SBA 7(a) LOANS- HELPING START UP AND EXISTING SMALL BUSINESS OWNERS GET WORKING CAPITAL, PURCHASE EQUIPMENT, OR ACQUIRE A SMALL BUSINESS.
The basic 7(a) Loan Program gives loans to eligible borrowers for starting, acquiring and expanding a small business. This type of loan is the most basic and the most used within SBA’s business loan programs.
SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible. However, there are some universally applicable requirements. To be eligible for assistance, businesses must:
Operate for profit
Be small, as defined by SBA
Be engaged in, or propose to do business in, the United States or its possessions
Have reasonable invested equity
Use alternative financial resources, including personal assets, before seeking financial assistance
Be able to demonstrate a need for the loan proceeds
Use the funds for a sound business purpose
Not be delinquent on any existing debt obligations to the U.S. government
Basic uses for 7(a) loan proceeds include:
To provide long-term working capital to use to pay operational expenses, accounts payable and/or to purchase inventory
Short-term working capital needs, including seasonal financing, contract performance, construction financing and exporting
Revolving funds based on the value of existing inventory and receivables, under special conditions
To purchase equipment, machinery, furniture, fixtures, supplies or materials
To purchase real estate, including land and buildings
To construct a new building or renovate an existing building
To establish a new business or assist in the acquisition, operation or expansion of an existing business
To refinance existing business debt, under certain conditions
SBA loans cannot be used for these purposes:
To refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing
To affect a partial change of business ownership or a change that will not benefit the business
To permit the reimbursement of funds owed to any owner, including any equity injection or injection of capital to continue the business until the SBA-backed loan is disbursed
To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow
For a purpose that is not considered to be a sound business purpose as determined by SBA
If you are unsure whether or not your anticipated use of funds is allowed, check with your SBA-approved lender
The SBA’s loan programs are generally intended to encourage longer term small-business financing. However, actual loan maturities are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan maturities have been established: 25 years for real estate, up to 10 years for equipment (depending on the useful life of the equipment) and generally up to seven years for working capital. Short-term loans and revolving lines of credit are also available through the SBA to help small businesses meet their short-term and cyclical working capital needs.
Most 7(a) term loans are repaid with monthly payments of principal and interest. For fixed-rate loans, the payments stay the same because the interest rate is constant, whereas for variable rate loans the lender can require a different payment amount when the interest rate changes. Applicants can request that the lender establish the loan with interest-only payments during the start-up and expansion phases (when eligible) to allow the business time to generate income before it starts making full loan payments. Balloon payments or call provisions are not allowed on any 7(a) loan. The lender may not charge a prepayment penalty if the loan is paid off before maturity, but the SBA will charge the borrower a prepayment fee if the loan has a maturity of 15 or more years and is prepaid during the first three years.
The SBA expects every 7(a) loan to be fully secured, but the SBA will not decline a request to guarantee a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. This means every SBA loan is to be secured by all available assets (both business and personal) until the recovery value equals the loan amount or until all assets have been pledged (to the extent that they are reasonably available). Personal guarantees are required from all owners of 20 percent or more of the equity of the business, and lenders can require personal guarantees of owners with less than 20 percent ownership. Liens on personal assets of the principals may be required.
Loans guaranteed by the SBA are assessed a guarantee fee. This fee is based on the loan’s maturity and the dollar amount guaranteed, not the total loan amount. The lender initially pays the guaranty fee and they have the option to pass that expense on to the borrower at closing. The funds to reimburse the lender can be included in the overall loan proceeds.
On loans under $150,000 made after October 1, 2013, the fees will be set at zero percent. On any loan greater than $150,000 with a maturity of one year or shorter, the fee is 0.25 percent of the guaranteed portion of the loan. On loans with maturities of more than one year, the normal fee is 3 percent of the SBA-guaranteed portion on loans of $150,000 to $700,000, and 3.5 percent on loans of more than $700,000. There is also an additional fee of 0.25 percent on any guaranteed portion of more than $1 million.
The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. Both fixed and variable interest rate structures are available. The maximum rate is composed of two parts, a base rate (usually Prime rate) and an allowable spread.
Lenders are allowed to add an additional spread to the base rate to arrive at the final rate. For loans with maturities of shorter than seven years, the maximum spread will be no more than 2.25 percent. For loans with maturities of seven years or more, the maximum spread will be 2.75 percent.
If your small business is looking for a loan, start here! This guide will help you understand the SBA 7a program and how it helps you get long term working capital, purchase equipment, purchase real estate or even acquire a business.