SBA 7a loans are a popular method used to finance the purchase of small business. Below we walk through how these loans work and what their requirements are.
Put simply, an SBA 7a loan is a small business loan that is partially guaranteed by the government (the Small Business Administration). This means that if the borrower is unable to pay the loan, the SBA will cover the guaranteed balance.
The SBA can guarantee as much as 85 percent of the loan proceeds, eliminating some of the risk for the financial institution issuing the loan. Because of this guarantee, lenders are willing to offer better terms. So when a business applies for an SBA loan, it is actually applying for a commercial loan that is structured according to SBA requirements and includes an SBA guaranty.
To clarify, it’s not the SBA that is doing the lending. The SBA works with a network of approved financial institutions – typically traditional banks – that already provide financial solutions.
SBA terms may vary depending on business qualifications and which lender is chosen. SBA loans can be as large as $5 million and generally offer APR’s as low as 6.5% (as of the date this blog is posted). 10 years is a standard SBA loan repayment term length.
Fast facts regarding SBA 7a Loan features and requirements:
- SBA financing requires just a 10% equity down payment. Up to 50% of the down equity payment may be filled using seller financing that is on full standby for life of the SBA loan.
- The seller is not able to stay on with the business for longer than one year.
- SBA loans can extend up to a 10-year term on a business acquisition that does not include real estate or up to 25 years on real estate.
- Personal guarantees are required for any owner greater than 20%, in fact, SBA policy requires that personal assets are available to be pledged are used as collateral if there is a collateral shortfall.
- A third-party business valuation is required. This process typically takes about 2 weeks and costs $2,500.
- General SBA financing standards require business owners to have a minimum of 2 years of business history, a 640+ personal credit score and $100,000+ in annual revenue.
With some of the highest loan amounts, the longest repayment terms, and the lowest APR’s available, SBA 7a loans are the undisputed champion of small business acquisition loans.
Small Business Deal Advisors has a network of lending institutions that are capable of providing SBA financing.