed loans, there are some additional qualifications:

• Existing mortgage must be 6 months old.

• Refinance cannot exceed 90% of property value with no cash-out and 85% of property value with cash-out.

• Cash-out can only be used for eligible business expenses.

• Refinancing existing debt must provide a substantial benefit defined by a 10% savings on the new installment amount.

• For government debt, not more than 85% of the original proceeds can have been used for eligible purchases (property purchases, expansion, equipment, etc.) based on your original SBA authorization for the debt to be refinanced.