Glossary
SBA 7(a) Loan
An SBA 7(a) loan is a small business loan made by a private lender and partially guaranteed by the U.S. Small Business Administration. It is the most widely used SBA program and funds business acquisitions, working capital, equipment and owner-occupied real estate, with maximum loan amounts up to $5,000,000.
Example
A buyer acquires a business for $1,800,000 and needs $200,000 for working capital and closing costs, a $2,000,000 project. The buyer injects 10%, or $200,000, and borrows $1,800,000 through SBA 7(a) at 10% interest with a 10-year amortization, for annual debt service of about $285,446. If the business produces $440,000 of cash flow after a market salary for the buyer, DSCR is about 1.54x.
How it is used in underwriting
Lenders underwrite 7(a) loans primarily on cash flow and the borrower's character and experience, since business acquisitions often lack enough hard collateral to cover the loan. The SBA guaranty reduces the lender's loss in default, which allows longer terms and lower equity requirements than conventional business loans. Underwriters rebuild cash flow from business tax returns, add back supportable owner expenses, deduct a reasonable salary for the new owner, and calculate a global DSCR that includes the guarantor's personal obligations. They also verify the equity injection and review the buyer's industry or management experience.
Program rules are detailed and change periodically, so underwriters work from the current SBA standard operating procedure. Key topics include eligibility, equity injection, treatment of seller notes, personal guaranties from owners of 20% or more, collateral requirements and the use of business valuations for change of ownership. Maximum terms generally run up to 10 years for business acquisitions, equipment and working capital and up to 25 years for real estate. Common underwriting problems include unsupported add-backs, overstated SDE, customer concentration, and buyers without relevant experience, any of which can sink an otherwise attractive deal.
Typical benchmarks
Lenders commonly look for a business DSCR of roughly 1.15x to 1.25x or higher on a global basis, and an equity injection around 10% of the project for acquisitions, subject to current SBA rules.
Run the numbers: DSCR Calculator
Frequently asked questions
How much down payment does an SBA 7(a) loan require?
For business acquisitions, lenders commonly require an equity injection of around 10% of total project costs, though requirements depend on current SBA rules and the lender's policy. Part of the injection can sometimes come from a seller note under specific conditions. Startups and riskier deals may need more.
What can an SBA 7(a) loan be used for?
7(a) loans can fund business acquisitions, partner buyouts, working capital, equipment, inventory, owner-occupied commercial real estate, construction and refinancing of certain existing business debt. Passive real estate investment and certain business types are ineligible. The lender confirms eligibility against current SBA rules.
What is the difference between SBA 7(a) and 504?
7(a) is a flexible program for many purposes, including business acquisitions and working capital. 504 is designed for fixed assets such as owner-occupied real estate and heavy equipment, using a bank first lien and a second lien from a Certified Development Company, typically with long fixed rate terms on the 504 portion.
Related terms
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