SBA 7(a) Loan Program
by Ryan Kernan
Find out about the most common loans made by the SBA, 7(a) loans, including who's eligible, how you go about getting one, and how you can use them.
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The Small Business Administration's (SBA) basic 7(a) loans are the simplest and most common business loans the SBA offers. This article will introduce you to the basics of the SBA 7(a) loan program, including how the loans are made, who is eligible, what the loans may be used for, and some characteristics of the loans themselves.
The Small Business Administration does not make loans, nor does it direct lenders to make loans to specific borrowers. Rather, the SBA guarantees a portion of a qualified loan made by a lender, which is structured according to SBA guidelines. Since the SBA does not make loans directly, borrowers must approach a commercial lender to receive a loan. If a particular loan application from a business owner is weak, and the lender chooses not to make the loan internally, it may request a guarantee from the SBA in order to make the loan. The whole loan will not be guaranteed; the exact percentage guaranteed by the SBA depends on the loan amount. The guarantee means that the lender will be repaid in the event that a borrower defaults on the loan, up to the amount of the guarantee. Most American banks participate in the 7(a) loan program as lenders, though none are required to. Additionally, some non-bank lenders also participate in the program.
In order to receive a 7(a) loan, a borrower must meet the eligibility requirements set by the SBA. Nearly all business are eligible for these loans. In order to receive a 7(a) loan, a business must be a for-profit enterprise, and intend to do business in the United States. Size requirements must also be met. Size standards vary depending on industry, are calculated based on the average number of employees in the past twelve months, or by the average sales volume over the last three years. The SBA will not approve a loan if the business has adequate sources of alternative financing, or if the business owners have not already committed personal resources to the business enterprise. In addition to the standard eligibility requirements, the SBA seeks borrowers with a demonstrated ability to repay the loan, good character, a record of sound business practices, and owners with significant equity in their businesses, among other factors. Among the types of businesses that are not eligible for 7a loans are those engaged in pyramid sale distribution plans, lending institutions, speculative businesses, businesses that teach religion, businesses that engage in illegal acitviities, and those that have previously defaulted on a goverment loan.
Loans made through the 7(a) program may be used to start a new business or to acquire, expand, or continue the operation of a current business. Examples of acceptable uses of 7(a) funds are the purchase of new land or equipment, including the cost of construction or refurbishing of existing capital, refinancing existing debt to more favorable terms, or for short and long term working capital needs. Proceeds from the loans may not be used to effect a change of control in the business, engage in speculative behavior, pay delinquent taxes, or to refinance debt such that the lender or the SBA would incur a loss. More generally, loans may not be used for unsound business practices.
The maximum loan amount under the 7(a) program is $5 million. On all loans over $150,000, the SBA's exposure is limited to 75% of the loan amount. On loans under $150,000 the exposure may reach 85%. For information on guarantee fees, interest rates and other details, see the 7a loan program infromation posted on the SBA website.
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