Do you want to have the best boss in the world? There’s only one way to do it: become your own boss. And thanks to the Small Business Association (SBA) 7(a) Loan Program, becoming your own boss is easier than you might think.
The 7(a) Loan Program is the SBA’s principal business loan program. It provides lenders with guaranties that enable them to grant financial assistance to small businesses so long as they meet certain criteria. Because the SBA will guarantee 90% of a borrower’s loan amount, an SBA-approved lender is able to provide advantageous terms to small businesses whether they are just starting out or already established. Even if it lacks a history of strong cash flow or a perfect credit score, a small business can receive a maximum 7(a) loan of $5 million.
What Can a Business Use a 7(a) Loan For?
A business may use a 7(a) loan to refinance existing high-cost debt, purchase equipment, supplies, inventory and/or real estate, or undergo a full or partial change of ownership. (In other words, you can use a 7(a) loan to buy the business you presently work for from its current owner.) A small business may also use a 7(a) loan to support its long- or short-term operational expenses, including marketing costs and employee wages.
Note that a business is not permitted to use a 7(a) loan for certain purposes. A 7(a) loan may not reimburse the owner for any equity they have already invested into their business, nor may it be used to pay delinquent taxes.
When Is a Business Eligible for a 7(a) Loan?
The SBA won’t guarantee a loan for just any small business. If you want to qualify, then you must meet the following requirements:
- You must own an operating and for-profit business: legally, and inside the United States or one of its territories. (Non-profit and speculative businesses are ineligible for 7(a) loans.)
- You must not be on parole.
- Your business must have fewer than 500 employees.
- Your net income must be less than $5 million.
- Your net worth must be less than $15 million.
- Your business must generate less than $7.5 million annually, averaged over the past three years.
- You must prove that you have invested your own money and time into your business.
- You must prove that you have attempted and failed to receive funding from other non-SBA financial lenders.
- You must prove that you aren’t delinquent to pre-existing debts to the United States government.
- You must demonstrate that you seek funding to fulfill a viable business purpose (e.g. improving real estate, installing new machinery, or purchasing office furniture).
- You must demonstrate that you are worthy of credit, and have both the ability and intention to repay the loan.
The 11 preceding items are all requisite for approval for this loan. There are certain industry-specific exceptions, however, which is why it is important to speak with a financial institution’s loan officer before determining whether your business may qualify or not.
7(a) loans minimize risk to lenders. That is why lenders are more inclined to grant them to startups (the majority of which fail within one year of establishment). While it necessarily cannot prove cash flow history, a startup may still qualify for a 7(a) loan if its owner demonstrates they possess both business management and industry-specific experience. A startup’s business plan also bears heavily on its 7(a) loan application process.
How Can a Business Increase Its Chance of 7(a) Loan Approval?
You can only help increase your application’s chance of success if you evince that you have one of more of the following:
- A good credit score (680 or higher is ideal)
- No recent history of tax liens, foreclosures or bankruptcies
- A business that has remained operational for two years or longer
- Collateral of/worth $25,000 or more (which assures the financial lender that you can still reimburse it for the 10% it contributed toward your loan in the event of a default)
- The existing funds requisite to make a 10% down payment (presuming you intend to use 7(a) funding to purchase a business, real estate or equipment)
- Cash flow sufficient to satisfy your existing debt obligations
- Working capital
- Good character, as defined by the SBA
Note that a 7(a) loan applicant is evaluated according to their most recent business income tax return, as well as their personal tax returns over the past three years.
What Is the Application Process for a 7(a) Loan?
A 7(a) loan application must include three items:
The borrower is only required to provide the information requisite to fill Form 1919. The financial lender is responsible for filling out the application and its various supporting documents.
Would you like to learn more about the SBA 7(a) Loan Program – and whether you are a candidate for it? Then we welcome you to contact Sherburne State Bank or visit one of our locations in Becker, Monticello or Princeton, MN in person today. We are proud to offer a wide range of business banking services that help propel Central Minnesota’s economy!
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