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.