SBA 7(a) Loans vs. Low-Doc Loans: Which Is Right for You?

When savings run out, many small business owners turn to loans from the Small Business Administration to find financing. Because of their preferable repayment terms and the fact that they’re guaranteed by the federal government, SBA loans are one of the most common methods of small business financing.

Still, many business owners are unaware that several types of SBA loans exist to help them meet their needs. Two of the most common types are traditional 7(a) loans and Low-doc SBA loans. Not sure which is right for you? Here are a few ways in which they differ:

Funding Amount

Traditional 7(a) loans are better suited for small businesses or franchises needing a larger amount of money to get their business up and running. With 7(a) loans, entrepreneurs can obtain up to $5 million, perfect for costs associated with start-ups, acquisitions and/or expansions.

Low-doc SBA loans, on the other hand, fill the void for small business owners who are almost ready to launch but need a smaller financial boost to get there. Low-doc loans offer $25,000 – $150,000 that can be used for working capital, inventory, etc.

Application Process

As you can imagine, traditional 7(a) SBA loans require more documentation during the application process since a larger amount of money is at stake. The SBA will want proof that you’re a good investment, requiring to see your projected business model, any prior business tax returns, previous business experience, etc.

Meanwhile, Low-doc SBA loans were created to provide a simpler path to funding, and as such have strict requirement buckets. To apply, the SBA just wants to see a snapshot of you and your business to ensure you qualify, which makes the process shorter. The SBA also guarantees a response within 36 hours (on business days) so you can move forward with financing sooner.

Timeframe

The main benefit of Low-doc loans is that they can be finalized in half the time it takes for a traditional SBA loan. On average, Low-doc loans are finalized within 45 days. Meanwhile, traditional 7(a) loans take longer due to paperwork review — up to 120 days.

Eligibility

Low-doc SBA loans, while simpler in application process, have stricter credit requirements to qualify. Low-doc loans require a 690+ credit score, no bankruptcies within the last three years and at least 10 percent equity injection. Franchise fees must be paid prior to getting the loan, but Low-doc loans don’t require personal collateral. In contrast, 7(a) loans only require a 640 credit score, but you’d need to put 20 — 30 percent down, plus provide personal collateral to back it.

Both 7(a) and Low-doc SBA loans offer low interest rates and are preferred by lenders because they’re backed by the government. By working with a financing firm well-versed in both kinds of SBA loans, you’ll be able to choose the one that’s right for you and your business.

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