7(a) loan program
The 7(a) Loan program is the SBA’s primary business loan program. It is the agency’s most frequently used non-disaster financial assistance program because of its flexibility in loan structure, variety of uses for the loan proceeds and availability. The program has broad eligibility requirements and credit criteria to accommodate a wide range of financing needs.
The business loans that SBA guarantees do not come from the SBA, but rather from banks and other approved lenders. The loans are funded by these organizations and they make the decisions to approve or deny the applicants’ request for financial assistance.
The guaranty that SBA provides the lender reduces the lender’s risk of borrower non-payment because the guaranty assures the lender that if the borrower defaults, the lender can request that SBA pay the debt rather than the borrower. SBA only guarantees a portion or percentage of every loan not the whole debt, so in the event of default the lender will only get partially repaid by SBA. This means that if the borrower can’t make the payments and defaults, the lender can recover the guaranteed portion of the defaulted debt from the SBA. The borrower is still obligated for the full amount.
To qualify for an SBA guaranteed loan, a small business must meet the lender’s criteria and the 7(a) program requirements. One of those requirements is that the lender must certify that it would not provide this loan under the proposed terms and conditions without an SBA guaranty. If the SBA is going to provide a lender with a guaranty, the applicant must be eligible and creditworthy and the loan structured under conditions acceptable to the SBA.
SBA only guarantees a portion of any particular 7(a) loan so each loan will have an SBA share and an unguaranteed portion which gives the lender a certain amount of exposure and risk on each loan. The percentage of guaranty depends on either the dollar amount or the program the lender uses to obtain its guaranty. For loans of $150,000 or less the SBA generally guarantees as much as 85% and for loans over $150,000 the SBA generally provides a guaranty of up to 7 %.
The maximum dollar amount of a single 7(a) loan is $5 million and there is no minimum. The maximum dollar amount of the SBA share which can be provided to any one business (including affiliates) is $3.75 million.
The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender but is subject to the SBA maximums. Both fixed and variable interest rate structures are available.
Loans guaranteed by the SBA are assessed a guaranty fee. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total dollar amount of the loan. The guaranty fee is initially paid by the lender and then passed on to the borrower at closing. The funds the business needs to reimburse the lender can be included in the overall loan proceeds.
The SBA’s loan programs are generally intended to encourage longer term small-business financing, but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. Maturity generally ranges from 7 to 10 years for working capital, business start-ups, and business acquisition type loans, and up to 25 years if the purpose is to acquire real estate or fixed assets with a long term useful life.
The structure of a basic 7(a) loan is that repayment has to be set up so the loan is paid in full by maturity. Over the term of the loan there can be additional payments or payment relaxation depending on what is happening with the business. Balloon payments and call provisions are not allowed on any 7(a) term loan.
For collateral, SBA expects every 7(a) loan to be secured first with the assets acquired with the loan proceeds and then with additional business and personal assets, depending upon the loan amount and the way the lender requests their guaranty. However, SBA will not decline a request to guaranty a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. When the lender says they will need an SBA guaranty, the applicant should be prepared for liens to be placed against all business assets. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals may also be required. Loans under $25,000 do not require collateral.
Eligibility for a 7(a) loan is based on a number of different factors, ranging from size and nature of business to use of proceeds and factors that are case specific.
Size Eligibility
An in-depth listing of standards can be found at www.sba.gov/size.
The first eligibility factor is size, as all loan recipients must be classified as “small” by the SBA. The size standards for all 7(a) loans are outlined below.
SBA Size Standards have the following general ranges:
• Manufacturing: from 500 to 1,500 employees;
• Wholesale trades: up to 100 employees;
• Services: an average of $2 million to $35.5 million in annual receipts;
• Retail trades: an average of $7 million to $35.5 million in average annual receipts;
• Construction: an average of $7 million to $33.5 million in annual receipts;
• Agriculture, forestry, fishing and hunting: an average of $750,000 to $17.5 million in average annual receipts.
There is an alternate size standard for businesses that do not qualify under their industry size standards for SBA funding. That alternative is that the applicant business (plus affiliates can’t have a tangible net worth exceeding $15 million and average net income exceeding $5 million for the last two years). This new alternate makes more businesses eligible for SBA loans and applies to SBA non-disaster loan programs, namely its 7(a) business loans and certified development company programs.
The second eligibility factor is based on the nature of the business and the process by which it generates income or the customers it serves. The SBA has general prohibitions against providing financial assistance to businesses involved in such activities as lending, speculating, passive investment, pyramid sales, loan packaging, presenting live performances of a prurient nature, businesses involved in gambling and any illegal activity.
The SBA also cannot make loan guaranties to non-profit businesses, private clubs that limit membership on a basis other than capacity, businesses that promote a religion, businesses owned by individuals incarcerated or on probation or parole, municipalities, and situations where the business or its owners previously failed to repay a federal loan or federally assisted financing, or are delinquent on existing federal debt.
The third eligibility factor is use of proceeds. A Basic 7(a) loan can provide proceeds to purchase machinery, equipment, fixtures, supplies and to make improvements to land and/or buildings that will be occupied by the subject applicant business. Proceeds can also be used to expand or renovate facilities; acquire machinery, equipment, furniture, fixtures and leasehold improvements; acquire businesses; start businesses; for working capital; acquire land or build a location; or to refinance debt under certain conditions.
SBA 7(a) loan proceeds cannot be used for making investments, providing funds to any of the owners of the business except for ordinary compensation for actual services provided; for floor-plan financing; or for a purpose that does not benefit the business.
The fourth factor involves a variety of requirements such as SBA’s credit elsewhere test where the personal resources of the owners need to be checked to see if they can make a contribution before getting a loan guaranteed by the SBA. It also includes the SBA’s anti-discrimination rules and limitations on lending to agricultural enterprises because there are other agencies of the Federal government with programs to fund such businesses.
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