An SBA 7(a) loan is a highly flexible government-backed loan for small businesses, used for almost any general business purpose, including working capital, equipment, real estate purchases/renovations, business acquisitions/expansions, and refinancing existing debt, providing up to $5 million for long-term growth or short-term needs like inventory and payroll.
The 7(a) Loan Program, SBA's primary business loan program, provides loan guaranties to lenders that allow them to provide financial help for small businesses with special requirements. 7(a) loans can be used for: Acquiring, refinancing, or improving real estate and buildings. Short- and long-term working capital.
SBA loans can be used for a wide range of business growth initiatives. These government-guaranteed loans can be used for any activity related to starting, growing, or building your business. The flexible eligible uses of proceeds enables business owners to have a high level of control over how they choose to use funds.
What Can SBA Loans NOT be Used For? 7(a) cannot be used for refinancing debt that is reasonably structured (as defined by the SBA), to pay delinquent taxes, or for a loan that does not benefit your business directly.
The most popular way to buy an existing business, including buying out a partner or opening a franchise, is through the SBA 7(a) Loan Program.
I've been speaking with a number of lenders and recently learned about the SBA's rule that owners with 20% ownership or greater must provide a personal guaranty on the loan.
Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding. The lender will provide you with a full list of eligibility requirements for your loan.
Wrongful misapplication means the willful use of any loan proceeds without SBA approval contrary to the loan authorization. If you fail to use loan proceeds for authorized purposes for 60 days or more after receiving a loan disbursement check, such non-use also is considered a wrongful misapplication of the proceeds.
SBA 7(a) loan rates and terms
If a 7(a) loan is used for a real estate purchase, the repayment term is a maximum of 25 years. Interest rates tend to range from 7% to 9.5% but are subject to economic fluctuations. They will also require a down payment of anywhere from 10% to 20%.
Key takeaways
Using business loan funds for personal expenses violates your loan agreement and can lead to financial, tax and legal consequences. If you need cash for personal expenses, consider paying yourself from your business, using a personal credit card or a personal loan.
The SBA requires that the bank collateralize the SBA loan to the maximum extent possible up to the loan amount. If business assets do not fully secure the loan, the lender must take available personal assets of the owners as collateral. This more often than not includes your real estate, including your home.
SBA 7(a) loans have more flexibility on eligible spending, but the loans are not forgivable. Use 7(a) loan funds to cover payroll expenses, including salaried, hourly, part-time, and 1099 employees. Cover short-term expenses such as marketing, membership programs, inventory purchases, and day-to-day expenses.
First let's get the BIG No-No out of the way. You cannot use an SBA Participation Loan for Personal Use.
SBA 7(a) loan disadvantages include:
The Targeted EIDL Advance provided funds of up to $10,000 to applicants who were in a low-income community, could demonstrate more than 30% reduction in revenue during an eight-week period beginning on March 2, 2020, or later, and had 300 or fewer employees.
The "2% Rule" in real estate investing is a quick screening tool suggesting a rental property is a good investment if its gross monthly rent is at least 2% of the purchase price (including repairs), indicating strong potential cash flow, though it's often hard to find and should be used alongside other financial analysis, as it ignores expenses and varies by market. For a $200,000 property, this means aiming for $4,000 in monthly rent ($200,000 x 2%).
You cannot use an SBA loan for personal expenses (like homes, cars, or trips), to fund speculative investments or passive real estate, pay off delinquent taxes or other non-eligible debts, or for businesses in ineligible industries (like lending, insurance, or adult entertainment). Funds must be used for direct business operations and growth, not for personal benefit or non-qualifying business activities.
Assets Can Be Seized
In only a short time you could go from failing to pay your SBA loan to having your bank account wiped, your wages garnished, and your assets seized to repay your loan. This is why you cannot ignore an SBA loan default.
Personal and Business Credit Issues
SBA lenders expect strong personal and business credit. You may be disqualified if: Your personal credit score is very low (commonly below 650) You have recent bankruptcies, foreclosures, or unpaid tax liens.
Use of loan proceeds
The most common SBA Loan is the 7(a) loan, which is also often used to purchase a franchise. SBA 504 loans often are used to buy commercial real estate for your franchise. These SBA loans offer: Lending limit of $5 million – often plenty to acquire a franchise business.
The minimum credit score required for an SBA loan depends on the type of loan. For SBA Microloans, the minimum credit score is typically between 620-640. For SBA 7(a) loans, the minimum credit score is typically 640, but borrowers may find greater success if they can boost their credit score into the 680+ range.