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Small Business and SBA Lending Blog
Last updated on Feb 19, 2023
2 min read

Do SBA 7(a) Loans Have Prepayment Penalties?

Like many kinds of loans, SBA 7(a) loans do have prepayment penalties, which are fees designed to compensate a lender should a borrower decide to pay off their loan early. Since lenders depend on getting interest payments for a specific number of years when they issue a loan, prepayment penalties

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Like many kinds of loans, SBA 7(a) loans do have prepayment penalties, which are fees designed to compensate a lender should a borrower decide to pay off their loan early. Since lenders depend on getting interest payments for a specific number of years when they issue a loan, prepayment penalties provide them a degree of financial protection.

What are the Prepayment Penalties for SBA 7(a) Loans?

For SBA 7(a) loans, prepayment fees only apply when a borrower “voluntarily prepays 25% or more” of a loan’s outstanding balance on a loan 15 years or longer. In addition, the prepayment must also be made within 3 years after the initial loan disbursement. So, unlike many other kinds of loans, if you’re a borrower who decides to wait more than 3 years after first receiving funds to make a prepayment, you won’t face any fees. Plus, you’re only charged based on the prepayment amount, not the entire amount of the loan. And, it’s important to keep in mind that if your loan has a term of less than 15 years, your lender cannot charge prepayment fees at all.

So, for prepayment-eligible SBA 7(a) loans, prepayment penalties include:

  • Year 1: 5% of the total prepayment amount

  • Year 2: 3% of the total prepayment amount

  • Year 3: 1% of the total prepayment amount

Related Questions

What are the terms of an SBA 7(a) loan?

SBA 7(a) loans have terms including a maximum loan amount of $5 million with no minimum loan amount, meeting the SBA's size standards for its particular industry, having fewer than 500 employees and less than $7.5 million in revenue each year for the previous three years, being physically based in the U.S. and operating within the U.S. and its territories, operating for profit, using other sources of financing, and not being involved in lending, real estate, or speculation.

The loan term depends on the type of loan:

Loan Type Loan Term
Commercial Real Estate Up to 25 years
Equipment Up to 10 years
Working Capital Up to 10 years

The interest rate is between 7.25% and 9.75%.

What are the benefits of 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)
    • Broker referral fees

In addition, SBA 7(a) loans can be used for various business purposes, including renovations, capital purchase, seasonal lines of credit, or refinancing of existing debt. There is no prepayment penalty for loans that mature within 15 years, and no balloon payment.

What are the requirements for an SBA 7(a) loan?

The SBA 7(a) loan has the following requirements:

  • Your business must operate for profit. Nonprofits and not-for-profit businesses are not eligible.
  • You must also have some equity in the business — this could mean you already have a profitable business, or you could use your own personal equity as collateral.
  • If you have any alternative financial resources, you must have used them first. For example, if you have a personal savings account or are able to get a personal loan, then you must first pursue those options before applying for an SBA 7(a) loan.
  • The business owner cannot be on parole.
  • You must be doing business in the U.S. or its territories.
  • A maximum loan amount of $5 million with no minimum loan amount (most loans, however, are $30,000 or more).
  • The business must meet the SBA's size standards for its particular industry.
  • The business must have fewer than 500 employees and less than $7.5 million in revenue each year for the previous three years.
  • The business must physically be based in the U.S. and operate within the U.S. and its territories.
  • Business owners must first have used other sources of financing, including personal funds, in order to qualify.
  • Businesses must not be involved in lending, real estate, or speculation.

What are the risks of an SBA 7(a) loan?

The risks of an SBA 7(a) loan include lengthy approval times (for standard SBA 7(a) loans), lots of documentation, collateral is often required, certain businesses, including real estate investing, lending, gambling, and speculation are prohibited, high credit scores are typically required (typically 680+), and may be restrictions on supplemental/additional financing.

Does an SBA 7(a) loan have a prepayment penalty?

Yes, SBA 7(a) loans have prepayment penalties. According to the SBA 7(a) Loans Small Business Blog, prepayment fees only apply when a borrower “voluntarily prepays 25% or more” of a loan’s outstanding balance on a loan 15 years or longer. In addition, the prepayment must also be made within 3 years after the initial loan disbursement. So, unlike many other kinds of loans, if you’re a borrower who decides to wait more than 3 years after first receiving funds to make a prepayment, you won’t face any fees. Plus, you’re only charged based on the prepayment amount, not the entire amount of the loan. And, it’s important to keep in mind that if your loan has a term of less than 15 years, your lender cannot charge prepayment fees at all.

For prepayment-eligible SBA 7(a) loans, prepayment penalties include:

Year Penalty
Year 1 5% of the total prepayment amount
Year 2 3% of the total prepayment amount
Year 3 1% of the total prepayment amount
Tags
  • SBA 7(a) Loans
  • SBA Loans
  • SBA 7(a)
  • SBA 7(a) Prepayment Penalties
  • SBA Business Loans

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