7(a) loans are small business loans financed by a private lender and backed by the U.S. Small Business Administration (SBA). They have fairly broad eligibility requirements for existing profitable businesses and are very flexible in amount depending on the business’ needs. There is no minimum loan amount and can be as large as 5 million dollars.

Who qualifies for an SBA loan?

In order to qualify for an SBA 7(a) loan, the first requirement is to be a small business as defined by the SBA. The exact parameters for small business size vary by industry but are generally based on the total number of employees, total yearly revenues, or both. 2022 guidelines for small business size can be determined here.

Once you have determined that your business is indeed a small business, you can progress to the other requirements on the list. The next requirements practically ensure that you already have an established business – the 7a loan is not for startups. Your business must operate for profit – you cannot have a hobby or a business that consistently operates at a loss. You must be doing business, or propose to do business, in the United States or its possessions.

Next, the SBA lender will verify that you truly need the loan for your business, and that you are capable of paying it back. You must have equity invested in the business already and have exhausted other personal equity financing options before applying for a loan. You must have a demonstrable need for a loan, and proof that the loan will be used for a legitimate business purpose. Lastly, you must not already be in default on any other US government debt, including other loans, taxes in arrears, or other payments.

How do I apply?

Once you have established your eligibility, there are a variety of forms and paperwork that will need to be filed for the loan application. First is SBA Form 1919, which covers the borrower’s information, whether the borrower is a sole proprietor, members of a partnership, or an owner of a corporation. Information from all business principals must be collected for this form.

Next is SBA forms 413 and 912. Form 413 collects more personal financial information to comply with SBA’s requirement that the owner have invested personal equity before applying for an SBA loan. Form 912 is a history of personal character and credit to determine eligibility and the risk level of the potential loan.

You must also submit:

  • a current profit and loss statement for the business,
  • an income projection for the business over the next year,
  • 3 years of personal and business income tax returns for all business principals,
  • a written history of the business, along with an explanation of how the SBA loan will help your business overcome a challenge,
  • a copy of your business license if applicable,
  • written terms of your business’ lease,
  • records of any other loan applications,
  • personal resumes for all business principals.

Variations on SBA loans

What can SBA loan money be used for?

SBA loans are principally used for acquisition or expansion of business real estate but can also be used for other purposes. Approved purposes include:

  • short- and long-term working capital,
  • the purchase of equipment, inventory, furniture, raw materials, or supplies,
  • the purchase of real estate or buildings,
  • construction, expansion or betterment of real estate or buildings,
  • acquisition of other existing businesses,
  • refinancing of existing debt (under limited circumstances)

SBA loan money may not be used for any purpose that will financially damage the business, refinance debt in a way that will cause the SBA lender to bear a loss from the refinance, repay owners for equity injected into the business, repay money that should be held in escrow, or pay taxes in arrears.

How long is the term of an SBA loan?

Loan terms for SBA loans are based on the ability of the borrower to repay and the intended use of the funds. The maximum loan maturity varies by the asset class that will be funded by the loan. Real estate loans have a maximum maturity of 25 years, not including construction time for new business construction, while other categories such as equipment or working capital loans have a maximum term of 10 years.

If the borrower intends to use the loan for a mixture of real estate and other uses, a blended maturity date will be calculated based on the percentage of funds that will be used for each purpose.

The terms of an SBA loan also include prepayment penalties for loans with maturities of more than15 years that discourage the borrower from paying off large portions of the loan early in the loan term. If the borrower pays back more than one quarter of the loan balance in a single payment within the first year of the loan, a penalty of 5% of the prepayment amount will apply. During the second year of the loan, the penalty drops to 3% of the prepayment, and in the third year, the penalty will be 1%. After the third year, there is no penalty for prepayment.

Associated fees and loan costs

The interest rate of an SBA loan is based on the current Federal Reserve interest rate and the amount of the loan. SBA loans can have either variable or fixed interest rates. The interest rate will be less for a larger loan, and greater for a smaller loan. The interest rate for variable rate loans may not vary more often than monthly, and the frequency of variation will be written into the loan agreement.

SBA loans have limited fees compared to other loans and are prohibited from charging broker fees, extra points, processing, or application fees. There is, however, a standard fee attached to most SBA loans which is based on the loan size and the SBA-guaranteed portion of the loan. The only exception to this is an SBA Express loan to veterans and spouses, which has zero fees.

Please contact Kislay Shah CPA with additional questions at kislay@shahcpaus.com or call 646-328-1326.


Visit http://www.sba.gov, or open using hyperlinks below:

Table of size standards (sba.gov) (Small Business)

Borrower Information Form (sba.gov) (SBA Form 1919)

SBA Form 413 Updated and Issued (SBA Form 413)

Statement of Personal History (sba.gov) (SBA Form 912)