The Small Business Administration’s SBA 7a Business Loan Program is SBA’s primary and most popular loan program for helping start-up and existing small businesses. The SBA definition of a small business is a little misleading to some as the actual size limits are quite large in my book but it does vary some by industry sales or number of employees. Here is a link to the size standards –http://www.sba.gov/sites/default/files/files/Size_Standards_Table(1).pdf
Despite popular belief, the SBA does not make loans (with the exception of the disaster loans) but rather guarantees loans made by participating lenders. Businesses do not apply to the SBA for funding. A 7(a) loan guarantee is provided to lenders to encourage them to lend money to small businesses with certain weaknesses or deficiencies such as a lack of collateral or lack of proven cash flows which is typically the largest hurdle for start-up businesses. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lending institution for a portion of its loss.
The portion of guaranty depends on either the dollar amount or the method by which the lender obtains its guaranty. For SBA 7a business loans of $150,000 or less, the SBA will guaranty as much as 85 percent. For loans over $150,000, the SBA can provide a guaranty of up to 75 percent. The maximum loan amount is $2 million, and the maximum guaranty amount to any one business is $1.5 million.
Many people also expect SBA 7a business loans to offer lower interest rates which is also untrue. SBA 7a business loans are guaranteed by taxpayer funds along with higher fees and higher interest charged to the bank to secure the guarantee. SBA loans also carry a higher cost as the SBA charges the lender an upfront fee to provide its guaranty, and the lender will pass this charge on to the borrower. This fee varies between .25 percent to 2 percent depending on the term and amount borrowed. Even with the guarantee, the borrower remains obligated for the full debt, even in the event of default.
SBA loans can be set up as fixed or variable rates which are set based on a combination of prime rate and length of the loan. Interest rates are negotiated between the borrower and the lender but are subject to SBA maximums.
Most businesses are eligible for SBA financing provided they propose to do business in the United States, have reasonable owner equity (at least 10%) and do not have sufficient personal financial resources to secure the loan without assistance.
Maximum loan terms for SBA 7a business loans are:
- 25 years for real estate
- Up to 10 years for equipment (depending on the useful life of the equipment)
- Generally up to 10 years for working capital.
SBA 7a business loans can be used for many things but this is a list of the typical uses:
- The purchase land or buildings, to cover new construction as well as expansion or conversion of existing facilities
- The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
- Long-term working capital, including the payment of accounts payable and/or the purchase of inventory
- Short-term working capital needs, including seasonal financing, contract performance, construction financing and export production
- Financing against existing inventory and receivable under special conditions
- The refinancing of existing business indebtedness that is not already structured with reasonable terms and conditions
- To purchase an existing business
The SBA carefully scrutinizes each loan application for the ability to repay the loan on time from the projected operating cash flow and there are sufficient funds, including the SBA-guaranteed loans, to operate the business on a sound financial basis. The SBA will also ensure that the owners and operators are of good character, that the business plan is feasible, that the management team has expertise and commitment necessary for success, that there is adequate equity invested in the business and that there is sufficient collateral to secure the loan.
How It Works
Applicants submit their loan application to a lender for their initial review. The lender will generally review the credit merits of the request before deciding if they will make the loan themselves or if they will need an SBA guaranty. If a guaranty is needed, the lender will also review eligibility, and the applicant should be prepared to complete some additional documents before the lender sends its request for guaranty to the SBA.
The SBA expects every loan to be fully secured, however the SBA will not automatically decline a guaranty if the only issue is insufficient collateral but every SBA loan must be secured by all business and personal assets until the recovery value equals the loan amount or until all assets have been pledged to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all owners of the business with a 20% of higher ownership position. Liens on personal assets of the principals may be required too.
SBA 7a business loan approval will take an average of 15 to 90 days and during this process there are usually several requests from SBA for additional information from the applicant. After going through this process and the conditions are met the SBA will contact the lender to inform them of the approval for a guarantee. The lender then will work with the applicant to make sure the terms and conditions are met before closing the loan, disbursing the funds, and assuming responsibility for collection and general servicing. The borrower makes monthly loan payments directly to the lender. As with any loan, the borrower is responsible for repaying the full amount of the loan in a timely manner.
One of our clients wanted to open a convenience store in a small community. There wasn’t a grocery store or other filling station within 15 miles and there was a fair amount of population, river terminal traffic, recreational traffic to support a store.
The bank liked the project as the local demographics supported enough sales to support the store leaving the other traffic as an extra margin of safety but what the bank was worried about was whether there would be sufficient value once the store was built as it was in a small community and there was no way to get a reliable valuation. Plus they were worried that a larger competitor could come in should the client start having strong success at his store.
Once the business plan was completed the bank worked with the SBA to get a guarantee on the project. The owner put in 20% of the project and the appraisal came in good and the SBA approved the guarantee.
Why Get an SBA 7a business loan?
We have had many clients say they want an SBA loan and in many cases they really don’t. Why? They simply cost more. However, there are times that a bank can’t or won’t fund a project without a guarantee such as a start-up or if your project has insufficient collateral. Out of the loan guarantee programs, the SBA 7a business loan is the most popular one and most banks are eligible to offer them. That said, smaller banks or banks in small communities do not typically like doing these due to the complexity and time of preparing the SBA paperwork. If you have a smaller project, the SBA (S/RLA) program may be a better fit as it is faster and there is less paperwork.
Where To Find
Most banks offer SBA 7a business loans, but here is a link to the 100 most active SBA 7(a) lenders –http://www.sba.gov/category/lender-navigation/lender-loan-data/100-most-active-sba-7a-lenders