The 7(a) Loan Program is SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. The SBA guarantees loans made by participating banks to small businesses that are otherwise unable to secure financing on reasonable terms through normal lending channels.
Most lenders are familiar with SBA loan programs so business owners and other interested applicants should contact their local lender for further information and assistance in the SBA loan application process.
How the Program Works
The 7(a) Loan program operates through private-sector lenders that provide loans which are, in turn, guaranteed by the SBA — the Agency has no funds for direct lending or grants. Therefore, SBA does not make loans itself, but rather guarantees loans made by participating lending institutions. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender but not to the borrower, who remains obligated for the full debt, even in the event of default.
Banks, credit unions, S&Ls, and other specialized lenders participate with SBA on a deferred basis to provide small business loans that are structured under 7(a) guidelines. Lending partners must execute an SBA Form 750, Deferred Participation Agreement, which establishes the terms under which SBA will guarantee a loan submitted by the lender. When a lending partner applies to SBA for a guaranty on a proposed loan, it must certify that it would only make the loan if SBA guarantees it. SBA then decides whether to guarantee the loan based on the information provided in the loan application. When a loan is guaranteed by SBA, certain conditions are imposed on the lending institution. Some of these conditions are related to how the lender must close and administer the account; others are imposed on the borrower, and pertain to the business or its owner(s). The borrower must agree to these requirements as a condition for obtaining the loan.
If a guaranteed loan defaults, the lender may request SBA to purchase the guaranteed portion.
SBA offers its lending partners a variety of methods for applying for a guaranty on proposed loans. The differences are related to the levels of authority and responsibility the lender and SBA have in making decisions associated with processing, closing, and administering each loan. Lenders are given authority to take on more of these responsibilities based on their experience and performance with SBA. The better a lender has conducted its analysis and performed administrative functions in the past, the more likely SBA will not have to re-analyze or check these factors in the future.
Loan Amounts Available
Effective since 2000, a maximum loan amount of $2 million has been established for 7(a) loans. However, the maximum dollar amount the SBA can guaranty was raised in 2009 from $1 million to $1.5 million. Small loans which had previously carried a maximum guaranty of 85 percent can now be guaranteed up to 90 percent. Loans are considered small if the gross loan amount is $150,000 or less. For loans greater than $150,000, the maximum guaranty is 75 percent.
There are numerous sub-categories of 7(a) loans worth considering. Speak with your local loan officer or go to the SBA website (see link below) to learn more about the Small/Rural Lender Advantage program, Community Express loan program, Patriot Express, Export Express, and Gulf Opportunity loan programs.
Eligibility is generally determined by four factors:
1. Type 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.
2. Size of Business:
- The Small Business Act defines an eligible small business as one that is independently owned and operated and not dominant in its field of operation. The Act also states that in determining what is a small business, the definition shall vary from industry to industry to adequately reflect industry differences. The SBA has therefore developed size standards that define the maximum size of an eligible small business.
- If a potential borrower is close to these standards, size eligibility should be discussed with the local SBA office. Also note that the standards for a particular business may change from time to time and some exceptions do apply.
- When affiliations exist with other companies (for example, through common ownership, directorships, or by contractual arrangements), the primary business activity must be determined both for the applicant business as well as for the entire affiliated group. In order to be eligible for financial consideration, the applicant must meet the size standard for its primary business activity and the affiliated group must meet the standard for its primary business activity.
3. Use of Loan Funds
- The proceeds of SBA loans can be used for most business purposes. These may include the purchase of real estate to house the business operations; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery, and equipment; purchase of inventory; and, working capital.
- Proceeds of an SBA Loan cannot be used to (a) finance floor plan needs, such as inventory for an automobile dealer; (b) purchase real estate where the participant has issued a forward commitment to the builder/developer; (c) purchase real estate primarily for investment purposes; (d) provide liquidity to owners; (e) pay delinquent withholding taxes; or, (f) to pay existing debt unless it can be shown that the refinancing will benefit the small business and that the need to refinance is not indicative of imprudent management.
4. Special Circumstances
Certain other considerations apply to the types of businesses and applicants eligible for SBA loan programs.
- Franchises are eligible except in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.
- Recreational Facilities and Clubs are eligible provided: (a) the facilities are open to the general public, or (b) in membership only situations, membership is not selectively denied to any particular group of individuals and the number of memberships is not restricted either as a whole or by establishing maximum limits for particular groups.
- Farms and Agricultural Businesses are eligible; however, these applicants should first explore the Farm Service Agency (FSA) programs, particularly if the applicant has a prior or existing relationship with FSA.
- Fishing Vessels are eligible; however, 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 (NMFS), a part of the Department of Commerce.
- Medical Facilities. Hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided hey are licensed by the appropriate government agency and services rendered go beyond those of room and board.
- An Eligible Passive Company (EPC) is a small entity which does not engage in regular and continuous business activity. An 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 for conducting the Operating Company’s business. The EPC must comply with the conditions set forth in 13 CFR Sec 120.111.
- Change of Ownership. Loans for this purpose are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the sound development of the business or, perhaps, in preserving its existence. Loans cannot be made when proceeds would enable a borrower to purchase: (a) part of a business in which it has no present interest or (b) part of an interest of a present and continuing owner. Loans to effect a change of ownership among members of the same family are discouraged.
- Aliens are eligible; however, consideration is given to the type of status possessed, e.g., resident, lawful temporary resident, etc. in determining the degree of risk relating to the continuity of the applicant’s business. Excessive risk may be offset by full collateralization. The various types of visas may be discussed in more detail with the local SBA office.
- Probation or Parole. Applications will not be accepted from firms where a principal (any one of those required to submit a personal history statement, SBA Form 912): 1) is currently incarcerated, on parole, or on probation; 2) is a defendant in a criminal proceeding; or 3) whose probation or parole is lifted expressly because it prohibits an SBA loan. This restriction would not necessarily preclude a loan to a business, where a principal had responded in the affirmative to any one of the questions on the Statement of Personal History. These judgments are made on a case by case evaluation of the nature, frequency, and timing of the offenses. Fingerprint cards (available from the local SBA office) are required any time a question on the form is answered in the affirmative.