What is a SBA 7 (a) Loan?

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SBA is a government agency which provides financial assistance to small businesses and not individuals. This is the reason why the eligibility criteria depend on the business and not the owners.

They do not specify eligible business for the loan program. But there are certain specifications such as the base of the business’s income, the owner and the place of its operation.

If a business start-up is ineligible for a conventional personal loans bad credit scheme, then the SBA 7(a) would provide an increased guaranty against your default. Even the interest rate depends on the prime lending rate, loan size and its maturity.

Terms regarding maturity of the loan

SBA generally encourages small businesses which has a longer term of maturity. The maximum loan maturities for each business financing have been set by the SBA.

For working capital, the loan maturity is up to 7 years; for machinery, it is set up to 10 years based on the life of the equipment; for real estate, a little more up to a period of 25 years.

Though there are different loan maturities set for each loan, the actual financing is based on the following:

  • Repayment ability of the business owner.
  • Purpose of obtaining the loan
  • Better life of the assets

Amortization

Most of the loans are repaid along with principle and interest at monthly installments. Usually lenders provide loan based on the maturity of the loan over the loan term; but in some cases, the business might generate unexpected income so that you pay back the loan before the loan has matured.

This causes the lender to lose the mature amount and therefore SBA demands prepayment fee in case of a 15 year maturity loan being paid back within the first three years.

Applicants are allowed to request the lender to grant them interest-only payments if the business is a start-up.

All about collaterals

SBA usually expects that every 7(a) loan must be fully secured. But there is an unusual feature with respect to SBA 7(a) that is not generally applicable to other loan programs.

Generally, if all eligibility criteria are satisfied but still if the collateral is insufficient then your loan application will be declined. Whereas, 7(a) loan program insists that if the only unfavorable component is the unsatisfactory collateral then the loan application should not be rejected.

Liens on personal properties of the initial amount might be necessary. Personal guarantees are mandatory and should be 20% or more of the business investment.

Eligible and ineligible businesses for claiming SBA 7(a) loans

7(a) loans are favorable for business owners who indulge in small businesses; it might be either a start-up or an existing business.

Land or building purchase, for buying or installing machinery, equipment or supplies, long-term or short-term working capital, refinancing, restoring existing business are all businesses which fall under eligible category.

Ineligible businesses include real estate, pyramid sales organization, lending companies, non-profit institutions and concerns which indulge in illegal activities.

There is also one situation for which SBA loan may be denied for the borrower; it is when you have other funding resources for business but still expecting government funds.