How Do I Apply for a 7(a) Loan?

Small businesses are the engine of the US economy. They provide a significant amount of employment, provide vital services in their communities, and develop important innovations. However, finding the funding to start and run a small business is not always easy.

Since it was established in 1953, the Small Business Administration (SBA) has been facilitating loans to small businesses that would otherwise not find suitable funding. However, the process of applying for 7(a) loans (named for the section of the Small Business Act that authorized them) can be complicated. Here are the steps to go through to apply for a 7(a) loan.

Is Your Business Eligible?

There are many basic requirements your business must meet to be eligible for an SBA 7(a) loan. Some of them are fairly straightforward. The basic ones are:

Be an operating business
Operate for profit
Be located in the US

If you meet those requirements, you can dive into the more complicated aspects of qualifying for 7(a) loans.

Is Your Business Small Enough?

What counts as a small business from the SBA perspective? This is defined according to the type of business that you are and can be quite variable. Some industries have their size defined by the number of employees, while others have their size defined by the value of the business. For example, soybean farming businesses are considered small if they are less than $2.25 million in value, but a new single-family housing construction business is considered small if it is worth less than $45 million. Furniture wholesalers are considered small if they have fewer than 100 employees, but iron mining companies are considered small until they have 1400 employees. You can see the size requirements by industry here.

Note that size standards include your business and its affiliates.

Is Your Business of an Eligible Type?

There are some types of business that aren’t eligible for 7(a) loans. In addition to non-profits, businesses are ineligible if they are:

Financial institutions that lend money
Passive businesses that don’t use or occupy the assets they buy or improve
Life insurance companies
Pyramid sales companies
Casinos and other businesses that get more than 1/3 of their income from gambling
Illegal businesses, including marijuana operations that are legal in Colorado
Private clubs with exclusive memberships
Government-owned businesses (except those owned by Native American tribes)
Loan packagers that significantly package SBA loans
Businesses with an associate guilty of financial misconduct or lying
Businesses that perform live performances of a sexual nature
Selling products or services of a sexual nature
Political lobbyists or lobbying firms
Speculative businesses
Businesses that have defaulted on a previous SBA loan

In the last case, a small business can get a loan if the SBA waives the default for good cause.

Have You Tried Other Lenders?

The SBA sees 7(a) loans as a resource of last resort. You should only go to them after you have tried (and failed) to get funding from other sources.

Be Creditworthy and Capable of Repaying the Loan

Being creditworthy can mean several different things when it comes to a 7(a) loan. It could mean that you have an appropriate FICO score. Other times, you might have to provide sufficient collateral. In still other cases, you might just need to have a solid business plan. It depends on the type and the size of the loan.

The same is true of demonstrating that you will be able to repay the loan. Lenders will often want to see certain types of proof that you are going to be able to generate revenue to repay the loan. Having a solid business plan, good market research, contracts, a list of preorders, potentially even social media exposure might be enough, depending on the nature of the loan and its size.

For this eligibility requirement, it can really help to get the advice of someone who has gone through the process before and will know what’s likely to work in your case.

Is the Use Eligible for a Loan?

Just as the SBA only backs loans for certain types of businesses, it also only backs loans for certain types of uses. However, the list of use cases is relatively straightforward, compared to the types of eligible businesses.

You can use your 7(a) loan for:

Real estate and buildings, including purchases, refinancing, or renovating
Working capital, over both the short- and long-term
Refinancing current business debt
Machinery and equipment
Supplies, furniture, and fixtures
Buying a business
A combination of any of the above

Some types of 7(a) loans also allow a line of revolving credit, usable over a period of up to seven years.

Find a Lender

The SBA doesn’t issue loans directly. Instead, the SBA supports loans by lending institutions. However, you will use the SBA’s Lender Match tool to connect with one or more potential lenders.

Before you start, you should assemble all the details that explain the information we’ve discussed above, including:

Your business plan
How much money you need and how you’ll use it
Evidence of the credit history of you and/or your business
Financial projections
Collateral
Industry experience or anything else that contributes to your likelihood of repaying the loan

Then you’ll be asked a few general questions about your business and the loan. After that, the Lender Match will (probably) link you with one or more lenders who might be willing to provide your loan.

Compare the terms you’re offered and decide which lender is right for you. Although 7(a) lenders have a maximum interest rate that they can charge, they won’t all offer you the same terms. In addition to different rates, some might pay fees related to the loan while others will pass them on to you. They might offer different repayment periods. You will be able to communicate with lenders and potentially bargain.

Submit Your Application

Now it’s time to complete your application. This is where you’ll need to provide all the detailed information you discussed with your lender, including supporting documentation. Then you just have to wait for a final decision.

With a 7(a) loan, the decision could be completed in under two days, but it might take up to ten business days.

Get Help with Your Application

If this is the first you’ve ever applied for a 7(a) loan (or possibly any loan at all!), the process can seem daunting. Mistakes can cost you your funding. With up to $5 million on the line, it makes sense to consult with someone who has done this before and has critical knowledge that can improve your chances of getting the funding your business needs.

Elizabeth Lewis is a Denver small business lawyer who has helped dozens of small businesses go successfully through the complicated process of applying for a 7(a) loan. She is prepared to use her expertise to help you assemble a winning loan application. This can include taking steps like finding the right structure for your small business, writing an effective business plan, communicating your relevant expertise, setting up a spending plan, and making financial projections.

Since 2010, Elizabeth has been helping small businesses in the Denver area. Whether you’re a startup out of your basement or a 100-person factory operation, she is prepared to help you. Her expertise is in small business law, and she has helped many small businesses navigate the challenges of early growth. She is dedicated to providing long-term help for you by building a relationship based on mutual trust. Her results-oriented approach can help you focus on what matters for your business’ success.

To learn how Elizabeth can help your business, please schedule an appointment at the Law Office of E. C. Lewis.