SBA 7a
SBA 7a Loans
SBA 7a Loans
SBA 7a loans are the most basic and most used type loan of SBA’s business loan programs. Its name comes from section 7a of the Small Business Administration Act, which authorizes the Agency to provide business loans to American small businesses. SBA 7a 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 7a 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.
Sba 7a Loans - Requirements
| Properties | Medical, Dental, Industrial, Commercial, Manufacturing, Car Wash, Montessori Schools, Day Care, Assisted Living, Liquor Stores, C-Stores, Auto Repair, Office, Warehouse, Medical Labs, and Restaurants |
| Occupancy | >51% Owner Occupied |
| Origination Fee | TBD |
| Prepayment Penalty | TBD |
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 SBA 7a loans which SBA guaranty must meet the SBA 7a criteria. The business gets a loan from its lender with a 7a 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 7a guaranty loan program.
A key concept of the SBA 7a 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 7a 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 7a 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.
Size - Maximum Loan Amounts
SBA’s 7(a) Loan Program has a maximum loan amount of $2 million dollars. SBA’s maximum exposure is $1.5 million. Thus, if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.5 million or 75 percent. SBA Express loans still have a maximum guaranty set at 50 percent
Fees
Loans guaranteed by the SBA are assessed a guarantee fee. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. The lender initially pays the guaranty fee and they have the option to pass that expense on to the borrower at closing. The funds to reimburse the lender can be included in the overall loan proceeds. On loans under $150,000 made after October 1, 2013, the fees will be set at zero percent. On any loan greater than $150,000 with a maturity of one year or shorter, the fee is 0.25 percent of the guaranteed portion of the loan. On loans with maturities of more than one year, the normal fee is 3 percent of the SBA-guaranteed portion on loans of $150,000 to $700,000, and 3.5 percent on loans of more than $700,000. There is also an additional fee of 0.25 percent on any guaranteed portion of more than $1 million.
Interest Rates
The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. Both fixed and variable interest rate structures are available. The maximum rate is composed of two parts, a base rate and an allowable spread. There are three acceptable base rates (A prime rate published in a daily national newspaper*, London Interbank One Month Prime plus 3 percent and an SBA Peg Rate). Lenders are allowed to add an additional spread to the base rate to arrive at the final rate. For loans with maturities of shorter than seven years, the maximum spread will be no more than 2.25 percent. For loans with maturities of seven years or more, the maximum spread will be 2.75 percent. The spread on loans of less than $50,000 and loans processed through Express procedures have higher maximums.
Percentage of Guarantee
SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. SBA’s maximum exposure amount is $3,750,000. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3,750,000 or 75%. SBA Express loans have a maximum guarantee set at 50 percent.
Types Of Business
The vast majority of businesses are eligible for financial assistance from the SBA. However, applicant businesses must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and, use alternative financial resources first including personal assets. It should be noted that some businesses are ineligible for financial assistance.
Certain other considerations apply to the types of businesses and applicants eligible for SBA loan programs.
Loan Program Eligibility
Uses
SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible. However, there are some universally applicable requirements. To be eligible for assistance, businesses must:
- To provide long-term working capital to use to pay operational expenses,
accounts payable and/or to purchase inventory - Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting
- Revolving funds based on the value of existing inventory and receivables, under special conditions
- To purchase equipment, machinery, furniture, fixtures, supplies or materials
- To purchase real estate, including land and buildings
- To construct a new building or renovate an existing building
- To establish a new business or assist in the acquisition, operation or expansion of an existing business
- To refinance existing business debt, under certain conditions
Illegal Uses
- To refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing
- To affect a partial change of business ownership or a change that will not benefit the business
- To permit the reimbursement of funds owed to any owner, including any equity injection or injection of capital to continue the business until the SBA-backed loan is disbursed
- To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow
- For a purpose that is not considered to be a sound business purpose as determined by SBA
- If you are unsure whether or not your anticipated use of funds is allowed, check with your SBA approved lender
Special Considerations
Special considerations apply to some types of businesses and individuals, which include:
- Franchises are eligible except when a franchiser retains power to control operations to such an extent as to equate to an employment contract; the franchisee must have the right to profit from efforts commensurate with ownership
- Recreational facilities and clubs are eligible if the facilities are open to the general public, or in membership-only situations, membership is not selectively denied or restricted to any particular groups
- Farms and agricultural businesses are eligible, but these applicants should first explore Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA
- Fishing vessels are eligible, but those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service
- Privately owned medical facilities including hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible; recovery and nursing homes are also eligible, provided they are licensed by the appropriate government agency and they provide more than room and board
- Privately owned medical facilities including hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible; recovery and nursing homes are also eligible, provided they are licensed by the appropriate government agency and they provide more than room and board
- Legal aliens are eligible; however, consideration is given to status (e.g., resident, lawful temporary resident) in determining the business’ degree of risk
- Probation or parole: Applications will not be accepted from firms in which a principal is currently incarcerated, on parole, on probation or is a defendant in a criminal proceeding
Special Considerations
Special considerations apply to some types of businesses and individuals, which include:
- Franchises are eligible except when a franchiser retains power to control operations to such an extent as to equate to an employment contract; the franchisee must have the right to profit from efforts commensurate with ownership
- Recreational facilities and clubs are eligible if the facilities are open to the general public, or in membership-only situations, membership is not selectively denied or restricted to any particular groups
- Farms and agricultural businesses are eligible, but these applicants should first explore Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA
- Fishing vessels are eligible, but those seeking funds for the construction or reconditioning of vessels with a cargo capacity of five tons or more must first request financing from the National Marine Fisheries Service
- Privately owned medical facilities including hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible; recovery and nursing homes are also eligible, provided they are licensed by the appropriate government agency and they provide more than room and board
- An Eligible Passive Company (EPC) must use loan proceeds to acquire or lease, and/or improve or renovate, real or personal property that it leases to one or more operating companies and must not make any profit from conducting its activities
- Legal aliens are eligible; however, consideration is given to status (e.g., resident, lawful temporary resident) in determining the business’ degree of risk
- Probation or parole: Applications will not be accepted from firms in which a principal is currently incarcerated, on parole, on probation or is a defendant in a criminal proceeding
Loan Repayment Terms
The SBA’s loan programs are generally intended to encourage longer term small-business financing. However, actual loan maturities are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan maturities have been established: 25 years for real estate, up to 10 years for equipment (depending on the useful life of the equipment) and generally up to seven years for working capital. Short-term loans and revolving lines of credit are also available through the SBA to help small businesses meet their short-term and cyclical working capital needs.
Amortization
Most 7(a) term loans are repaid with monthly payments of principal and interest. For fixed-rate loans, the payments stay the same because the interest rate is constant, whereas for variable rate loans the lender can require a different payment amount when the interest rate changes. Applicants can request that the lender establish the loan with interest-only payments during the start-up and expansion phases (when eligible) to allow the business time to generate income before it starts making full loan payments. Balloon payments or call provisions are not allowed on any 7(a) loan except SBA Express loans. The lender may not charge a prepayment penalty if the loan is paid off before maturity, but the SBA will charge the borrower a prepayment fee if the loan has a maturity of 15 or more years and is prepaid during the first three years.
Collateral
The SBA expects every 7(a) loan to be fully secured, but the SBA will not decline a request to guarantee a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. This means every SBA loan is to be secured by all available assets (both business and personal) until the recovery value equals the loan amount or until all assets have been pledged (to the extent that they are reasonably available). Personal guarantees are required from all owners of 20 percent or more of the equity of the business, and lenders can require personal guarantees of owners with less than 20 percent ownership. Liens on personal assets of the principals may be required.
Use of Proceeds
7(a) loan proceeds may be used to establish a new business or to assist in the operation, acquisition or expansion of an existing business. These may include (non-exclusive):
- To purchase land or buildings, to cover new construction as well as expansion or conversion of existing facilities;
- To acquire equipment, machinery, furniture, fixtures, supplies, or materials;
- For long term working capital including the payment of accounts payable and/or for the purchase of inventory;
- To refinance existing business indebtedness which is not already structured with reasonable terms and conditions;
- For short term working capital needs including: seasonal financing, contract performance, construction financing, export production, and for financing against existing inventory and receivable under special conditions; or
- To purchase an existing business.
Ineligible use of Proceeds
There are certain restrictions for the use of SBA loans. The following is a list of purposes which SBA loans can not finance:
- To refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing;
- To effect a partial change of business ownership or a change that will not benefit the business;
- To permit the reimbursements of funds owed to any owner. This includes any equity injection, or injection of capital for the purposes of the businesses continuance until the loan supported by SBA is disbursed;
- To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow; and
- For a non sound business purpose.
Loan Application Checklist
Once you have decided to apply for a loan guaranteed by the SBA, you will need to collect the appropriate documents for your application. The SBA does not provide direct loans. The process starts with your local lender, working within SBA guidelines. Use the checklist below to ensure you have everything the lender will ask for to complete your application. Once your loan package is complete, your lender will submit it to the SBA.
Checklist
1. Personal Background and Financial Statement – To assess your eligibility, the SBA also requires you complete the following forms:
* Statement of Personal History – SBA Form 912
* Personal Financial Statement – SBA Form 413
2. Business Financial Statements – To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
* Profit and Loss (P&L) Statement – This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
* Projected Financial Statements – Include a detailed, one-year projection of income and finances and attach a written explanation as to how you expect to achieve this projection.
3. Ownership and Affiliations – Include a list of names and addresses of any subsidiaries and affiliates, including concerns in which you hold a controlling interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.
4. Business Certificate/License – Your original business license or certificate of doing business. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
5. Loan Application History – Include records of any loans you may have applied for in the past.
6. Income Tax Returns – Include signed personal and business federal income tax returns of your business’ principals for previous three years.
7. Résumés – Include personal résumés for each principal.
8. Business Overview and History – Provide a brief history of the business and its challenges. Include an explanation of why the SBA loan is needed and how it will help the business.
9. Business Lease – Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.
10. If You are Purchasing an Existing Business – The following information is needed for purchasing an existing business:
* Current balance sheet and P&L statement of business to be purchased
* Previous two years federal income tax returns of the business
* Proposed Bill of Sale including Terms of Sale
Checklist
1. Personal Background and Financial Statement – To assess your eligibility, the SBA also requires you complete the following forms:
* Statement of Personal History – SBA Form 912
* Personal Financial Statement – SBA Form 413
2. Business Financial Statements – To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
* Profit and Loss (P&L) Statement – This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
* Projected Financial Statements – Include a detailed, one-year projection of income and finances and attach a written explanation as to how you expect to achieve this projection.
3. Ownership and Affiliations – Include a list of names and addresses of any subsidiaries and affiliates, including concerns in which you hold a controlling interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.
4. Business Certificate/License – Your original business license or certificate of doing business. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
5. Loan Application History – Include records of any loans you may have applied for in the past.
6. Income Tax Returns – Include signed personal and business federal income tax returns of your business’ principals for previous three years.
7. Résumés – Include personal résumés for each principal.
8. Business Overview and History – Provide a brief history of the business and its challenges. Include an explanation of why the SBA loan is needed and how it will help the business.
9. Business Lease – Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.
10. If You are Purchasing an Existing Business – The following information is needed for purchasing an existing business:
* Current balance sheet and P&L statement of business to be purchased
* Previous two years federal income tax returns of the business
* Proposed Bill of Sale including Terms of Sale
7a loans - Availability of Funds from other sources
The Federal Government does not extend credit to businesses where the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Therefore, the utilization of both the business and personal financial resources is reviewed as part of the eligibility criteria. If business and personal resources are found to be excessive, the business will be required to be use those resources in lieu of part or all of the requested loan proceeds.
New Changes to SBA 7a loans
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) (P.L. 111-5). Section 501 of the Recovery Act authorizes SBA to reduce or eliminate certain fees on 7(a) and 504 loans. The purpose of this Notice is to announce the implementation of fee eliminations in the 7(a) Loan Program and the 504 Development Company Program. A notice on this subject will also be published in the Federal Register.
Fee Eliminations
7(a) Loan Guarantee Fee Eliminations: For 7(a) loans approved by SBA on or after February 17, 2009, SBA will temporarily eliminate the Small Business Act section 7(a)(18)(A) fees (upfront guaranty fees) for all eligible loans, including those made with higher SBA guarantees (up to 90%) as provided in section 502 of the Recovery Act. For eligible loans approved between February 17, 2009 and the date of this notice, the Agency will make funds available to refund payments for these fees. The Agency is developing a refund mechanism. SBA expects to be able to begin issuing refunds by approximately May 1, 2009. If borrowers have already paid lenders for the fee on eligible loans, lenders must reimburse the borrowers from the SBA refund.
Consistent with the prioritization for fee eliminations or reductions in the Recovery Act, the on-going guaranty fee set forth in section 7(a)(23) of the Small Business Act will continue to apply. In addition, SBA’s ¼ point guaranty fee set forth in 13 CFR 120.220(a) for loans with maturities of 12 months or less will continue to apply.
SBA will eliminate upfront guaranty fees until the aggregate dollar amount of 7(a) loans made under this authority exhausts the funds dedicated to that purpose. SBA currently estimates that program level will be approximately $8.7 billion. Depending on loan volume in the 7(a) program, SBA estimates that it will be able to eliminate upfront guarantee fees on loans approved through approximately December 31, 2009.
504 Development Company Program Fee Eliminations: For eligible loans approved through the Agency’s section 504 Development Company Program on or after February 17, 2009, SBA will temporarily eliminate two program fees:
1) Third-Party Participation Fees (Small Business Investment Act Section 503(d)(2) fees codified at 13 CFR 120.972)
2) CDC Processing Fees (13 CFR Section 120.971(a)(1) fees). Consistent with the Recovery Act’s temporary elimination of CDC Processing Fees, CDCs will no longer be allowed to collect deposits from small business applicants that would have gone towards payment of the CDC Processing Fee upon loan approval under 13 CFR 120.935. SBA will reimburse the CDCs for the waived CDC Processing Fees.
SBA will pay CDCs two-thirds of the estimated CDC Processing Fee at the time of loan approval by SBA or upon the issuance of a loan number for a loan approved under the Premier Certified Lenders Program. The remainder of the fee will be paid immediately following debenture funding and will be equal to 1.5% of net debenture proceeds for which a CDC does not collect the CDC Processing Fee, minus the amount previously paid. If a borrower has already paid a CDC for the fee, the CDC must reimburse the borrower from the SBA refund. SBA will not permit CDCs to cancel loans approved by SBA prior to February 17th, 2009 and resubmit them in order to qualify for the reimbursement of the processing fee. If the Participation Fee has already been paid to SBA on an eligible loan, SBA will refund the fee.
SBA will eliminate the Participation Fee and the CDC Processing Fee until the aggregate dollar amount of 504 loans made under this authority exhausts the funds dedicated to that purpose. SBA currently estimates that program level will be approximately $3.6 billion. Depending on loan volume in the 504 program, SBA estimates that it will be able to eliminate these fees on loans approved through approximately December 31, 2009.
Prohibition on Use of Funds
Section 1604 of the Recovery Act states that none of the funds appropriated or otherwise made available in this Act may be used by any State or local government, or any private entity, for any casino or other gambling establishment, aquarium, zoo, golf course, or swimming pool. Further guidance will be issued on this subject in the near future.
For loans for these Recovery Act prohibited uses, lenders and CDCs may continue to submit applications in accordance with SOP 50 10 5(A) and all applicable fees will apply.
Additional Requirements
The provisions of the Small Business Act and the Small Business Investment Act applicable to the 7(a) and 504 loan programs and the regulations promulgated thereunder will continue to apply to loans made under the Recovery Act.
Lenders, CDCs, and/or borrowers may be subject to additional reporting or recordkeeping requirements in connection with loans under the Recovery Act.