SBA Regular and Special 7(a) Loan Guarantees
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
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
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
- 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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