Small business owners and entrepreneurs have big dreams, but they don’t always have the capital to fund them. The Small Business Administration’s 7(a) loan program is designed to help dreamers build their business, with multiple loan types suiting various goals and needs.
Navigating the world of small business loans can be tricky, but often, it just comes down to learning the lingo. Below you’ll find a list of common SBA 7(a) loan terminology, with links to more detailed information about each concept.
7(a) standard loan: Commonly referred to as just the 7(a), this loan’s designed to help secure funding for small business owners and entrepreneurs. It does this by offering third-party lenders a government-backed guarantee that a predetermined portion of the loan will be repaid in the event of borrower default. This reduces the risk for lenders, making it more likely that they’ll approve a borrower’s loan. The SBA 7(a) loan generally has terms and conditions similar to non-SBA-guaranteed loans.
7(a) loan programs: There are several SBA 7(a) loan programs designed to help small businesses obtain funding. This funding can be used for a business mortgage, purchasing land for new construction, equipment and heavy machinery, repairing existing capital, and for operating expenses. The most common 7(a) loan is the standard 7(a).
7(a) small loan: A 7(a) small loan is an SBA 7(a) loan with a maximum amount of $350,000. It offers a guarantee of 85% for loans of up to $150,000, and 75% for loans between $150,001 and $350,000.
7(a) lender: Banks, credit unions, and other financial institutions can be SBA lenders. The SBA 7(a) lender gives the loan to a qualified borrower, and the SBA guarantees a portion of the loan in case the borrower defaults.
7(a) loan borrower eligibility: To receive an SBA 7(a) loan, a borrower must first be found to be eligible. Eligibility is based on several factors decided by both the lender and the SBA. Borrowers should check eligibility requirements of the specific 7(a) loan program that they’re applying to before submitting the application. Some common eligibility requirements include the intention to operate a for-profit business with the loan capital, reasonable owner equity, a demonstrated need for the loan, and an intent to operate the business within the United States.
7(a) loan disbursement: This is the actual act of paying out the capital of a loan. It may occur as one lump sum, or be disbursed in increments over a set period of time.
7(a) loan down payment: The down payment is the out-of-pocket amount that a small business owner or entrepreneur must contribute to their start-up costs. One of the reasons why SBA 7(a) loans are so attractive is because they offer lower down payment requirements than many other loan programs. Learn more about the SBA 7(a) loan terms here.
Borrower equity: An SBA 7(a) loan isn’t meant to cover 100% of the costs of your new business. Borrowers are expected to inject their own money into the venture as well, and this monetary injection is what’s referred to as borrower’s equity. Borrower’s equity is often in the form of cash; but, under certain approved conditions, a borrower may also use borrowed money or non-cash assets instead.
CAPLines: This is a series of permanent loan programs under SBA 7(a) that let small business owners to take out loans specifically for seasonal or cyclical needs, like seasonal inventory, labor costs, or material costs to accomplish an assigned contract.
Capital: Also referred to as borrowed capital, this is the amount of money that’s borrowed through the loan and that must be repaid (with accrued interest) when the loan reaches maturity.
Collateral: Collateral is additional security promised by the borrower to help secure a loan. This security is often in the form of fixed assets with monetary value, like buildings, equipment, or land. It’s promised with the knowledge that these assets could be liquidated if the borrower defaults on the loan. Lenders aren’t required to take collateral for SBA loans of less than $25,000. But, for larger SBA loans, the lending amount must be collateralized as much as possible up to the loan amount.
Express loan: Loans of up to $350,000 may qualify for SBA Express, wherein the SBA review of the loan is done on an accelerated basis. Responses can be expected within 36 hours of the application submission.
Export Express loan: This is a streamlined process for lenders to get SBA-backed financing for loans of up to $500,000 using the lender’s own decisions processes and documentation. Under the Export Express program, lenders will receive a decision from the SBA within 24 hours of the application being filed.
Export Working Capital Program (EWCP): The EWCP is type of SBA 7(a) loan that’s specifically for businesses that generate sales through exports and require upfront assistance to support these sales. The maximum loan amount for export working capital is $5 million.
Fixed assets: Also referred to as tangible assets, these are assets that are likely to be kept by the borrower for a long period of time, and aren’t easily convertible into cash. Examples of fixed assets include real estate properties, equipment, and land. These are the assets promised by the borrower as collateral in the event that they default on the loan.
Guarantee: The SBA doesn’t lend money directly, but guarantees a portion of loans made from third-party lenders. This protects the lender by ensuring that the SBA will take over a predetermined portion the loan if the borrower fails to pay. The benefit of this for small business entrepreneurs is that it takes a considerable amount of risk away from the lenders, which makes them more likely to provide a loan.
Guaranty fee: This is a fee that the borrower must pay, and can range from .25% to 3.75% of the loan amount. It can be financed with the loan proceeds.
Liabilities: Liabilities are a business’s payable obligations, including loans, salaries, mortgages, and deferred payments. They are deducted from the business owner’s total equity.
Loan interest rate: This is the fee charged by a lender of a loan, with the exact amount being a percentage of the principal amount. Interest rates for SBA 7(a) loans can be either variable (the rate fluctuates over time) or fixed (based on a maximum rate determined by the Federal Register). The type of interest rate for a loan is chosen by the lender.
Loan-to-cost ratio (LTC): LTC is the loan amount divided by the total cost of a project. This comparison helps lenders determine the risk of offering an SBA loan for land or real estate. For example, if a lender is willing to loan $750,000 for a construction project that will cost the borrower a total of $1 million, the LTC ratio is 75%.
Maturity: The maturity of a loan is the agreed upon date that the loan is to be repaid in both principal amount and interest. SBA loans have a range of maturity dates, from a maximum of 10 years for loans given for inventory or working capital to a maximum of 25 years for loans given for real estate.
Maximum SBA guaranty: The SBA doesn’t not lend money directly to borrowers; it guarantees loans made by third-party lenders. Maximum SBA guaranty amounts vary based on the type of SBA 7(a) loan. For loans of $150,000 or less, the SBA guarantees a maximum of 85% of the loan amount. For loans of more than $150,000, the SBA guarantees a maximum of 75% of the loan amount. For Express loans, the SBA guarantees only 50% of the amount. The maximum guarantee that the SBA will make on a 7(a) loan is $3.75 million.
Owner equity: Owner’s equity refers to the assets they own in the business, less any funds needed to pay liabilities. Before applying for a loan for investment in a for-profit business, borrowers under the SBA 7(a) loan program must have reasonable owner equity. The most common form of owner equity is the down payment made on the business, but outside assets can be considered as well.
Pilot 7(a) loan programs: In some cases, the SBA may choose to offer a pilot loan program to spur development in a specific sector or geographical region. These loans have their own terms and conditions separate from a standard 7(a) loan. They’re only offered during a fixed period of time, though maturity of the loan will likely occur after the pilot program is no longer offered.
Preferred Lenders Program (PLP): This is a special status assigned to lenders who have a thorough understanding of SBA lending policies and have a proven track record of successful lending. PLP lenders can instantaneously approve borrower applications, making them more desirable to potential borrowers.
Specialized lender: Traditional loans aren’t right for everybody, especially small business entrepreneurs who are planning on repaying the capital of their loan through income made on their new business. In these scenarios, specialized lenders fill in the gaps, offering flexible funding solutions that make a loan more possible. The SBA is just one example of a specialized lender.
State-specific requirements: Although the SBA is a federal program, certain states may have their own requirements around the specifics of how the 7(a) loan is used, as well as any insurance that’s required with the loan. It’s important to research your state’s specific SBA loan requirements before beginning the SBA 7(a) application process.
Veterans Advantage: This is an SBA 7(a) permanent program that specifically aims to support small businesses that are at least 51% owned by a veteran or Active Duty service member, or by their spouse or widow.