The 7(a) Loan Guaranty Program is the SBA's primary business loan program. It is also the most flexible, since the agency can guarantee financing for a variety of general business purposes.
7(a) loans are provided by lenders who choose to structure their own loans by the SBA's requirements, and who apply for and receive a guaranty from the SBA on a portion of these loans. Under 7(a) the SBA guarantees up to $1,500,000 of a private-sector loan - as much as 85 percent on loans of $150,000 or less and 75 percent on loans greater than $150,000.
A borrower may have more than one SBA loan at a time, as long as the SBA portion does not exceed its guaranty cap of $1,500,000. (The SBA's guaranty caps are higher under a few 7(a) lending programs: Pollution Control, International Trade, 504 and DELTA. They are described later in this brochure.)
A key concept of the 7(a) Loan Guaranty Program is that the loan comes from a commercial lender, the and the guaranty comes from SBA. A business applies to you, the leader, and you decide whether to make (or Reject) the loan internally, or if the application needs to be bolstered with an SBA guaranty (see Lender Options, page 6), as the lender, you can also administer the approved loan.
Since the SBA's guaranty is available only to lenders, applicants need to know your criteria and requirements along with those of the SBA. To be considered for an SBA-guaranty loan, the applicant must be both eligible and credit-worthy.
Use of Proceeds
A start-up or exercising business may use the proceeds of a 7(a) guaranteed loan to-
- Expand or renovate facilities;
- Purchase machinery, equipment, fixtures and leasehold improvements;
- Finance receivables and augment working capital
- Refinance existing debt (for compelling credit reasons of benefit to the borrower);
- Provide seasonal lines of credit;
- Construct commercial buildings; and/or
- Purchase land or buildings.
Terms, Interest Rates & Fees
The loan repayment schedule depends on both the use of the proceeds and the ability of the business to repay. The general terms are--
- 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 the purchase of equipment (not to exceed the useful life of the equipment).
Both fixed and variable interest rates are available. The maximum rate is 2.25 percent over the lowest prime rate for a loan with a maturity of less than seven years, and 2.75 percent over prime for a loan of seven years or longer. If the loan is under $50,000, you may charge a slightly higher rate.
The SBA charges a guaranty fee.
Personal guaranties are required from all principals owning 20 percent or more of the business.
What the SBA Looks For
To be eligible, the business must be operated for profit and not exceed the SBA's size standards.
- Good character
- Management expertise and commitment necessary for success
- Reasonable personal contribution and/or business equity, which along with the loan proceeds enable the borrower to operate the business on a sound financial basis (for new business, 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 replay the loan on time from the projected operating cash flow
504 Certified Development Company Program
Through certified development companies, the 504 Certified Development Company Program provides growing business with long-term, fixed-rate financing for major fixed assets, such as land and building. Approximately 270 CDCs nationwide work with the SBA and private sector lenders in a public-private partnership to provide financing to small businesses.
CDCs are nonprofit corporations sat up to contribute to the economic development of their communities. The 504 CDC Program is designed to enable small business to create or retain at least one job for every $35,000 of debenture proceeds provided by the SBA.
Typically, a 504 project includes--
- A loan secured with a senior lien from private-sector lender (covering a percentage of the total cost);
- A loan secured with a junior lien from a CDC (a 100 percent SBA-guaranteed debenture), covering up to 40 percent of the total cost; and
- A contribution of at least 10 percent equity from the borrower.
The SBA-guaranteed debentures are pooled monthly and sold to private investors. The maximum debenture is generally $750,000 (and up to $1 million in some cases).
Use of Proceeds
Proceeds from 504 loans must be used for fixed-asset projects such as--
- Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping;
- Constructing, modernizing, renovating or converting existing facilities; and purchasing machinery and equipment.
The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or refinancing.