7(a) loans are the most basic and most used type
loan of SBA's business loan programs. Its name comes from section
7(a) of the Small Business Act, which authorizes the Agency to
provide business loans to American small businesses.
All 7(a) loans are provided by lenders who are called participants
because they participate with SBA in the 7(a) program. Not all
lenders choose to participate, but most American banks do. There
are also some non-bank lenders who participate with SBA in the
7(a) program which expands the availability of lenders making
loans under SBA guidelines.
7(a) loans are only available on a guaranty basis. This means
they are provided by lenders who choose to structure their own
loans by SBA's requirements and who apply and receive a guaranty
from SBA on a portion of this loan. The SBA does not fully guaranty
7(a) loans. The lender and SBA share the risk that a borrower
will not be able to repay the loan in full. The guaranty is a
guaranty against payment default. It does not cover imprudent
decisions by the lender or misrepresentation by the borrower.
Under the guaranty concept, commercial lenders make and administer
the loans. The business applies to a lender for their
financing. The lender decides if they will make the loan
internally or if the application has some weaknesses which, in
their opinion, will require an SBA guaranty if the loan is to
be made. The guaranty which SBA provides is only available to
the lender. It assures the lender that in the event the borrower
does not repay their obligation and a payment default occurs,
the Government will reimburse the lender for its loss, up to the
percentage of SBA's guaranty. Under this program, the borrower
remains obligated for the full amount due.
All 7(a) loans which SBA guaranty must meet 7(a) criteria. The
business gets a loan from its lender with a 7(a) structure and
the lender gets an SBA guaranty on a portion or percentage of
this loan. Hence the primary business loan assistance program
available to small business from the SBA is called the 7(a) guaranty
loan program.
A key concept of the 7(a) guaranty loan program is that the loan
actually comes from a commercial lender, not the Government. If
the lender is not willing to provide the loan, even if they may
be able to get an SBA guaranty, the Agency can not force the lender
to change their mind. Neither can SBA make the loan by itself
because the Agency does not have any money to lend. Therefore
it is paramount that all applicants positively approach the lender
for a loan, and that they know the lenders criteria and requirements
as well as those of the SBA. In order to obtain positive consideration
for an SBA supported loan, the applicant must be both eligible
and creditworthy.
WHAT SBA SEEKS IN A LOAN APPLICATION
In order to get a 7(a) loan, the applicant must first be eligible.
Repayment ability from the cash flow of the business is a primary
consideration in the SBA loan decision process but good character,
management capability, collateral, and owner's equity contribution
are also important considerations. All owners of 20 percent or
more are required to personally guarantee SBA loans.
ELIGIBILITY CRITERIA
All applicants must be eligible to be considered for a 7(a) loan.
The eligibility requirements are designed to be as broad as possible
in order that this lending program can accommodate the most diverse
variety of small business financing needs. All businesses that
are considered for financing under SBA’s 7(a) loan program
must: meet SBA size standards, be for-profit, not already have
the internal resources (business or personal) to provide the financing,
and be able to demonstrate repayment. Certain variations of SBA’s
7(a) loan program may also require additional eligibility criteria.
Special purpose programs will identify those additional criteria
Eligibility factors for all 7(a) loans include: size, type of
business, use of proceeds, and the availability of funds from
other sources. The following links will provide more detailed
information on these eligibility issues.
SIZE
ELIGIBLE AND INELIGIBLE TYPES OF BUSINESS
USE OF PROCEEDS
AVAILABILITY OF FUNDS FROM OTHER SOURCES:
CHARACTER CONSIDERATIONS:
SBA must determine if the principals of each applicant firm have
historically shown the willingness and ability to pay their debts
and whether they abided by the laws of their community. The Agency
must know if there are any factors which impact on these issues.
Therefore, a "Statement of Personal History" is obtained
from each principal.
OTHER ASPECTS OF THE BASIC 7(a) LOAN PROGRAM
In addition to credit and eligibility criteria, an applicant
should be aware of the general types of terms and conditions they
can expect if SBA is involved in the financial assistance. The
specific terms of SBA loans are negotiated between an applicant
and the participating financial institution, subject to the requirements
of SBA. In general, the following provisions apply to all SBA
7(a) loans. However, certain Loan Programs or Lender Programs
vary from these standards. These variations are indicated for
each program.
Maximum Loan Amounts
Maturity Terms For 7(A) Loans
Interest Rates Applicable to 7(A) Loans
Percentage of Guaranty on 7(A) Loans
SBA Fees for 7(A) Loans
Prepayment Penalties for SBA 7(A) Loans