SBA 7a loans: the basics

SBA 7a loans are term loans that can be used to finance a variety of small business needs including:

• Land/Building Acquisition
• Construction/Tennant Improvements
• Business Acquistion
• Business Debt Refinance
• Machinery and Equipment
• Inventory
• Furniture, Fixtures, and Equipment
• Working Capital

7a loans are normally guaranteed 75% to 85% depending on the size of the loan; an 85% guaranty is available for loans of $150,000 or less and a 75% guaranty is available for loans greater than $150,000.

Special note: As of the writing of this post and per the provisions of the American Recovery and Reinvestment Act of 2009, the SBA guaranty on new 7a loans can be raised to a maximum of 90%.

Term to Maturity:
Depending on the primary purpose of the loan, its term to maturity generally ranges from 7 to 25 years.  7a loans are fully amortized through maturity with no prepayment penalties for loans with less than a 15-year term.  Loans with a term of 15 years or more come with a 3-year declining prepayment penalty; a 3% prepayment fee in year 1, 2% in year 2, and 1% in year 3. 

Interest Rate:
Typically, 7a loans are variable rate loans, adjusted calendar quarterly.  Interest rates are set at a margin above the Wall Street Journal Prime Rate; within a range of WSJ Prime Rate + 2.00% (presently 5.25%) to WSJ Prime + 2.75% (presently 6.00%). 

Tip: When developing financial projections for your business and estimating your monthly loan payments, assume your SBA loan will be priced at the maximum = Prime + 2.75%.

Fees:
The SBA guaranty fee for a 7a loan is paid by the borrower and is as follows:

• 2% of the guaranteed portion of the loan for all loans $150,000 or less -- For example, the guaranty fee on a $100,000 loan with an 85% guaranty would be 2% of $85,000 or $1,700
• 3% of the guaranteed portion of the loan for all loans $150,001 to $700,000
• 3.5% of the guaranteed portion of the loan up to $1,000,000, PLUS 3.75% of the guaranteed portion of the loan over $1,000,000, for all loans $700,001 to $2,000,000 -- For example, the guaranty fee on a $2,000,000 loan with a 75% guaranty ($1.5 million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) PLUS 3.75% of $500,000 ($18,750), which totals $53,750

The SBA guaranty fee can be rolled into the SBA loan.  Note: As of the writing of this post and per the provisions of the American Recovery and Reinvestment Act of 2009, SBA guaranty fees on 7a loans are temporarily eliminated.

SBA 7a loans are comparatively flexible and the terms noted above make them a great source of financing for new business startups and small business expansions.