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A Correspondent Lender and SBA Specialist
7(a) Loan Program
The 7(a) Loan Program is SBA’s primary program to help start-up and existing
small businesses obtain financing when they might not be eligible for business
loans through normal lending channels. The name comes from section 7(a) of the
Small Business Act, which authorizes SBA to provide business loans to American
small businesses. SBA itself does not make loans, but rather guarantees a
portion of loans made and administered by commercial lending institutions.
7(a) loans are the most basic and most commonly
used type of loans. They are also the most flexible, since financing can be
guaranteed for a variety of general business purposes, including working
capital, machinery and equipment, furniture and fixtures, land and building
(including purchase, renovation and new construction), leasehold improvements,
and debt refinancing (under special conditions). Loan maturity is up to 10 years
for working capital and generally up to 25 years for fixed assets.
Most American banks participate in the program,
as do some non-bank lenders, which expands the availability of loans.
Participating lenders agree to structure loans according to SBA's requirements,
and 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 against
payment default; it does not cover imprudent decisions by the lender or
misrepresentation by the borrower.
How the Program Works
Since a key concept of the 7(a) loan program is that the loan
comes from a commercial lender, not the Government, a small business applies
directly to a lender for financing. The lender reviews the application and
decides if it merits a loan on its own or if it requires additional support in
the form of an SBA guaranty. The SBA guaranty assures the lender that if the
borrower does not repay the loan, the Government will reimburse the lender for
its loss, up to the percentage of SBA's guaranty. However, the small business
borrowing the money remains obligated for the full amount due.
If the lender is not willing to provide the loan, even with an SBA guaranty, SBA
cannot force the lender to do so. So it is important for applicants to be
prepared when they approach a lender; they should know and meet the lender’s
criteria and requirements as well as those of the SBA. To be considered for an
SBA–backed loan, the applicant must be both eligible and creditworthy.
Eligibility
To be considered for a 7(a) loan, applicants must meet certain eligibility
requirements. These requirements are designed to be as broad as possible so the
program can accommodate the most diverse variety of small business financing
needs.
What SBA Looks For:
·
Operate as a for-profit company.
·
Do business (or propose to) in the United States or its possessions.
·
Meet SBA
Size Standards.
·
Be an eligible type of business. While the vast majority of businesses are
eligible for financial assistance from the SBA, some are not. Check this list of Eligible
and Ineligible Types of Businesses to
see if your company qualifies.
·
Plan to use proceeds for an approved purpose. 7(a) loan proceeds may be used to
establish a new business or to assist in the operation, acquisition or expansion
of an existing business. This list explains Eligible
and Ineligible Use of Proceeds.
·
Not have funds available from other sources. SBA does not extend financial
assistance to businesses when the financial strength of the individual owners or
the company itself is sufficient to provide all or part of the financing. Both
business and personal financial resources are reviewed as part of the
eligibility criteria. If these resources are found to be excessive, the business
will be required to use those resources in lieu of part or all of the requested
loan proceeds.
·
Ability to repay the loan on time from the projected operating cash flow of the
business.
·
Good character. SBA obtains a "Statement of Personal History" from the
principals of each applicant firm to determine if they have historically shown
the willingness and ability to pay their debts and whether they have abided by
the laws of their community.
·
Management expertise and commitment necessary for success.
Feasible business plan
Terms and Conditions
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.
Loan Amounts
SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75
percent on loans of more than $150,000. 7(a) loans have a maximum loan amount of
$2 million. SBA's maximum exposure is $1.5 million. Thus, if a business receives
an SBA-guaranteed loan for $2 million, the maximum guaranty to the lender will
be $1.5 million or 75 percent. SBAExpress loans have a maximum guaranty set at
50 percent. The American Recovery and Reinvestment Act signed into law February
17, 2009, authorized a temporary increase in SBA’s guaranty percentage to up to
90% on guaranty loans, except those processed under SBAExpress, through the end
of calendar year 2009, or until the funds appropriated for this provision are
exhausted, whichever comes first.
Maturity Terms
SBA loan programs are generally intended to encourage longer-term small business
financing. 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 and equipment, and
terms for a working capital or inventory loan should be appropriate to the
borrower’s ability to repay up to 10 years.
The maximum maturity of loans used to finance fixed assets other than real
estate will be limited to the economic life of those assets, in no instance to
exceed 25 years. The 25-year maximum will generally apply to the acquisition of
land and buildings or the refinancing of debt incurred in their acquisition.
Where business premises are to be constructed or significantly renovated, the
25-year maximum would be in addition to the time needed to complete
construction. (Significant renovation means construction of at least one-third
of the current value of the property.)
When loan proceeds will be used for a combination of purposes, the maximum
maturity can be a blended maturity based on the use of proceeds or up to the
maximum for the asset class comprising the largest percentage of the use of
proceeds.
Interest Rates
Interest rates are negotiated between the borrower and the lender but are
subject to SBA maximums, which are pegged to the prime rate, the LIBOR rate, or
an optional peg rate. Interest rates may be fixed or variable. These are the
interest rates for fixed rate loans:
·
Fixed rate loans of $50,000 or more must not exceed the base rate plus 2.25
percent if the maturity is less than seven years, and the base rate plus 2.75
percent if the maturity is seven years or more.
·
For loans between $25,000 and $50,000, maximum rates must not exceed the base
rate plus 3.25 percent if the maturity is less than seven years, and the base
rate plus 3.75 percent if the maturity is seven years or more.
·
For loans of $25,000 or less, the maximum interest rate must not exceed the base
rate plus 4.25 percent if the maturity is less than seven years, and the base
rate plus 4.75 percent, if the maturity is seven years or more.
Variable rate loans may be pegged to the lowest prime rate, the LIBOR Rate, or
the SBA optional peg rate. The optional peg rate is a weighted average of rates
the federal government pays for loans with maturities similar to the average SBA
loan. It is calculated quarterly and published in the Federal
Register. The
lender and the borrower negotiate the amount of the spread, which will be added
to the base rate. An adjustment period is selected which will identify the
frequency at which the note rate will change. It must not be more often than
monthly and it must be consistent (e.g., monthly, quarterly, semiannually,
annually, or any other defined period).
Percentage of Guaranty
SBA can guarantee up to 85 percent of loans of $150,000 and less, and up to 75
percent of loans above $150,000. This standard applies to most variations of the
7(a) Loan Program. However, SBAExpress loans carry a maximum of 50 percent
guaranty. The Export Working Capital Loan Program carries a maximum of 90
percent guaranty, up to a guaranteed amount of $1,000,000.
The American Recovery and Reinvestment Act signed into law February 17, 2009,
authorized a temporary increase in SBA’s guaranty percentage to up to 90 percent
on guaranty loans, except those processed under SBAExpress, through the end of
calendar year 2009, or until the funds appropriated for this provision are
exhausted, whichever comes first. The maximum outstanding guaranteed
amount remains at $1,500,000.
Fees
To offset the costs of its loan programs to the taxpayer, SBA charges lenders a
guaranty fee and a servicing fee for each loan approved and disbursed. The
amount of the fees is based on the guaranty portion of the loans. The lender may
charge the upfront guaranty fee to the borrower after the lender has paid the
fee to SBA and has made the first disbursement of the loan. The lender's annual
service fee to SBA cannot be charged to the borrower.
For loans approved on or after December 8, 2004, the following fee structure
applies:
·
For loans of $150,000 or less, a 2 percent guaranty fee will be charged. Lenders
are again permitted to retain 0.25 percent of the up-front guaranty fee on loans
with a gross amount of $150,000 or less.
·
For loans more than $150,000 but up to and including $700,000, a 3 percent
guaranty fee will be charged.
·
For loans greater than $700,000, a 3.5 percent guaranty fee will be charged.
·
For loans greater than $1,000,000, an additional 0.25 percent guaranty fee will
be charged for that portion greater than $1,000,000. The portion of $1,000,000
or less would be charged a 3.5 percent guaranty fee; the portion greater than
$1,000,000 would be charged at 3.75 percent.
The American Recovery and Reinvestment Act signed into law February 17, 2009,
authorized a temporary elimination of the borrower upfront guaranty fee on 7(a)
loans having a maturity of longer than 12 months, through the end of calendar
year 2009, or until the funds appropriated for this provision are exhausted,
whichever comes first.
The annual on-going servicing fee for all 7(a) loans approved on or after
October 1, 2007, shall be 0.550 percent of the outstanding balance of the
guaranteed portion of the loan. The legislation provides for this fee to remain
in effect for the term of the loan.
Combination Financing
As of October 1, 2004, Combination Financing is no longer allowed.
Prohibited Fees
Processing fees, origination fees, application fees, points, brokerage fees,
bonus points, and other fees that could be charged to an SBA loan applicant are
prohibited. The only time a commitment fee may be charged is for a loan made
under the Export Working Capital Loan Program.
Prepayment Penalties
Prepayment penalties apply when a loan:
·
Has a maturity of 15 years or more and the borrower is prepaying voluntarily;
·
The prepayment amount exceeds 25 percent of the outstanding balance of the
loan;
·
The prepayment is made within the first three years after the date of the first
disbursement (not approval) of the loan proceeds.
The prepayment fee is:
·
During the first year after disbursement, 5 percent of the amount of the
prepayment;
·
During the second year after disbursement, 3 percent of the amount of the
prepayment;
·
During the third year after disbursement, 1 percent of the amount of the
prepayment.
