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SBA Regular and Special 7(a) Loan Guarantees

Filed under Getting Financing. Fact checked on January 18, 2013.

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The SBA continues to administer its traditional Section 7(a) guarantee program, which includes a number of specialty loans. Due to their popularity, we've included the information you'll need to help secure your 7(a) loan.

The biggest advantage from the lender's point of view (which makes it an advantage from your point of view) is the government's guaranty to pay them in the event you cannot do so.  The amount that is guaranteed varies based on the size of the loan. Small loans (those under $150,000) carry a maximum guarantee of 85 percent. Loans greater than $150,000 are guaranteed at 75 percent.  The maximum amount the SBA will guarantee for a Section 7(a) loan is $3.75 million, annually. 

To get assistance in completing the paperwork, check with your prospective lender or any local municipal, county or state economic development agencies in your area. Some of these groups will provide no-cost or low-cost assistance in preparing the application.

If you don't have any luck with any of those resources, consider engaging one of the various services or professionals that prepare loan packages. For a listing of these services, request a referral from your lender or Google "loans" for your area. Expect to pay anywhere from approximately $1,200 to $5,000. 

To avoid unnecessary expenses, make sure that you have a bank commitment  prior to engaging a loan guarantee packaging service. The bank will need only about one-half of the material and information necessary for the SBA requirements.

Using Your Funds

Loan proceeds may be used to:

  • establish a new business
  • assist in the operation, acquisition or expansion of an existing business, including working capital
  • purchase inventory, machinery and equipment
  • construct, expand and rehabilitate business property

An SBA guarantee is especially helpful to small businesses who need long-term credit for these purposes but cannot afford the large equity down payment (often around 30 percent) required by conventional lenders.

Anticipating Your Loan's Maturity

Loan maturity varies according to the estimated economic life of the assets being financed and the applicant's ability to repay. In addition, the following maximum maturities apply:

Purpose Loan Life
Working capital Maturity up to 7 - 10 years
Machinery and equipment Maturity up to 10-25 years, but no longer than the economic life of the assets
Building purchase/construction Maturity up to 25 years

What Interest Rate You Should Expect

The interest rate for guaranteed loans reflects prevailing market rates and can either be fixed over the life of the loan or can fluctuate with the market. The interest rate is negotiated between the borrower and the lender, the interest rate is capped. The base rates are pegged to the prime rate, the LIBOR rate or an optional rate. (Plus, the SBA prohibits extraneous fees.)

These are the maximum interest rates for fixed rate loans:

  • Loans greater than $50,000
    • Base rate plus 2.25 percent if the maturity is less than seven years
    • Base rate plus 2.75 percent if the maturity is seven years or more
  • Loans between $25,000 and $50,000
    • Base rate plus 3.25 percent if the maturity is less than seven years
    • Base rate plus 3.75 percent if the maturity is seven years or more
  • Loans of $25,000 or less
    • Base rate plus 4.25 percent if the maturity is less than seven years
    • Base rate plus 4.75 percent, if the maturity is seven years or more

Regular 7(a) guarantees prohibit the use of balloon payments ( a "balloon" is a large, final lump sum payment due after a set time period) or prepayment penalties (a charge for paying off a debt early and reducing the total interest paid on the loan) by the private lender.

While traditional 7(a) loans represent a large contingency of small business applications, the SBA has established special programs for lenders to help small business owners that don't fit neatly in the standard 7(a) box.

SBA Special 7(a) Loan Guarantees

In an effort to expedite processing of larger loan applications under Section 7(a), the SBA has special lender programs:

  • the Certified Lender Program 
  • the Preferred Lender Program

These programs are illustrative of the SBA's efforts to transfer more administrative and processing burdens to private lenders. 

Navigating the Certified Lender Program (CLP)

Loan guarantee activity that is performed by certified and preferred lenders requires less staff time and paperwork by the SBA. This enables the agency staff to handle a greater volume of loan applications and to devote needed resources to portfolio management and other agencies.

Certified lenders have been more heavily involved in regular SBA guaranty loan processing and who meet certain criteria. For their extra work and experience, they receive a partial delegation of authority, and their loan guarantee applications are given a three-day turnaround by the local SBA office. This loan process accounts for about 30 percent of all business loan guarantees. 

Navigating the Preferred Lender Program (PLP)

Preferred lenders can decide unilaterally on SBA participation in eligible business loans. These lenders can determine eligibility, creditworthiness, loan structuring, loan monitoring, loan collection/servicing and loan liquidation actions, and to make necessary decisions at each stage of the procedure without, in most instances, SBA's prior review or consent.

The purpose is to expedite processing time for creditworthy borrowers and to more minimize the administrative burdens on the SBA. The program is to be used only for the strongest credits: those on which the SBA can justify giving a lender the unilateral right to put government funds at risk.

Tip

To locate the nearest local Certified or Preferred Lender, call your nearest SBA office or visit the SBA website.

Qualifying for the SBAExpress

To further accelerate the 7(a) program, the SBA has a program dubbed SBAExpress. This program is designed to increase the availability of smaller loans for SBA customers and to decrease the paperwork burden imposed on the Agency's lending partners.

It replaces the "low doc" program terminated in 2005. Under the SBAExpress program, selected lenders are authorized to make, service and liquidate loans in amounts up to $350,000 using their own application and disbursement documents and processes. Lenders are given the authority to attach an SBA guarantee to an approved loan without having to submit the loan application to an SBA field office for a credit analysis or review.

These loans are sent to a single location for assignment of an SBA loan number and a determination of borrower eligibility. In exchange for the convenience of using their own forms and processes, lenders agree to:

  • limit the loan amount to $250,000
  • accept a maximum SBA guarantee of 50 percent
  • waive payment on defaulted loans until after the lender has completed liquidation and SBA has reviewed the underlying documentation supporting the loan.

SBAExpress allows lenders to serve small businesses with revolving credit. The turnaround time on these transactions can be within 36 hours. You'll want to read the full facts on SBAExpress and the Community Express program.

Taking Advantage of Programs for Veterans

For full details on the SBA's opportunities for veterans, visit VetBiz and the SBA's Veterans website.

Exploring the Patriot Express Program

The relatively new Patriot Express program works closely with the SBA's Office of Veterans Business Development.

Engaging in Women's and Other Minority Prequalification Pilot Loan Programs

The Prequalification Pilot Loan Program uses intermediaries to assist prospective borrowers in developing loan applications and securing loans. A Women's Business Development Center or a Small Business Development Company are examples of intermediaries. 

The loan package is submitted to the SBA and a decision is generally rendered in three days. If approved, the SBA issues a letter of prequalification stating the SBA's intent to guarantee the loan. The maximum loan under this program is $250,000 with a guarantee of 85 percent up to $150,000 and 75 percent for loans over $150,000. The intermediary can usually help the applicant find a competitive lender.

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