Using an SBA 7(a) Loan for Working Capital

One of the best uses of the SBA 7(a) loan is to get more working capital for your business or startup.

A business can’t operate without the funds to buy inventory, hire staff, and get the word out to customers. The working capital you need to run your business isn’t always readily available, however, and that’s where a loan from the Small Business Administration can help. The SBA family of loans allow businesses to use the funds for a wide array of purposes – including for working capital. 

But Before We Talk Working Capital: What is the SBA 7(a) Loan?

SBA 7(a) loans are offered by the United States Small Business Administration, but the SBA itself doesn’t lend money -- they operate as an insurer. Banks, credit unions, or other lending institutions offer the actual loan product to the business, and the SBA backs the loan, ultimately reducing the amount of risk the lender takes on. 

The loan can be used to buy real estate or land, treated like working capital, or spent on equipment costs. Small businesses can also use the SBA 7(a) loan to refinance existing debt.

Because your lender will need to get approval from the SBA to back your loan, the application process and paperwork for an SBA 7(a) loan can be lengthy. However, these loans typically boast better terms than traditional small business loans, and sometimes even come with counseling to ensure your business runs efficiently.

What Types of SBA Programs are Available for Working Capital?

The SBA 7(a) is the administration’s flagship term loan program. However, the SBA also offers specialized loan programs for certain circumstances. Some loan programs small businesses that need working capital might qualify for include:

• CAPLines – A revolving line of credit for financing seasonal or short-term needs. CAPLine loans that will be used for working capital require the borrower to show that their business generates accounts receivable and/or has inventory already.

• International Trade – For businesses that need funds to export internationally. This program offers up to a $4 million guarantee for working capital

• Export Working Capital – provides additional funding to increase domestic export sales without disrupting your business plan. This program allows for advances of up to $5 million to fund export transactions. These loans require that the business has been established for at least 12 months, and that the Export Management Company or Export Trading Company will take the title to the goods or services being exported, and the EMC or ETC has no bank ownership.

• Microloans – SBA-backed loans up to $50,000

Who Qualifies for the SBA 7(a) Loan?

SBA 7(a) loans have attractive interest rates, repayment terms, and closing costs, but they do have stricter qualification requirements than other business loans. Generally, in order to qualify for one, you’ll need:

• A credit score of at least 690

• A record free of any bankruptcies in the past three years

• At least a 10% down payment

• For franchisees, a paid franchise fee before the loan funds are released

• A clean criminal history, or the ability to explain any misdemeanors on your record

• No current Federal debt

In addition, the business that will benefit from the loan will generally need to be:

• A for-profit entity

• A small business

• Based in the United States

• A business with invested equity

• A business that has exhausted its other financing options

These requirements ensure that the loan is eligible for SBA backing. If the loan is ineligible, you’ll need to seek other forms of small business financing.

Who Guarantees the Working Capital Loan?

All owners of your business who have at least 20% equity in the company will be required to guarantee the loan, and you’ll need to include the names and information for each of these owners in your application paperwork. In addition, if your spouse has at least 5% equity in the company and you and your spouse’s equity totals at least 20% (for example, if you have 15% equity and your spouse has 5% equity), your spouse will have to guarantee the loan, too.

One distinction: if you are a sole proprietor, you will not need to provide a separate personal guarantee for your SBA loan because you execute the note yourself as a borrower (instead of as a business).

What Counts as Working Capital?

Generally, working capital is the operating liquidity available to a business. You can calculate your business’s working capital by subtracting the business’s current liabilities from its current assets. 

You may need additional working capital to:

• Pay expenses

• Pay debt

• Take advantage of business opportunities

• Invest money ahead of seasonal changes

• Increase business health with cash on hand

How Can I Use the Loan Proceeds to Fund My Projects?

If your business is upside down on its working capital ratio (in other words, if you have more liabilities than assets), you may need more working capital to operate, pay bills, or even to secure affordable financing. If your small business is growing, you may need more working capital to help you achieve your goals, like hiring more employees, securing more contracts, marketing your product, or increasing your inventory. 

What Documentation Will I Need to Provide? 

Your lender will need specific information about your business, including the business type, size, age, location, and industry. You’ll also fill out forms providing your lender with your personal information, like your legal name, address, and immigration status.

The forms and documents commonly required in the application package include:

• SBA Form 1919 (borrower information form)

• SBA Form 912 (statement of personal history)

• SBA Form 413 (personal financial statement)

• Business and affiliate financial statements, including a balance sheet, profit and loss, and income projection

The SBA allows applicants to get help (for example, from a lawyer or a translator) filling out the application paperwork, but your lender will be required to submit information about who gave you help to the SBA, so you’ll need to document who this person is as well.

I'm Ready for a Working Capital Loan! (Next Steps)

Once you’ve decided that an SBA 7(a) loan is for you, you’ll need to contact a lender to help you get started. The paperwork, terms, and jargon involved in putting together an application package for an SBA loan can be overwhelming. You can get personalized guidance at SBA7a.Loans. Because we live and breathe the SBA 7(a) loan process, we know how to help you at every stage. We match business owners like you with the best lender for your situation, even if it means that we have to look outside of the SBA 7(a) loan platform. We serve our customers by 1) offering a free educational portal, and 2) leveraging our lender-matching service to help you on your way to success. We have a deep love of American small businesses, and we believe it shows in our customer-first attitude.

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What Are the SBA 7(a) Loan Borrower Eligibility Requirements?

Eligibility depends on several factors decided by both the lender and the SBA. You must operate a for-profit business, have reasonable owner equity, have a proven need for the loan, and intend to operate the business within the United States or its territories.

How Long Does it Take to Approve an SBA 7(a) Loan?

SBA 7(a) approval time varies, depending on the lender’s experience level. Preferred lenders offer fastest closings, followed by certified lenders and standard lenders. All will guarantee your small business loan under SBA rules.

What Are Liabilities in the SBA 7(a) Program?

A business’s financial obligations—like SBA 7(a) loan payments, salaries, mortgages, and deferred payments—are considered liabilities. Liabilities are deducted from a business’s total equity. A business will settle liabilities over time by paying them off, or by trading goods or services.

What Are Fixed Assets in the SBA 7(a) Program?

The SBA talks about fixed assets as tangible and long term, meaning they can’t be converted into cash easily. Things like real estate and land, certain equipment, and other specialized property are considered fixed assets.

What Is an SBA Preferred Lender?

An SBA Preferred Lender can help borrowers get the funds they need faster than a regular SBA lender. When a bank or financial institution has a "Preferred Lender" status, this institution has the authority to make final credit decisions on SBA-guaranteed loans.

Do SBA 7(a) Loans Require Collateral?

The SBA 7(a) loan programs don't require collateral, but individual banks may have their own requirements. Buildings, equipment, and land are all possible types of collateral that you can offer.