SBA 7(a) Loan Terms, Conditions, and Eligibility
Let’s start by giving a quick overview of the loan terms, conditions, and eligibility requirements for the SBA’s 7(a) program. For the purposes of this article, we’ll be covering 7(a) loans up to $250,000.
Loan terms and conditions are as follows:
- Loan Amount: Up to $250,000, subject to trailing three-year average revenue
- Loan Term: 10 years
- Interest Rate: WSJ Prime + 2.75%
- Monthly Payment: as low as $300 per month for a $25,000 loan*
- Fees: No SBA Guaranty Fees; Packaging fee to Lender ($750)
- Allowable Uses: Working Capital
*Please note: The estimated monthly payment utilizes the WSJ Prime Rate at time of publication. Monthly payments will vary based on multiple factors including, but not limited to, loan size and current WSJ Prime Rates.
The SBA’s 7(a) program encourages banks and non-bank lenders to provide loans to small businesses that are not able to obtain financing on reasonable terms and conditions. The eligibility requirements for an SBA 7(a) working capital loan through NEWITY are as follows:
- In operation for at least one full tax year as a for-profit business
- U.S.-based location and operations
- Owner-supported, owner-funded
- Meet the SBA’s basic eligibility requirements (if you had a PPP loan, you likely qualify)
- Loan size determined based on average annual revenue
- Minimum FICO score of 600 for majority owner
1) Built for Businesses who might Struggle to Obtain Capital
7(a) loans are meant to provide capital to U.S. small businesses who might otherwise have challenges in obtaining a loan. Traditional banks typically require excellent business and personal credit scores and have high standards for cash flow, capital, and collateral. During a credit-tightening cycle (i.e., with a recession looming), bank standards can be exceptionally high.
SBA 7(a) loans can be a helpful avenue to obtain funding when others may have turned you down.
2) Eligibility and Documentation Requirements are Consistent
Another benefit of 7(a) loans is that the eligibility and documentation requirements stay the same, even with volatile economic conditions. Economic downturns typically lead to less available financing for small businesses as banks tighten their credit and underwriting standards. As banks’ requirements increase, eligibility and documentation requirements can become increasingly stringent.
SBA 7(a) loans, however, keep the same eligibility and documentation requirements even during uncertain times. Other financing options may require you to jump through additional hoops or have credit standards you can’t reach, but small businesses can rely on obtaining a 7(a) loan as long as they meet the eligibility criteria.
3) Low Interest Rate and Long Repayment Term
7(a) loans are the most popular SBA lending program and they serve as the U.S. Government’s primary offering for business financing.
As a government-backed product, the interest rate is kept low. 7(a) loan interest rates are based on the Variable WSJ Prime Rate + 2.75%. Interest rates for other business loans can range from 3% from a traditional bank for very strong credit scores and operating history all the way up to 150% with an alternative lender.
With a loan term of 10 years, you are also given more time to pay off the loan, which means a lower monthly payment and more available cash for business operations.
4) No SBA Guaranty Fees
Unlike other types of SBA loans, there is no guaranty fee for 7(a) loans below $250,000. This means you don’t have to pay anything extra to the SBA to obtain your loan.
The only fee involved with a 7(a) loan below $25,000 is a small packaging fee to the lender of $750. 7(a) loans ranging from $50,000 to $250,000 have packaging fees capped at $2,500. Since these loans are intended for small businesses, you do not need to pay packaging fees in cash – they are paid directly out of the loan amount at closing.
5) Flexibility in Allowable Spending
In our recent blog, we covered the permissible categories for spending the funds of a 7(a) loan under $250,000. As mentioned above, these all fall under “working capital”:
- Payroll – Includes salaried, hourly, part-time, and 1099 employees
- Operating expenses – Short-term expenses, e.g., marketing, inventory, membership programs, and day-to-day expenses
- Rent – Rent payments for your office or place of business
- Utilities – Includes all utility expenses you incur as a business
6) Small Balance Loans Available
While we’ve outlined 7(a) loans up to $250,000, there are many businesses who need smaller loan amounts. Traditional banks are usually less interested in funding these small loans because their cost to underwrite a small loan is equivalent to larger loan sizes, but the revenue potential is much lower for a small loan than a large loan.
At NEWITY, we strive to equalize access to working capital no matter the loan size you are seeking.
7) Higher Likelihood of Approval
When you take out a loan, a traditional lender will typically require collateral in case you cannot make your payments. Traditional banks often require the value of the collateral to be the same or greater than the full loan amount.
As a government-backed loan, SBA 7(a) limits risk to the lender. As a result, there are no, or limited, collateral requirements and your loan is more likely to be approved as compared to a private bank loan.
With NEWITY, you can apply for an SBA 7(a) loan up to $250,000 in less than 30 minutes.