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:
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:
*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 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.
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:
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.
90% 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.
95% Financing:
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.
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.
The SBA 7a allows the following as acceptable sources of down payment:
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 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.
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:
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:
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.
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.
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:
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.
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 ).
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*:
* 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:
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 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
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.
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 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:
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.
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:
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.
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.
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.
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.
