SBA 7a Loans Basics

SBA 7a loans are the most popular SBA loan program and most basic type of loan structure that is offered to small businesses. As far as who issues SBA 7(a) loans, most banks do participate though some banks do not. There are some non bank entities that do participate with the SBA as well which expands the sources and often loan program options for borrowers.

A key distinction is that the SBA only guarantees the bank/lender in case of borrower default. With the 7a program it is 75% of the loan amount. So the issuing bank makes the primary underwriting decision and administers the loan. It is only if and borrower goes into payment default that the SBA steps in and fulfills their obligation to back the lender providing the 75% of the loan amount guarantee. The SBA will not cover banks "imprudent decisions" and or misrepresentation by the borrower or the bank.

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Again the lender decides on whether or not to offer a loan to the borrower internally. If the bank deems the loan is very strong they often will fund the loan without the benefit of the SBA guarantee. If the bank likes the loan but feels that it may have an uncomfortable amount of risk they will often try to structure the loan to fit the 7a guidelines. The guarantee assures the lender that if the borrower does default that the lender will get the balk of their capital back - i.e. 75% of the loan amount.

It is important to note the borrowers loan request may fit the SBA guidelines but not the lenders. The SBA cannot force the bank to take on the loan, nor do they have their own money to lend. So the borrower should know both the SBA as well as bank criteria. It is mostly the case that the SBA will have more lenient requirements than the bank.

SBA Guidelines

In order to get an SBA 7(a) loan, the borrower must first be fit the guidelines. Repayment ability from the cash flow (ability to service the debt) of the business is a primary consideration in the SBA loan decision process. In addition, good character (credit scores, etc), management experience (like to see at least 2 years), collateral, and owner's equity contribution (aka down payment) are also important considerations. A personally guarantees is required by all borrowers with a 20% ownership or more.

The guidelines have been designed to be as broad as possible, so as to fit the broadest variety of borrower situations as possible. Including: SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to document repayment. Certain variations of SBA's 7(a) loan program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria.

A big consideration beside the business being able to service their debt, is that the SBA looks carefully at the "character" of the borrower. Has the borrower paid their bills in the past? Have they abided by the "rules of their community"? The SBA must know if there are any factors which impact on these issues. Therefore, a "Statement of Personal History" is obtained from each principal.

Terms

A major misconception with borrowers is that all SBA 7a Loans are the basically the same, i.e. floating rate, over Prime, with a 2.75% guarantee fee. However there are banks that do offer this program under a 5 year fixed and some banks have been known to absorb the Guarantee Fee in order to win a transactions.

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