The Small Business Administration (SBA) 7(a) loan program is a great option for financial institutions and your small business clients. It enables lenders to reconsider deals for clients who don’t quite meet conventional lending criteria – such as a lack of sufficient collateral, cash flow history or credit scores – while providing you the assurances of SBA guarantees.
Here, you’ll learn about the basics of SBA 7(a) eligibility requirements for your small business clients, and find answers to your most common questions.
Why the SBA 7(a) is an important loan option for small business lenders
As a responsible financial institution, you want to help all of your clients get the funds and services they need, including the small businesses that contribute to your community. The reality is, though, that many small business borrowers simply don’t meet conventional lending criteria. With continued uncertainty on the horizon, many banks and other lenders may have to tighten criteria even more.
That’s why offering the SBA 7(a) loan program is one of the best options for your team and your clients. Banks and other qualified financial institutions can offer the SBA 7(a) and provide trusted solutions to one of the most difficult challenges for small business owners: accessing financing at fair rates and with repayment terms that help them build their businesses.
SBA 7(a) eligibility requirements: Key points for lenders
The first step in every successful SBA 7(a) loan is to determine client and project eligibility.
Before introducing SBA 7(a) as an option to your small business clients, first, you’ll need to structure and evaluate potential deals using your financial institution’s internal credit policies and criteria. This critical step should be completed at the outset of the loan application process and verified through documentation; otherwise, your team and your client risk spending time and resources on deals that can’t be closed.
Once you determine that a client isn’t a conventional fit, then it’s appropriate to explore SBA options.
Basic SBA 7(a) eligibility requirements include that a business:
- Must be for-profit
- Meets the SBA size requirements for small businesses
- Is physically located and operating in the U.S. or its territories
- Is owned and operated by people of good character (as determined by the SBA’s guidelines) with relevant management experience
- Is able to repay the loan, including that the business will generate enough additional revenue to cover the loan payment
These common types of SBA 7(a) deals have these related additional requirements:
- Commercial real estate: When using an SBA 7(a) to purchase commercial real estate, the property must be 51% or more owner-occupied and have related and active business operations onsite.
- Business acquisitions: A buyer must purchase 100% of the ownership of a business in order to use a 7(a) for the purchase. In addition:
- Eligible acquisitions can be either stock purchases or asset purchases.
- An SBA-approved third-party business valuation is required for businesses with an agreed-upon price exceeding $250,000.
- Loan maturity will be 10 years (unless a weighted average will be used that incorporates commercial real estate).
- Debt refinance: To meet SBA 7(a) eligibility requirements, business debt that’s refinanced must meet criteria that deems the existing debt as having “unreasonable terms.” The SBA considers these types of issues to be “unreasonable,” although this list isn’t definitive:
- An interest rate for existing business debt that exceeds the maximum SBA 7(a) program rate
- A loan structured with a balloon payment or on a demand basis that makes the terms difficult for the borrower to meet
- Debt with a maturity note that’s challenging for the type of financing, such as a commercial real estate mortgage with a five-year term, as opposed to the 25-year term set forth by the SBA
- High-interest credit card obligations for expenses used for business purposes
- Revolving lines of credit in which the current lender is unwilling to renew the line
For SBA 7(a) debt-refinance loans, loan maturity will be 10 years unless the current note was originally used to finance commercial real estate purchase or for renovations to an owned commercial real estate property, in which case the loan’s terms are 25 years.
Lenders’ frequently asked questions about SBA 7(a) eligibility requirements
If my client lacks collateral, can they still qualify for financing?
Yes! The SBA doesn’t lend solely based on collateral. The SBA (7)a program allows for an 85% guarantee on loans up to $150,000 and a 75% guarantee on loans over $150,000. In the event of a collateral shortfall (resulting in a deal that’s not fully secured) on a 7(a) loan, the lender must take all available collateral in the form of business assets and personal real estate for any owners of 20% or more of the applicant and guarantors. An exception would be that the SBA doesn’t require a lender to collateralize a loan with real estate if there is less than 25% equity in the subject property.
If a client’s business doesn’t have historical cash flow, can they qualify for the 7(a) program?
Yes! Even without historical cash flow, the SBA allows loans to be based on projections, as long as relevant and supporting assumptions demonstrate why a loan will provide an improvement to the business going forward. Examples of relevant supporting assumptions include that a business will increase revenue by diversifying product offerings and expanding into new territory.
A client is looking to purchase a franchise business. Is this eligible for the SBA 7(a) loan program?
Typically, yes! As long as the franchise is already on the SBA’s Approved Franchise List and the new owner(s) acquire(s) 100% of the business. If the franchise isn’t already on the SBA list, the franchisor will need formal approval from the SBA before you can proceed with financing.
A client wants to buyout a business partner. Is this eligible?
Yes, usually! For this to be considered eligible, the partner has to buyout (or acquire) 100% of the remaining ownership in the business – partial buyouts aren’t permitted. In addition, anyone new (outside of the current ownership structure) won’t be permitted to join the new ownership structure.
A client has a current seller note with a high-interest rate and a short maturity – would this be eligible for SBA 7(a) financing?
Yes, these deals often are! For a seller note to be eligible, the note must be current and in place for at least 24 months.
A client wants to purchase commercial real estate for their business. Is this eligible?
Quite likely, yes! SBA 7(a) eligibility requirements stipulate that commercial real estate must be primarily owner-occupied (at least 51%) and be used for related business operations.
A client wants to refinance a loan from another lender. Is this allowed?
Possibly. The SBA has strict rules regarding refinance because SBA programs exist for those business owners who don’t have access to credit elsewhere. Given this, the business would need to meet the basic SBA 7(a) eligibility requirements and the existing loan must meet the SBA’s criteria for “unreasonable” terms, such as carrying a higher interest rate than the 7(a) maximum or having an “unreasonable” loan maturity.
Prudent Lenders can help determine SBA 7(a) eligibility for our lending partners
Prudent Lenders is a lender service provider with a goal of making every aspect of the SBA process easier for our lending partners. We offer proprietary tools, like the Fast Track Assessment, to help determine eligibility and we’re always just a call or an email away if you need additional help with this or anything else related to your SBA program.
And if your financial institution isn’t already set up to manage the SBA process and requirements, partnering with Prudent Lenders can make offering SBA options easier and more cost-effective for your team.