Is an SBA 7(a) Loan Right for You?

If you're a small business owner seeking financing, you've likely heard of 7(a) business loans offered by the Small Business Administration, or SBA.

The SBA 7(a) loan program has some attractive features for qualified business owners seeking financing. Learn the basics so you can decide whether this option makes sense for you.

What is the SBA 7(a) loan program?

The SBA uses the 7(a) loan program as its primary method of funding small businesses. Partially guaranteed by the SBA, these loans of up to $5 million include repayment terms of up to 25 years. They also offer competitive rates.

The 7(a) loan provides credit solutions for startups, business purchases, partner buyouts, business expansions and commercial real estate purchases. SBA loans are made through banks like First Citizens, as well as credit unions and other lenders that partner with the SBA.

What is the 7(a) loan used for?

Small businesses typically use the 7(a) business loan to:

• Establish, expand or acquire a new business
• Buy real estate—including buildings and land—to operate a business
• Construct a new building or renovate an existing for one business purposes
• Buy and install equipment and machinery for a business
• Purchase furniture, supplies and other materials to operate a business
• Refinance existing business debt

What are the benefits of a 7(a) loan?

There are multiple potential benefits of using the SBA 7(a) loan program.

1 Partial guarantee

While banks are still held accountable for making prudent credit decisions, 7(a) loans provide them with a 50% to 85% guarantee. This can help mitigate a portion of the credit risk, lower bank capital reserve requirements and offer new possibilities for clients to access capital.

2 Reduced down payment options

Traditional financing may require a down payment that can range between 15% and 30% of the purchase price or project cost. SBA financing has historically required a lower down payment, and in some circumstances SBA lenders can finance up to 100% of the transaction. These lower down payment requirements are key in allowing small business owners to preserve much-needed working capital.

3 Multiple allowable uses

With loan amounts of $50,000 to $5 million available, small business owners can wrap multiple aspects of a project's funding needs—from real estate and equipment to working capital and closing costs—into one loan. The SBA allows all eligible uses of proceeds to be rolled into a single loan at one term and at one rate, rather than have several conventional loans pieced together at different terms and rates.

4 Longer repayment terms

Another advantage of the SBA 7(a) loan program is that business owners can repay it over a longer time period than conventional financing. They can simply calculate how long it'll take to repay a loan for a better understanding of the timeframe. An SBA 7(a) loan also offers up to 10-year amortizations for equipment, startup working capital, leasehold improvement and business acquisition financing. Loans used primarily for real estate can benefit from 25-year options.

5 More flexibility

Borrowers can also make additional principal payments to an SBA 7(a) loan, which can be re-amortized to reduce future monthly payment requirements. For loans with amortizations of less than 15 years, there are no repayment penalties. This gives small business owners more flexibility as their needs change.

Finding the right 7(a) option

To qualify for an SBA 7(a) loan, a company must be for-profit and do business in the United States or its territories. Business owners must have already used alternative funding sources—including their own personal assets—before applying for the loan, and they can't be delinquent on any US government loans. They also must have reasonable equity in the business and a strong personal credit score.

If you have good personal credit and a growing small business, an SBA 7(a) loan could be just what you need. If you're still unsure, talk with a small business financial specialist to discuss your options.