SBA 7a Loan
SBA 7a loan requirements vary depending on the use of funds and the SBA lender making the loan.
The 7a is a loan program offered by banks and lenders to small and mid-sized "for profit" businesses backed by a guaranty from the U.S. Small Business Administration.
SBA 7a loan requirements are flexible and allow small businesses to finance everything from startup costs to commercial real estate.
The program is primarily used by the following types of borrowers:
- Healthy, cash-flowing businesses looking for an SBA loan with no down payment
- Healthy, cash-flowing businesses in search of better terms than they can get with a traditional bank loan
- Businesses/borrowers that can't qualify for a traditional bank loan for various reasons (uneven cash flow, imperfect credit, amount of down payment, etc.)
- Borrowers looking for a loan to purchase a business - in some cases with no money down.
- Borrowers looking for an SBA loan to buyout a partner (or to buy in to a company)
- Business Startups
SBA 7a loans come with a guaranty from the Small Business Administration and this guaranty acts like an mortgage insurance policy for a loan and allows lenders to approve loans they otherwise might not and also allows them to offer borrowers longer and/or better terms with little or no money down or out of pocket.
The maximum SBA 7a loan is $5 million (although $10 million transactions are possible) and a business can have a tangible net worth of up to $15 million and net (after tax) income up to $5 million and still qualify. (Much larger loans are available with the 504 loan).
SBA 7a Loan Uses:
- 100% "plus" financing for purchase, construction or renovation of a building for existing businesses. No down payment is required for ground up construction of a new building, a major renovation or purchase of real estate for use by the business. Profitable businesses can get loans well over 100% loan to value/loan to cost which can include financing for business debts, equipment purchase or refinance, working capital, moving costs, etc.
- 100% financing for a business expansion - in some cases a business can buy another business of the same type/same industry with no down payment. (Example: CPA buying another CPA's practice). The SBA rule has been amended as of August 1, 2023 to state that you do not need a down payment if buying a business with the same NAICS code.
- Buying a business with no money down with help from Seller - The new SBA rules state that if the seller of a business is willing to hold a 2nd mortgage equal to 10% of the sales price on "full standby" for 24 months then the buyer/borrower does not need to put any money down. "Full Standby" means that the borrower is not supposed to make payments to the seller for 24 months. The rule is new as of August of 2023, so it remains to be seen how many lenders will actually allow this, but it is possible - even if the borrower is not currently in the same industry.
- Buying a business with 5% Down- Similarly, SBA 7a loan guidelines allow you to buy a business in an industry that you are not currently in with just 5% down if the seller holds a second mortgage on "full standby" for 24 months. This is the similar to the "old" rule and many lenders will still require this because they would prefer that a borrower has more of their own "skin in the game."
- SBA Loan for Online Business - the 7a program can be used to buy an online business (and all of the above rules apply). Truly strong borrowers with strong transactions can borrow more than $5 million with some lenders. Full details on our blog here: SBA e commerce loans.
- Refinance of Business Debt and Existing SBA 7a (or 504) Loans - an SBA 7a refinance of business debt has some typical (and some atypical) requirements but generally speaking if the refinance will benefit the business then the request could be approved. Furthermore, you can now use an SBA 7a to refinance an existing SBA 7a loan (and even a 504 loan). This can make a lot of sense if you have a high rate 7a loan currently and wish to get better rates or possibly some cash out. We recently helped a client refinance an 11% SBA 7a loan with a 7.5% SBA 7a loan and they were able to get some cash out for equipment.
- Partner Buyout - An SBA partner buyout loan requires that a business have strong cash flow and the partner doing the buyout must be qualified (see below for more info on partner buyouts).
- Partner Buyin - An SBA Partner Buyin is now possible.
- Start Up of a New Business - startups can be difficult and many lenders are not interested in loans under $250K but there are definitely lenders who will do them.
- Purchase, Startup or Refinance of an SBA-approved Franchise business - it is easier to get approval for an SBA-approved franchise than for a pure startup.
- Tenant Improvements - you can use the 7a to build out space in a building for your business whether you are leasing or financing the building.
- Equipment Financing - equipment can be financed separately or as part of a larger loan that might include commercial real estate, business debt consolidation, etc.
- Working Capital - many SBA 7a lenders will give generous amounts of working capital if you can make a good case for needing it.
- Purchase of Inventory - the SBA 7a allows a business to purchase needed inventory.
*Some lenders will put a small conventional loan behind a $5 million SBA 7a to finance larger transactions. Also, SBA real estate loans are only for properties where your business will occupy at least 51% of the total square footage of the property.
SBA 7a Loan Requirements - Credit Score
SBA 7a loans require "good" credit.
For loans above $350,000, the definition of "good credit" is determined by the individual SBA lender. Some lenders allow for past poor credit including a prior bankruptcy and some will not lend to a borrower with a BK. Some lenders - especially those that offer excellent terms - require a minimum credit score.
SBA 7a Minimum Credit Score
Despite what you might read on many sites online, the SBA actually does not require that you have a minimum credit score for most loans above $350K, although there are some smaller SBA loans that actually do require certain minimum credit scores.
What needs to be understood about SBA lending requirements is for the most part individual lenders determine what is considered acceptable credit - not the SBA.
And the key to having good enough credit for an SBA loan is that your recent credit needs to be good and any "bad credit" typically needs to be long enough ago that a lender feels like you are now a good risk. You also need to be able to explain what caused your credit to suffer and prove that you have successfully moved beyond the past circumstances that led to your credit issues.
This is not to say that SBA loans are only for borrowers with past bad credit.
Far from it, actually.
The majority of SBA loans are made to business owners with very good to excellent credit who need financing for something that their local bank or lender cannot offer - typically either minimal or no down payment, a longer term and amortization, no balloon, etc., but it is important to understand that the SBA loan guidelines allow for many borrowers with both good and bad past credit to qualify.
Obviously, major derogatory items like an old bankruptcy need to be fully explained to a lender's satisfaction and will typically need to be approximately 3 years old for you to be considered for a loan and keep in mind that a "prior loss to the government" (default on a federally guaranteed loan) will usually make you ineligible for SBA financing, but know that you might have options if your credit score is not good enough for your local lender (whether they are an SBA lender or not).
You can visit our blog to learn more about SBA 7a loan credit requirements for borrowers with a previous bankruptcy by reading this post: Can you get an SBA loan with a bankruptcy?.
SBA 7a Loans are NOT made by the SBA
It is also important to note that SBA 7a loans are made by lenders and banks and not by the SBA, so while the SBA provides underwriting rules for eligibility they do not dictate to lenders what a borrower's credit scores need to be for loans over $350K. Because of this there is a lot of flexibility within the SBA credit guidelines and while many lenders require a minimum score there are plenty of lenders who do not as long as they can get comfortable with why the score is low.
SBA 7a Loan Down Payment Requirements
The 7a program does not have a down payment requirement for certain real estate and non-real estate transactions.
Many (most actually) SBA lenders require a down payment of at least 10%, but it is not an SBA 7a loan requirement and there are excellent lenders offering very good terms who do not require a cash injection despite what you might have read or heard.
How much you need to put down depends on the use of the loan proceeds. Below is a listing of down payment by property or transaction type:
100% Financing: No down payment is necessary for the following situations:
- Purchase of a building where your business will occupy 51% or more of the square footage
- Ground-up construction of a building where your business will initially occupy 60% or more of the square footage
- Purchase of another business of the same type (Examples: a law firm buying another firm, a retailer or service business buying a competitor, etc.)
- Expansion of an existing business or franchise by purchasing another location (Examples: acquisition of another Allstate or State Farm Insurance Agency or building, a Maaco franchise, a quick service restaurant franchise, another Goddard School, etc.)
Most lenders that offer a (7a) commercial loan with no down payment generally like to finance more generic buildings but there are those that will consider some specialty properties like preschools, auto repair, assisted living, etc., so it is always worth having a discussion with a lender to find out what is possible.
100% financing is generally offered as a floating rate, a 5 year fixed rate and occassionally a 25 year fixed rate, although the 25 year fixed is either a much higher rate OR a low rate for certain types of medical practices buying or building a new office and it may not be available nationwide.
In fact, initially these programs were designed for medical, dental and veterinary practices as some SBA lenders recognized that those types of businesses had extremely low default rates and they deemed it worth the risk to allow them to borrow 100% or more, but over time more lenders have realized that many other businesses also have low default rates and have stepped up their 100% lending to most any legitimate solid business.
Our 100% commercial real estate financing page covers most of what you need to know regarding SBA 7a loan requirements for 100% and 100% "plus" financing.
10% down is the requirement to get the best possible terms as the more conservative SBA lenders are willing to offer low 25 year fixed rate 7a loans. Most traditional banks and lenders typically do not like to fix a loan for more than 5, 7 or 10 years, but with the SBA 7a it is possible to get a 25 year fixed rate.
The SBA has a 10% down payment (equity) requirement for a business purchase or startup (whether you are financing real estate or not) unless you qualify for one of the business expansion-type transactions listed above.
If you are not buying a business of a type that you do not currently own you still might be able to get it done with just 5% down since the SBA allows the seller to cover half of the down payment.
So you can either put down 10% or you can put down 5% and ask the seller of the business to hold a note for the other 5% on "full standby." "Full Standby" means that you do not make payments on the seller-held note until you either refinance or pay off the SBA loan. Many sellers are agreeable to this since they will be getting 95% of the sales price at closing.
FYI: Sellers can also hold an additional note on terms - typically interest-only - in order to get a transaction done. Lenders like this because the additional seller held loan lowers their risk.
100% Financing for Business Acquisition/Expansion of an Existing Business
As mentioned above, it is also possible with some lenders to use the SBA 7a loan program to purchase another business as an expansion of your existing business with no down payment as long as you are buying a business just like yours. This option is a good fit for insurance agencies, daycares, preschools, independent and franchised restaurant chains, auto repair businesses and many others who want to conserve their cash.
When More Than 10% Is Required
It is important to understand the SBA loan down payment requirements vary from lender to lender depending on the transaction and it should also be noted that an SBA lender may want more than 10% down payment depending on all of the factors involved or if there is something about the transaction that is not right in line with their guidelines.
As an example, many SBA lenders have a minimum SBA down payment requirement of 20% for hotels regardless of your experience, but there are some lenders who will allow just 10% down if you have enough current management and/or ownership experience.
SBA 7a Loan Down Payment Acceptable Sources
The SBA 7a allows the following as acceptable sources of down payment:
- Cash on hand - this can be cash on your balance sheet or in personal accounts depending on the transaction
- Borrowed funds - you can borrow the funds if you have enough income from another source income or a spouse with enough income
- Investors - typically friends or family who give you cash in exchange for a percentage of ownership in the business
- Seller-Held Funds on "Full Standby" - seller held funds on full standby can be considered just like it is additional cash you are putting down and the SBA allows a seller to hold half of the required down payment. Full Standby means you are not supposed to make payments to the seller for as long as you have the SBA loan. There are some SBA lenders who will refinance the seller-held debt after 2 years, assuming things are going well for the business.
- Retirement account rollovers - numerous types of retirement accounts can be rolled over tax and penalty free for down payment
- Gifts - gift funds are allowed
- Equity in other business or personal property - borrowers frequently borrow against home or investment properties for down payment funds*
- Balance Sheet equity - rare, but possible
There are rules and caveats for all of the above but every one of the possible sources above are frequently used by borrowers to come up with the necessary down payment.
*Borrowed funds using another asset (i.e. a home equity line) are allowed per the SBA 7a loan program requirements as long as you can show you have the ability to repay the borrowed funds from another source (not from the business you are purchasing). Acceptable sources could be another business or job or income from a spouse.
SBA 7a Loan Requirements for Fixed Rates
SBA 7a 25 year fixed rate loans are available for owner occupied commercial real estate properties at very competitive rates for solid businesses from a few select lenders.
25 year fixed rate loans are very uncommon in the world of commercial lending, but a small percentage of SBA lenders offer them for qualified borrowers for transactions where their business will occupy at least 51% of the square footage of the property. (60% if ground-up construction).
The required down payment for the 25 year fixed will vary - it could be as little as 10% for stronger borrowers - and 100% financing is available with a 25 year fixed rate for certain medical professionals. You will need good credit and the business must have solid, consistent cash flow.
For non-real estate loans, fixed rates are also available but are limited to either 10 years or possibly more depending on collateral. For instance, if you are financing equipment with a remaining useful life of longer than 10 years then some lenders will extend the term.
SBA 7a Loan Terms
7a loans have various terms depending on the use of the funds.
SBA 7a commercial real estate loans are typically offered for 25 years while 7a loans for partner buyouts, buying a business, working capital, business debt considation, etc. are limited to 10 years.
"Blended" terms of between 10 and 25 years are available if your business purchase, debt refi or buyout includes commercial real estate and/or "long life" equipment and some lenders will allow for a 25 year amortization as long as the largest percentage of the use of proceeds for the loan is for commercial real estate.
Here is an example of what is possible with a 7a loan for a business moving from leasing to owning while consolidating debt and blending other eligible costs into the loan:
- Purchase price of building: 700K
- Debt to consolidate: 200K
- Moving Costs: 15K
- Working Capital: 50K
- Equipment Refinance: 150K
- Total: $1,115,000
In this case, a lender can offer the business a 25 year term and amortization because the purchase price of the building was easily the largest percentage of the loan. You will notice the real estate is actually the majority of the total loan request (approx 62.8%) which gives the lender a higher level of comfort, and while this is preferable to some 7a lenders, technically this higher percentage for real estate is not required. For instance, a 25 year term and amortization is possible even if the numbers looked like the following:
- Purchase price of building: 450K
- Debt to consolidate: 300K
- Moving Costs: 15K
- Working Capital: 50K
- Equipment Refinance: 300K
- Total: $1,115,000
You will notice the cost of the building is just 40.4% of the total amount of the new loan, but it is still the largest percentage of the total which technically makes it eligible for a 25 year term. It is important to note that it does not have to be more than 50% of the total costs, just the largest percentage of the use of proceeds.
And "technically" is the key term in this case because many conservative lenders will not approve a loan with this structure and the more flexible lenders will require that the cash flow of the business be stable and strong in order to get it done but transactions like this get funded all the time.
SBA 7a Loan Construction Requirements
The maximum SBA 7a term and amortization is 25 years except in the case of a construction loan as there are lenders who will tack on a few extra years of interest only payments on the front end of the loan if necessary. This is frequently done with SBA construction loans and flexible lenders will finance the interest only payments into the loan so that borrowers do not have to make 2 payments (construction loan payment + current rent or mortgage) while waiting on construction to be completed.
This is a major benefit for borrowers as they will still have a 25 year fully amortized loan at the time they move in and will have been able to avoid making payments during construction.
Please visit our Commercial Construction Loans page for detailed info.
SBA 7a Maximum Loan Amount
The SBA 7a maximum loan amount with a standard 75% guaranty is $5 million and most lenders will never allow a borrower to borrow more than this amount, but there are ways to borrow up to $10 million for very good transactions. It is rare but it is possible and it does happen.
If the transaction is strong enough there are lenders who will provide financing above $5 million one of 2 ways:
- They will take a lower percentage guaranty from the SBA
- They will put a 2nd mortgage behind the 7a loan
The lower guaranty is occasionally used by saavy lenders on transactions where a borrower needs a little higher loan amount to complete a transaction. The SBA 7a max loan amount is a function of the maximum SBA guaranty and the percentage of guaranty the lender feels they need.
The maximum dollar amount the SBA will guarantee on a 7a loan is $3,750,000 and the maximum percentage they will guarantee for most loans is 75%. The $5 million maximum loan amount is a result of dividing $3.75 million by 75%.
If a lender feels very good about a borrower/transaction they can take a lower guaranty from the SBA to stretch to a higher loan amount - and some lenders will do this for 100% SBA real estate financing including ground up construction if the transaction is solid enough.
$10 million "7a" Loans
If a transaction is especially strong (solid cash flow, solid borrowers, long enough time in business, etc.) it is possible to get a "un-guaranteed" 2nd mortgage of up to $5 million from a few lenders if they feel good enough about the transaction.
This type of loan structure is only available if the lender can get really comfortable with the transaction and it may require additional collateral from the owners or the business.
It is available for business acquisitions, partner buyouts, commercial property purchases, etc. It is not available for startups, as the only way a lender would take the additional risk is if there was a history of solid and stable cash flow.
SBA Loan to Buy a Business
Lenders prefer to offer the SBA 7a loan program to borrowers looking to buy a business as the typical 75% guaranty provided by SBA removes a lot of risk.
Many business acquisitions are what lenders call "airballs" (non-real estate loans primarily consisting of goodwill with limited to no collateral) and the $5 or $10 million 7a maximum loan amount covers a huge percentage and small and mid-sized business acquisitions making the program highly utilized.
It might sound like a bad idea to make such a large loan for a borrower to buy a business or to recapitalize a business with minimal collateral, but some SBA 7a lenders will do these types of transactions all day long - typically for a business acquistion or partner buyout where the business has strong and stable cash flow.
The SBA guaranty is the key for the lender in making this work. You can think of the guaranty as a mortgage insurance policy for the lender.
When a 7a lender makes a traditional 7a loan to a borrower they get a 75% guaranty from the SBA. This means the SBA is guaranteeing 75% of the loan in the case of a borrower default and this gives a lender a significant amount of security in making the loan. The lender must carefully underwrite the loan according to the current SBA 7a loan requirements and rules in order to get the guaranty, but they have a level of comfort in knowing that if they have underwritten the loan correctly and a borrower defaults the SBA will pay them 75% of what is owed on the loan.
This is huge benefit for both the borrower and the lender and it can make "airballs" or under-collateralized transactions possible.
It is worth mentioning that this program has been around for decades and the default rate for SBA 7a loans is very, very low.
(FYI: The SBA 504 loan can be used to finance much larger projects and is only for real estate, FF&E and long-life/heavy equipment. It is frequently used for SBA self-storage financing, RV Park financing, RV and Boat Storage, Hotel loans and Assisted Living Facility financing ).
SBA 7a Loan Requirements for a Refinance
The SBA 7a loan may also be your best option to refinance your current business debt or commercial real estate (or both).
You cannot refinance debt that would have been ineligible to be financed with an SBA loan at the time the debt was incurred and you cannot refinance debt that is already on "reasonable" terms, but the 7a can be used to refinance the following types of business debt*:
- Long term debt with a balloon
- Short term debt with a "high" rate
- Debt that is "over-collateralized"
- Business credit card debt – as long as you can show it was used for business purposes
- Revolving lines of credit that your current lender is either unwilling to renew or can be refinanced with a longer term or lower rate
- Debt with a maturity that is too short for the use of proceeds (i.e. long-life equipment financed over a short term)
- Debt that was originally used to finance a change of ownership for the business (Seller-held debt must be at least 2 years old to be eligible for refinancing)
- High Rate/Floating rate SBA 7a loans - current lender must be unwilling or unable to modify current SBA loan or payments
- Home Equity Debt - a Home Equity Line of Credit must be proven to have been used exclusively for business purposes typically by showing the interest deduction on the proper schedule of the borrower's tax return
* If using a 7a loan to refinance debt that a business has already refinanced all or part of the SBA requires that the current debt have been on the business's tax returns for the last 2 years.
Also, the SBA is very particular about making sure that a lender is not refinancing "bad debt." They want lenders to help businesses improve their cash flow and overall financial condition, but they do not want lenders to refinance bad debt and shift the risk to a new loan guaranteed by the SBA. As a result, they require lenders do the proper due diligence when considering a refinance that includes the payoff of existing business debt.
Also, the SBA requires that the new 7a loan reduces the payments on the refinanced debt by at least 10% (after closing and funding of the loan). The following types of debt do NOT have to meet the 10% requirement:
- Debt with a balloon payment or demand note
- Business credit card debt
- Revolving credit lines with a lender who is unwilling to renew
- Personal credit card debt documented as used for business purposes
SBA 7a Export Loan Requirements & Guaranty
SBA 7a "export loans" actually get a 90% guaranty since the SBA has as one of their goals to help U.S. businesses do more exporting. There are a number of options including a line of credit and we will be updating this page soon, but know that if you are an exporter (or you intend to export), you might qualify for a higher guaranty, which in turn, might make your loan more "approvable."
SBA 7a Loan Fees & the SBA "Guarantee" Fee
SBA 7a loans have high fees associated with them, although these fees might be waived on all new loans through September 2021 due to the second round of Stimulus due to COVID-19. Please contact us at 1-800-414-5285 for more info on this.
The SBA Guaranty comes with a fee. It is called the "SBA Loan Guaranty Fee" a.ka. "SBA Guarantee Fee." Without the fee paid to guarantee the loan the SBA programs would not exist. The fee is actually very similar to a mortgage insurance premium on a HUD loan or even a home mortgage except there is no monthly premium amount paid by the borrower.
On average, the SBA loan fees for most loans end up between 2.3% and 2.75%, so yes, they are expensive, but there are typically NO points or origination fees for SBA 7a loans like you have with many conventional bank loans, so they cost 1 to 1.5 percent more on average than conventional loan fees, but the benefits (100%+ financing, flexibility in use of proceeds, credit flexibility, possibility of a 25 year fixed rate/no need to refinance in the future, etc.) outweigh the additional cost in many cases.
Also, if your project includes ground up construction then SBA loans can be slightly more affordable as SBA lenders do not charge higher fees for construction transactions, whereas many traditional banks will charge additional fees since construction loans require a lot more effort to get closed. (SBA 7a construction lenders will charge construction mangement fees but most conventional loans will as well).
Here is the finer detail regarding how SBA loan "guarantee" fees are calcuated:
Loan Amounts from $150,001 to $700,000: 3% of guaranteed portion
If loan is $500,000 with a 75% guaranty then fee would be $11,250 (3% of 75% of loan amount)
Loan Amounts from $700,001 to $5,000,000: 3.5% of guaranteed portion up to $1,000,000, PLUS 3.75% of
the guaranteed portion over $1,000,000.
If loan amount is $3 million with a 75% guaranty then the SBA loan fee would be $82,500:
3.5% of $750,000 PLUS 3.75% of $1,500,000
SBA 7a Loan Interest Rates
Interest rates on 7a loans can be everything from a quarterly floating rate to a long term 25 year fixed rate. The range of rates for floating rate loans is typically anywhere from Prime + .50% to Prime + 2.75% and 25 year fixed rates could be anywhere from the mid 3's to mid 6's or higher depending on the lender and current economic factors. "Prime" usually means the Wall Street Journal Prime Rate which you can find here.
Buying a Business / Financing Goodwill
The 7a can be used to buy a business. Typically, the max loan is 10 years if just financing goodwill / blue sky / intangible assets. If there is some long life equipment included then longer term amortizations are possible, and if commercial property is included the loan term could be as long as 25 years as the rules for the SBA 7a allow for a 25 year amortization if the largest percentage of the use of proceeds for the loan is for commercial real estate.
Borrowing More than $5 million
Typically the maximum 7a loan will be $5 million whether the loan is for a business purchase, refinance, property purchase (or all of the above), but it is possible for very especially strong transactions (solid borrower, solid business/cash flow, etc.) to borrow more than $5 million as there are a few lenders who offer a second mortgage (that is not SBA-guaranteed) that they will put behind a first position SBA 7a loan. This does not happen very often, but it is a possibility for the right type of transaction, although it could require that the borrower put up/have additional collateral.
SBA Loan Requirements for a Partner Buyout
SBA rules for partner buyouts differ slightly depending on how much cash down or equity the remaining partner will have.
If the remaining partner is looking to finance more than 90% of the purchase price of the buyout then there are a few conditions:
- For the past 2 years the remaining partner must have been an “active participant” in the operation of the busines and must have had the same amount of ownership interest in the business during that time. i.e. if they currently own 20% then they will need to certify that they have owned at least 20% for the past 2 years.
- At the time of the buyout, the business must have a “debt to worth” ratio of no more than 9 to 1 per the current Balance Sheet as well as the Balance Sheet for the most recent (fiscal) year.
If the remaining partner is contributing at least 10% of the purchase price in cash then it is possible that neither of the 2 conditions above would apply.
Requirements for a Complete Change of Ownership with a New Owner
SBA 7a loans require a 10% equity injection/down payment when there is a complete change of ownership resulting in a new owner, although like all 7a loans half of the 10% can be carried by the seller as long as the debt is structured with no payments for as long as the new owner has the SBA loan.
Refinance of Existing Debt in a Partner Buyout
There are a few SBA rules regarding the refinance of business debts with a partner buyout:
- Any existing seller financing must have been “in place” for at least 24 months (and it must be current) in order to be refinanced.
- Existing business debt can be included in the buyout as long as the debt is eligible to be refinanced per SBA 7a refinance rules. (We will be publishing updated 7a refinance requirements soon so please call us for details in the interim).
It should also be noted that loan processing might take a little longer if the loan request includes any debt taken on by the business in the last 12 months as the SBA rules dictate that a 7a lender get approval from SBA to include recently acquired debt.
25 Year Fully Amortizing Loans for Commercial Real Estate
SBA 7a loans that include real estate are typically easier to qualfiy for and also easier to get higher leverage with, since lenders are more comfortable using a commercial building as collateral.
The major advantage of the 7a over most other commercial loans is that if business real estate is the largest percentage of the new loan then a 25 year amortization is possible.
Loans that do not include commercial real estate (like business acquisitions) or loans that are "under collateralized" can also be funded as long as a lender can get comfortable with the transaction. Cash flow - or in some cases, projected cash flow - is the most important factor to consider for lenders.
7a loans are also "fully amortizing" meaning they do not have a balloon. Most conventional loans require a balloon payment - typically after 5, 7 or 10 years - and this is not a requirement with the SBA 7a loan.
Additional Sources of Down Payment for an SBA 7a Loan
In addition to the above, the 7a is also fairly flexible with regard to equity contributions from the seller.
The SBA allows equity in the form of a second mortgage from the seller of the business. They allow the seller of the business to take back a second mortgage as equity IF the second mortgage is on what is called "Full Standby" for life of the loan. Full standy means that no payments can be made for as long as the borrower has the SBA loan - although interest can accrue during this period.
In some cases, a transaction will be structured with a seller held loan on full standby for equity/down payment requirements AND another seller held debt with "repayment terms" in order to reduce the lender's exposure on a transaction. We see this fairly frequently when a borower is buying a business that does not quite have strong enough cash flow, but the buyer has a plan and realistic projections to improve the cash flow.
These additional seller held debts serve to reduce the lenders risk and are sometimes the key to getting a loan approved.
Recent Creative Funding:
Client purchased a manufacturing business and building for $5 million with $6500 out of pocket, a seller held 2nd mortgage, an SBA loan of $2 million that we arranged and a $2 million accounts receivable and inventory line that we arranged. Client worked as CFO for the business for many years and was intimately familiar with every aspect of the business, so the lenders were able to be flexible in the financing structure.
Please call us at 1-800-414-5285 for more info about 100% financing with the 7a or leveraging equity in another property.
10% Down Payment for Business Purchase (more info)
A down payment of 10% is typically required for a business purchase using the SBA 7a loan where no real estate is included, however 100% financing is available for existing businesses (especially successful franchises) where the business or franchise is expanding to a new location. See our 100% commercial loans page here for more details.
SBA will typically limit the term of a non-real estate loan to 10 years although 15 year terms are possible. SBA also requires that any building or land leases be as long or longer (or at least has options for) the term of the loan.
Please note: the Small Business Administration does not make loans. They provide the guidelines for what can be done and they provide a guarantee most of a 7a loan for a lender, but you still have to rely on a bank or an SBA approved lender to secure financing.
Please contact us at 1-800-414-5285 for clarification on any of the above.
More SBA Eligibility
The 7a loan limit of $5 million is not only a maximum loan amount, but it also serves as a maximum threshold for eligibility because the SBA uses the same figure to determine how much SBA eligibility a business owner can have.
In other words, you can have just one loan of $5 million or you can have multiple loans totaling $5 million. This is significant for those in need of additional financing to either purchase or refinance additional businesses or locations.
If you need more than $5 million in SBA eligibility and you are buying real estate or heavy equipment, then consider the 504 loan program or the "Green 504" program. The "regular" 504 can now be used for projects in the $12 to $20 million range and the Energy Efficient/Green 504 can accommodate multiple projects using maximum financing with a cap of $16 million in eligibility for the same borrower/business.
7a Loan Rates
SBA 7a loan rates are typically Prime plus a margin not to exceed 2.75% and the rate you can expect to receive is typically based on the strength of your loan.
Some lenders will offer attractive 3, 5 or 10 year fixed rates and even 25 year fixed rates are available for some of the stronger transactions.
SBA 7a Loan Credit Requirements
The SBA has NO minimum credit score for 7a or 504 loans over $350K and some 7a lenders in particular, can be quite flexible with what they will accept - within reason.
You can still get an SBA loan with a low credit score, BUT you will need to have a very good explanation for why the score is low.
It is also possible to get an SBA loan with a bankruptcy as long as enough time has passed and again, as long as you can provide a very good explanation for what happened.
How to Apply for an SBA 7a Loan
SBA 7a loans are available through banks and lenders throughout the U.S.
There are lenders who specialize in smaller loans for working capital, equipment and startup and there are lenders who specialize in real estate and other larger business transactions. If you need a small loan for a startup (under $75K), your best bet is usually a small local bank that offers SBA financing as it is probably better to sit down face to face with a lender for that type of transaction. Also, many SBA lenders are not interested in smaller loans (especially for startups) as lenders are more interested in financing established businesses with historical cash flow as there is less risk of default and a higher level of profit for the lender.
You will find the most variety of lenders and the best possible terms for loans between $350K and $5 million as that is the typical range of loan size for the most experienced SBA lenders. Most loans in this size range are provided by banks who truly specialize in SBA lending.
For smaller loans there are some streamlined programs that are generally very credit score driven and quicker to process.
How to Qualify for an SBA 7a Loan
A key point to understand about SBA lending is that while there are many clearly defined rules for SBA loans, there is also a lot of room for interpretation on the part of the lender and this is why you can get some many different responses from lenders. Most 7a lenders will tell you that 100% financing is not possible, because that is what their policy is and maybe they are unaware that other lenders offer it.
Some lenders will tell you you need 15% or 20% (or more) down for certain types of business acquisitions whereas others offer no down payment or 10% down, so just like each loan request and borrower is different from the next, each lender is also different from the next.
Why The Differences?
The 7a loan is an attractive option for lenders because:
- Banks and lenders can sell the SBA guaranty for premium (profit) on the secondary market.
- 7a loans offer a 50% to 90% guarantee from the SBA which reduces the required capital and reserves a bank needs to make a loan which, in turn, enables banks to do more lending.
The 504 loan, while an excellent low risk loan still has some risk for a lender, because the SBA guaranty only covers the SBA debenture (or second mortgage) and in the case of default the bank is on the hook for the amount of the first mortgage - typically 50% of the total project cost.
SBA 7a Loans with Felony or Misdemeanor Conviction
Just as there are credit and credit score requirements for 7a loans, there are also "character" tests and guidelines.
SBA lenders will do background checks on any 20% or more owners of a business as well as some management. For instance, if a business has a manager who is not the owner and it is obvious the manager is truly responsible for the operations of the business then a lender may require a background check on that person.
And, just as the SBA is pretty forgiving when it comes to past credit issues, they will also consider loans for applicants with past character issues including previous convictions whether it be a felony or a misdemeanor.
Felonies require an automatic check against the FBI's database that includes fingerprints which sounds like an unpleasant process, but it is quite common, is not difficult (essentially the filing of some forms) and simply adds time to the process.
Most applications for applicants with a misdemeanor more than 6 months old can be handled internally by the lender at their discretion. All misdemeanors within the past 6 months must be processed just like a felony conviction.
Also, if any applicant is (currently) under indictment, on parole or on probation then they are not eligible under the 7a program - or any SBA program.
The good news here is that borrowers can get a 7a loan with a previous misdemeanor or felony.
Of Note: No Financial Covenants
Keep in mind that 7a loans rarely have the types of "financial covenants" that haunted businesses a few years ago, so if the economy hits another recession and property values were to drop it would be highly unusual for you to lose your property because you no longer have enough equity as long as you make your payments.
Unfortunately, this happened to many businesses with conventional loans during the Great Recession. Businesses who were making their payments on time still lost their buildings because their banks needed them to have more equity to satisfy regulators and called their loans due.
This would be unusual with an SBA loan as it is extremely rare for a bank or lender to impose covenants related to cash flow coverage and other financial ratios once the loan is closed. The key issue is that you make your payments on time.
Please contact us at 1-800-414-5285 if you need more information re: qualifying, eligibility under the new guidelines or timing for approval with the SBA 7a Loan.
Alternatives to SBA Financing
If you do not meet the SBA 7a loan requirements - or as some people mistakenly call it the SBA 7b loan or SB 7a loan - but your business has assets, there may be alternatives known as Asset Based Loans.
Asset Based Loans are an alternative to SBA lending where a lender secures the loan with an asset - anything from purchase orders, to accounts receivable to equipment or inventory and some programs are available for A through D credit.
They can be expensive, but they can be the right fit for some businesses. If we are unable to help you with SBA financing one of these alternatives may be possible:
- Accounts Receivable Financing
- Equipment Financing and Leasing
- Purchase Order Financing
- Financial Contract Amortization
- Service Contract Amortization
- Medical Equipment Financing
- Merchant Credit Card Advance Lending
- Construction Project Financing
- Tenant Improvement Financing
Please contact us if you have any questions about either an "SBA Section 7a Loan" or as some mistakenly call it an "SB 7a loan" or an Asset Based Loan and how to qualify for either.
You can call us toll free at 1-800-414-5285