Key takeaways
- SBA loans, including the SBA 7(a) loan, are fully assumable with SBA approval.
- To assume an SBA 7(a) loan, the new borrower must meet a variety of requirements set by the SBA, including being an SBA-eligible borrower, having good credit, and having the financial strength to fully repay the loan.
- A written agreement must be created and signed by all parties in order to assume an SBA 7(a) loan, and this agreement must have a “due on sale or death” clause.
- The assumption of an SBA 7(a) loan must not have a negative financial impact on the business.
Fortunately for borrowers, SBA loans, including the SBA 7(a) loan, are fully assumable with SBA approval. However, if you’re selling your business, getting approval from the SBA for another borrower to assume your loan can be somewhat complex. In particular, the SBA will look to ensure that the new borrower is eligible under SBA guidelines, and has enough financial strength and business experience to make a potential loan default unlikely.
What are the Requirements for Assuming an SBA 7(a) Loan?
The SBA will carefully examine a borrower trying to assume a current SBA 7(a) loan, ensuring that they meet a variety of requirements. These include:
Being an SBA-eligible borrower under the most recent SBA guidelines
The individual assuming the loan needs to be the primary owner of the business, and should have equal or better business experience/management skills than the current borrower
Good credit (usually 680+)
Having the financial strength to fully repay the loan
A written agreement stating all terms of the loan assumption must be created and signed by all parties
The agreement needs to have a “due on sale or death” clause, which will prevent any further assumption of the SBA 7(a) loan
Collateral must not be released during the assumption process, and the assumption process should not reduce the value of any current loan collateral
The assumption must not have a negative financial impact on the business
The seller must not keep the title of the property as collateral/loan security (i.e. no real estate contracts)
Related questions
Is it possible to assume an SBA 7(a) loan?
Yes, it is possible to assume an SBA 7(a) loan. The SBA will carefully examine a borrower trying to assume a current SBA 7(a) loan, ensuring that they meet a variety of requirements. These include:
- Being an SBA-eligible borrower under the most recent SBA guidelines
- The individual assuming the loan needs to be the primary owner of the business, and should have equal or better business experience/management skills than the current borrower
- Good credit (usually 680+)
- Having the financial strength to fully repay the loan
- A written agreement stating all terms of the loan assumption must be created and signed by all parties
- The agreement needs to have a “due on sale or death” clause, which will prevent any further assumption of the SBA 7(a) loan
- Collateral must not be released during the assumption process, and the assumption process should not reduce the value of any current loan collateral
- The assumption must not have a negative financial impact on the business
- The seller must not keep the title of the property as collateral/loan security (i.e. no real estate contracts)
What are the requirements for assuming an SBA 7(a) loan?
The SBA will carefully examine a borrower trying to assume a current SBA 7(a) loan, ensuring that they meet a variety of requirements. These include:
- Being an SBA-eligible borrower under the most recent SBA guidelines
- The individual assuming the loan needs to be the primary owner of the business, and should have equal or better business experience/management skills than the current borrower
- Good credit (usually 680+)
- Having the financial strength to fully repay the loan
- A written agreement stating all terms of the loan assumption must be created and signed by all parties
- The agreement needs to have a “due on sale or death” clause, which will prevent any further assumption of the SBA 7(a) loan
- Collateral must not be released during the assumption process, and the assumption process should not reduce the value of any current loan collateral
- The assumption must not have a negative financial impact on the business
- The seller must not keep the title of the property as collateral/loan security (i.e. no real estate contracts)
What are the benefits of assuming an SBA 7(a) loan?
The SBA 7(a) loan program offers several benefits to small businesses, including:
- Flexibility in underwriting
- Often has lower interest rates than other comparable financing options
- Long loan terms, up to 25 years for real estate, 10 years for equipment, and 10 years for working capital or inventory
- Flexible collateral requirements
- Lenders are prohibited from charging certain fees, including insurance service fees, add-on interest charges, legal service fees (with some exceptions), and broker referral fees
- No prepayment penalty for shorter-term loans
- No balloon payment
- Improved cash flow for the business
- Can be used for various business purposes, including renovations, capital purchase, seasonal lines of credit, or refinancing of existing debt
For more information, please visit https://www.sba.gov/category/lender-navigation/sba-loan-programs/7a-loan-programs and https://www.sbaexpress.loans/sba-express-glossary/what-is-an-sba-7-a-loan.
Are there any risks associated with assuming an SBA 7(a) loan?
Yes, there are risks associated with assuming an SBA 7(a) loan. These risks include lengthy approval times, lots of documentation, collateral requirements, restrictions on certain businesses, high credit scores, and restrictions on supplemental/additional financing.
For more information, please see the following sources:
What are the steps involved in assuming an SBA 7(a) loan?
Assuming an SBA 7(a) loan involves the following steps:
- Being an SBA-eligible borrower under the most recent SBA guidelines
- The individual assuming the loan needs to be the primary owner of the business, and should have equal or better business experience/management skills than the current borrower
- Good credit (usually 680+)
- Having the financial strength to fully repay the loan
- A written agreement stating all terms of the loan assumption must be created and signed by all parties
- The agreement needs to have a “due on sale or death” clause, which will prevent any further assumption of the SBA 7(a) loan
- Collateral must not be released during the assumption process, and the assumption process should not reduce the value of any current loan collateral
- The assumption must not have a negative financial impact on the business
- The seller must not keep the title of the property as collateral/loan security (i.e. no real estate contracts)
In addition, the business must meet the SBA's eligibility requirements, such as operating in the United States or within a U.S. territory, not being on parole, and not being a non-profit organization. The business owner must also exhaust other financial options before seeking out a 7(a) loan, such as liquidating extra houses or cars, or receiving a traditional loan. Certain industries are ineligible to receive SBA funding, such as speculation-based ventures, gambling, and others. Learn more about eligible and ineligible industries here.