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7(a) loans are the most basic and most used loan type of the 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 in the SBA's 7(a) program. Not all lenders choose to participate, but most American banks do. There are also some non-bank lenders who participate in the 7(a) program, which expands the availability of lenders providing 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. They 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 the SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty protects 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 financing: The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, would require an SBA guaranty if the loan were to be made. The guaranty provided by the SBA is only available to the lender. It assures the lender that, in the event that 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 the 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 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 cannot force the lender to change their mind. Nor can the SBA make the loan on its own, because the agency itself does not have any money to lend. Therefore it is paramount that all applicants positively approach the lender for a loan, and know the lender's criteria and requirements as well as those of the SBA. In order to obtain positive consideration for an SBA-backed loan, the applicant must be both eligible and creditworthy.
What SBA Seeks In A Loan Application: 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. Good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more of the business are required to personally guarantee SBA loans.
Eligibility Criteria: The eligibility requirements for 7(a) loans are designed to be as broad as possible to accommodate the most diverse variety of small business financing needs. All businesses being considered for financing under the 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 sufficient financing, and be able to demonstrate repayment ability. Certain variations of the 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.
Character Considerations: The SBA must determine that the principals of each applicant firm have historically shown the willingness and ability to pay their debts and abide by the laws of their community. The agency must know of any factors which impact these issues. Therefore, a "Statement of Personal History" is obtained from each principal. Other Aspects Of The Basic 7(a) Loan Program: |