The 7(a) Loan Guaranty Program is the SBA's primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms. The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs.
When a small business applies to a lending institution for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty. SBA backing on the loan is then requested by the lender. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lending institution for its loss. By providing this guaranty, the SBA is able to help tens of thousands of small businesses every year get financing they would not otherwise obtain.
To qualify for an SBA guaranty, a small business must meet the 7(a) criteria, and the lender must certify that it could not provide funding on reasonable terms except with an SBA guaranty. The SBA can then guarantee as much as 80 percent on loans of up to $100,000 and 75 percent on loans of more than $100,000. In most cases, the maximum guaranty is $750,000 (75 percent of $1 million). Exceptions are the International Trade, DELTA and 504 loan programs, which have higher loan limits.
How It Works
You submit a loan application to a lender for initial review. If the lender approves the loan subject to an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds; you make monthly loan payments directly to the lender. As with any loan, you are responsible for repaying the full amount of the loan. There are no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans. Repayment plans may be tailored to each individual business.
Use of Proceeds
- You can use a 7(a) loan to:
- purchase land or buildings;
- construct commercial buildings;
- finance seasonal lines of credit;
- refinance existing debt (with compelling reason);
- finance receivables and augment working capital;
- purchase machinery, equipment, fixtures and leasehold improvements;
- expand or renovate facilities.
Terms, Interest Rates and Fees
The length of time for repayment depends on the use of the proceeds and the ability of your business to repay:
- usually five to 10 years for working capital, and
- up to 25 years for fixed assets such as the purchase or major renovation of real estate or purchase of equipment (not to exceed the useful life of the equipment).
Both fixed and variable interest rates are available. Rates are pegged at no more than 2.25 percent over the lowest prime rate (as published in the Wall Street Journal on the day the application is received by the SBA) for loans up to 2.75 percent for seven years or longer. For loans under $50,000, rates may be slightly higher.
The SBA charges the lender a nominal fee to provide a guaranty, and the lender may pass this charge on to you. The fee is based on the maturity of the loan and the dollar amount that the SBA guarantees. On any loan with a maturity of one year or less, the fee is just 0.25 percent of the guaranteed portion of the loan. On loans with maturities of more than one year where the portion that the SBA guarantees is $80,000 or less, the guaranty fee is 2 percent of the guaranteed portion. On loans with maturities of more than one year where the SBA's portion exceeds $80,000, the guaranty fee is figured on an incremental scale, beginning at 3 percent.
You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals also may be required. However, in most cases a loan will not be declined where insufficient collateral is the only unfavorable factor.
Your business generally must be operated for profit and fall within the size standards set by the SBA. The SBA determines if the business qualifies as a small business based on the average number of employees during the preceding 12 months or on sales averaged over the previous three years. Loans cannot be made to businesses engaged in speculation or investment.
Maximum Size Standards
- Manufacturing -- from 500 to 1,500 employees
- Wholesaling -- 100 employees
- Services -- from $2.5 million to $21.5 million in annual receipts
- Retailing -- from $5 million to $21 million
- General construction -- from $13.5 million to $17 million
- Special trade construction -- average annual receipts not to exceed $7 million
- Agriculture -- from $0.5 million to $9 million
What You Need to Take to the Lender
Documentation requirements may vary; contact your lender for the information you must supply. Common requirements include the following:
- Projected opening day balance sheet (new business)
- Aging of accounts receivable and payable (existing businesses)
- Schedule of term debts (existing businesses)
- Financial statements for three years (existing businesses)
- History of the business
- Purpose of loan
- Lease details
- Amount of investment in the business by the owner(s)
- Projections of income, expenses and cash flow
- Signed personal financial statements
- Personal resume(s)
What the SBA Looks For
- Good character
- Management expertise and commitment necessary for success
- Sufficient funds, including the SBA-guaranteed loan, to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase)
- Feasible business plan
- Adequate equity or investment in the business
- Sufficient collateral
- Ability to repay the loan on time from the projected operating cash flow
Specialized Programs Under 7(A)
In addition to the standard loan guaranty, the SBA has two categories of targeted programs under 7(a): those that are designed to meet the specialized needs of borrowers and those that meet the various needs of lenders.
Programs for borrowers include CAPLines, the International Trade Loan and Export Working Capital programs, and DELTA. Lender programs provide the SBA's guaranty in various ways with different responsibilities. These include the Minority and Women's Prequalification Loan programs, LowDoc, FA$TRAK, and the Certified and Preferred Lenders Program.
Unless otherwise indicated, these are governed by the same rules, regulations, interest rates, fees, etc. as the regular 7(a) loan guaranty.