What Are SBA 7(a) Loans?
When beginning your search for business lending, it’s easy to get overwhelmed with financial terminology and jargon.As a current, or soon-to-be, business owner, you’ve probably heard of an SBA loan at some point – but what are they, really? No matter where you are in your entrepreneurial journey, “SBA loan” is one industry acronym every small business owner should be aware of.
SBA loans can be a little daunting at first, but we’re here to break it down for you. Let’s explore SBA 7(a) loans - what they are, why they can be an excellent lending option, and how to obtain one for your small business.
What are SBA loans?An SBA loan is a small business loan that is issued by a private lender, such as SouthState Bank, and backed by the federal government (the Small Business Administration). Since these loans are guaranteed by the government, the risk for the lender significantly decreases, and the financing terms are more favorable for borrowers. The SBA does not do the lending, instead they partner with lending institutions (most of the time these are banks and credit unions) to make loans more accessible to small businesses.
Do you have to pay back an SBA loan?Borrowers are obligated to pay back SBA loan funds. If you default on your SBA loan, the government will pay the lender their guaranteed portion of the loan- which can cover up to 85 percent. As collateral, the SBA requires an unconditional personal guarantee from everyone with at least 20% ownership in the company.
What are the benefits of an SBA loan as opposed to a regular small business loan? By nature, SBA loans are loans that cannot be made conventionally. They offer competitive rates, low fees, and longer terms than what a small business owner would otherwise receive. Federal regulations require SBA lenders to base their interest rates on the prime rate, and fees typically consist of an upfront guaranteed fee, along with a yearly service fee (many financial institutions will cover this fee on your behalf). Additionally, loan term depends on how you plan to use the money.
What terms does an SBA loan offer?With an SBA 7(a) loan, the repayment term is typically longer than a traditional bank loan, and the term is dependent on how you plan to use the money. If needed, it can be stretched out to a maximum of 25 years for real estate or 10 years for goodwill, equipment or working capital. By stretching out the repayment term, businesses are able to conserve cash for their operating needs with lower monthly payments.
How do I apply for an SBA loan?
1. Make sure your business is eligibleContacting one of our experienced small business bankers is a great place to start. We can talk you through eligibility requirements and help determine the best type of SBA loan structure for your business. Lenders and loan programs each have unique eligibility requirements, but there are some things that are standard; you must be a for-profit business operating in the United States with the ability to repay the loan.
2. Gather your documents, and apply for the loanThe next step requires the business owner(s) to submit a financial package. The application will be easier if you gather your documents before-hand; you can use the SBA loan application checklist to stay organized. Some of the records you’ll need to gather include business tax returns, your personal financial statement and your business plan explaining your products or services.
3. WaitSBA loans can be a tedious process. Just like other lending, the loan is subject to credit approval and requires a lengthy document package. After submission, an underwriter will take a look at your package and make a decision. Loans under $350,000 are eligible for abbreviated credit underwriting and are funded quicker than larger loans. For a small loan, wait times can be as little as three weeks; for larger loans, borrowers can expect to wait about three months. At SouthState, we have a collective 400+ years of SBA lending experience and take pride in making the process as easy as possible.
4. Schedule your closingIf your application is approved, a closing will be scheduled where any fees will need to be paid, and the funds are dispersed to the appropriate parties. If your application is not approved, your small business banker may be able to provide you with an alternative solution.
The SBA helps small businesses get loans that otherwise wouldn’t be available to them. At SouthState, we have experienced, local small business bankers who will spend time with you to talk about your business plans and financial goals. Our experts will work to secure your business the funds needed and explore alternative options if necessary.