Eligible Uses of SBA 7a Loan Funds
A 7a loan may be used to:
- purchase / build / improve owner-occupied real estate;
- purchase machinery & equipment for business use;
- purchase a business;
- expand a business;
- debt refinancing (must meet SBA requirements);
- working capital needs;
- start a business.
Typical SBA 7a Structure
A commercial lender funds a 7a loan and in most cases the structure used will be a function of whatever is being financed. For example, a new business seeking to start operations may be asked to put 25% or 30% down. An established business seeking to finance a new building, may be asked to put down 10%.
The role of the US Small Business Administration on a 7a loan is to guarantee a percentage of whatever the bank lends to the small business. In normal times, this would be 75% of whatever the bank lends up to a maximum guaranty amount of $3.75 million.
SBA 7a Terms / Interest Rates
SBA 7a terms are set by the commercial lender funding the 7a loan but these are typically longer than terms that you will find on regular conventional loans, and may be up to 25 years on fixed asset projects.
The SBA sets maximum interest rates that commercial lenders may charge. If the 7a loan has a maturity of 7 years or less, the maximum interest rate will be Prime or a LIBOR base rate + 2.25%. If the 7a loan has a maturity in excess of 7 years, the maximum interest rate a commercial lender may charge is Prime or a LIBOR base rate + 2.75%. If the 7a loan is lower than $50,000, a bank is permitted to charge slightly higher interest rates.
Effective October 1st, 2009, the SBA will now allow lenders to charge fixed interest rates on 7a loans where the maximum interest rate can be the LIBOR Base Rate+ the average 5 and 10 year LIBOR Swap Rates + allowable spread as above.
There is a prepayment penalty on a 7a loan only if the term of the loan is 15 years or more and the borrower voluntarily pre-pays more than 25% of the outstanding loan balance within any of the first three years after the loan is fully disbursed.
SBA 7a Loan Limits
The maximum SBA 7a loan is currently $5 million and the maximum SBA guarantee amount is $3.75 million. A small business may have multiple SBA 7a and SBA 504 loans but the combined outstanding guaranteed principal balance on these loans may not exceed the loan limits of whichever is the last program (7a or 504) that the small business is applying for.
SBA 7a Fees
The fee charged by a commercial lender to secure a 7a loan is a function of the loan size and the amount of the loan guaranteed by the SBA.
- if the loan size is $150,000 or less, the fee = 2% of the SBA guaranteed portion of the loan;
- if the loan size is $150,000 to $700,000, the fee = 3% of the SBA guaranteed portion of the loan;
- if the loan size is $700,000 to $2 million, the fee = 3.5% of the SBA guaranteed portion of the loan up to $1 million plus 3.75% of the guaranteed portion of the loan above $1 million.
A packaging fee and legal fees may also be associated with a 7a loan application. If Colorado Lending Source is assisting a bank package a 7a loan for a small business client, the packaging fee would be $2,500.
Owner Occupancy Tests
SBA 7a real estate loans are only available to small businesses who meet the same defined owner-occupancy guidelines applicable under the SBA 504 loan program. If the project property involved with the loan application is an existing structure, the small business must actively occupy 51%+ of the interior space of that structure. If the project property is being newly constructed for the small business, the occupancy test increases to 60% initially with a reasonable expectation of increasing to 80% within ten years.