Using A Financing Mosaic and SBA Guaranteed
October 14, 2004
There is no better feeling than getting a company
to profitability and still owning and controlling 100% of your equity.
If you have a scalable company then you probably have the ability to
generate considerable personal wealth and the freedom to do as you
please with the company moving forward. Of course this can also get you
into trouble. Taking that company to the next level will require a
different set of skills too. I am not talking as much about a service
business where your scaling is limited, but one with product leverage.
One way is to develop a mosaic of financing that includes personal
resources, friends and family and then loans. These can be had much
easier using government guarantee programs that reduce the lenders risk
and lower the bar on what banks need to OK that loan thanks to Uncle
Sam's desire to create jobs.
This Article is from the Small Business Administration Web site and
copied here for your use.
Basic 7(a) Loan Program
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
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
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.
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
ELIGIBLE AND INELIGIBLE TYPES OF BUSINESS
AVAILABILITY OF FUNDS FROM OTHER SOURCES
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.