Small Business Administration

SBA Basic 7(a) Loan Program

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7(a) loans are the most basic and most used type of loan in the Small Business Administration’s (SBA’s) business loan programs. All 7(a) loans are provided by lenders who are called participants because they participate with SBA in the 7(a) program.

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 guarantee 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 guarantee against payment default.

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.

Eligibility Criteria

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.

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.

SBA (504) Loan Program

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The 504 Program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender covering up to 50 percent of the project cost, a loan secured with a junior lien from a local or regional community development corporation (backed by a 100 percent SBA-guaranteed debenture) covering up to 40 percent of the cost and a contribution of at least 10 percent equity from the small business being helped.

Maximum Debenture

The maximum SBA debenture is $1,500,000 when meeting the job creation criteria or a community development goal. Generally, a business must create or retain one job for every $50,000 provided by the SBA, except for "Small Manufacturers," which have a $100,000 job creation or retention goal (see below).

The maximum SBA debenture is $2.0 million when meeting a public policy goal. The public policy goals are as follows:

• Business district revitalization
• Expansion of exports
• Expansion of minority business development
• Rural development
• Increasing productivity and competitiveness
• Restructuring because of federally mandated standards or policies
• Changes necessitated by federal budget cutbacks
• Expansion of small business concerns owned and controlled by veterans (especially service-disabled veterans)
• Expansion of small business concerns owned and controlled by women

The maximum debenture for "Small Manufacturers" is $4.0 million. A Small Manufacturer is defined as a small business concern that has:

1. Its primary business classified in sector 31, 32, or 33 of the North American Industrial Classification System (NAICS) and
2. All of its production facilities located in the United States.

In order to qualify for a $4 million 504 loan, the Small Manufacturer must (1) meet the definition of a Small Manufacturer described above, and (2) either (i) create or retain at least 1 job per $100,000 guaranteed by the SBA [Section 501(d)(1) of the Small Business Investment Act (SBI Act)], or (ii) improve the economy of the locality or achieve one or more public policy goals [sections 501(d)(2) or (3) of the SBI Act].

What Funds May Be Used For

Proceeds from 504 loans must be used for fixed asset projects such as: purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; construction of new facilities, or modernizing, renovating or converting existing facilities or purchasing long-term machinery and equipment. The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt or refinancing.

Terms, Interest Rates and Fees

Interest rates on 504 loans are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues. Maturities of 10 and 20 years are available. Fees total approximately three (3) percent of the debenture and may be financed with the loan.

Collateral

Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

Eligible Businesses

To be eligible, the business must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years. Loans cannot be made to businesses engaged in speculation or investment in rental real estate.

SBA Micro-Loans

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The Micro-Loan Program provides very small loans to start-up, newly established or growing small business concerns. Under this program, the Small Business Administration (SBA) makes funds available to nonprofit community based lenders (intermediaries) which in turn make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan size is about $10,500. Applications are submitted to the local intermediary, and all credit decisions are made on the local level.

Terms, Interest Rates and Fees

The maximum term allowed for a micro-loan is six years. However, loan terms vary according to the size of the loan, the planned use of funds, the requirements of the intermediary lender and the needs of the small business borrower. Interest rates vary depending upon the intermediary lender and costs to the intermediary from the U.S. Treasury.

Collateral

Each intermediary lender has its own lending and credit requirements. However, business owners contemplating application for a micro-loan should be aware that intermediaries will generally require some type of collateral and the personal guarantee of the business owner.

Technical Assistance

Each intermediary is required to provide business based training and technical assistance to its micro-borrowers. Individuals and small businesses applying for micro-loan financing may be required to fulfill training and/or planning requirements before a loan application is considered.

These are merely brief descriptions of the programs and are not intended to fully disclose all the requirements and criteria for these programs. More information regarding these programs and other SBA services can be found at http://www.sba.gov/.