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What is an SBA 7A Loan?

by Michelle Orr of Live Oak Bank

SBA 7(a) Loans

The Small Business Administration (SBA) is a government agency that serves as the main resource for government-backed business loans. A portion of SBA loans is guaranteed by the government and these loans allow small business owners to obtain capital with less equity than a conventional loan requires. To clarify, the federal government does not lend you the money, the bank does. The SBA just guarantees a percentage in the event of a default on the loan. The most common SBA loan program is 7(a). These loans can be used to set up a new business but can also assist in an acquisition or expansion of an established business. There are many benefits of an SBA loan and the specific terms can be negotiated between the borrower and an SBA-approved lender.

Down payment: Typically, most conventional bank loans require around a 25%-35% down payment. SBA loans are based on a cash flow analysis and require less of a down payment. This allows a borrower to get started with less money down and opens the doors to new owners seeking financing. For a new business purchase, the SBA requires at least a 10% down payment but this can vary depending on the transaction.

Loan terms: SBA 7(a) loans are long-term loans, with the average term around 10 to 25 years. The interest rate varies depending upon the lending institution. The maximum loan amount for an SBA 7(a) loan is $5 million. Live Oak Bank can add conventional financing to a SBA 7A loan to achieve up to $9MM in total financing.

Working capital: Working capital can be rolled into an SBA 7(a) loan. A working capital reserve can help bridge the financial gap until the business becomes stabilized.

Financial covenants: SBA 7(a) loans do not have restrictive financial covenants that you may find in conventional loans, such as loan to value or debt service coverage ratio covenants. Personal guarantees: SBA loans require a personal guarantee from individuals who own 20% or more of the business applying for the loan.

Choosing the right lender: Working with an SBA-preferred lender should make the experience less time consuming. Typically, a lender is what makes the difference in whether or not the transaction goes smoothly. When choosing a financial institution, make sure that the lender has a proven track record of helping small- to medium-sized businesses succeed. Preferred Lender Program (PLP) lenders have the ability to make credit decisions without SBA review, expediting the loan approval process.

For further information about an SBA 7a or any other business loan, please feel free to reach out to me directly by email: michelle.orr@liveoak.bank or phone at: 203-461-5097.