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7(a)
loans are the most basic and most used type loan of SBA's business loan
programs. Its name comes from section 7(a) of the Small Business Act, which
authorizes the Agency to provide business loans to American small businesses.
All 7(a) loans are provided by lenders who are
called participants because they participate with SBA in the 7(a) program.
Not all lenders choose to participate, but most American banks do. There are
also some non-bank lenders who participate with SBA in the 7(a) program which
expands the availability of lenders making loans under SBA guidelines.
7(a) loans are only available on a guaranty basis.
This means they are provided by lenders who choose to structure their own
loans by SBA's requirements and who apply and receive a guaranty from SBA on
a portion of this loan. The SBA does not fully guaranty 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 a guaranty against payment default. It does not
cover imprudent decisions by the lender or misrepresentation by the borrower.
Under the guaranty concept, commercial lenders make
and administer the loans. The business applies to a
lender for their financing. The lender decides if they will make
the loan internally or if the application has some weaknesses which, in their
opinion, will require an SBA guaranty if the loan is to be made. The guaranty
which SBA provides is only available to the lender. It assures the lender
that in the event the borrower does not repay their obligation and a payment
default occurs, the Government will reimburse the lender for its loss, up to
the percentage of SBA's guaranty. Under this program, the borrower remains
obligated for the full amount due.
All 7(a) loans which SBA guaranty must meet 7(a)
criteria. The business gets a loan from its lender with a 7(a) structure and
the lender gets an SBA guaranty on a portion or percentage of this loan.
Hence the primary business loan assistance program available to small
business from the SBA is called the 7(a) guaranty loan program.
A key concept of the 7(a) guaranty loan program is
that the loan actually comes from a commercial lender, not the Government. If
the lender is not willing to provide the loan, even if they may be able to
get an SBA guaranty, the Agency can not force the lender to change their
mind. Neither can SBA make the loan by itself because the Agency does not
have any money to lend. Therefore it is paramount that all applicants
positively approach the lender for a loan, and that they know the lenders
criteria and requirements as well as those of the SBA. In order to obtain
positive consideration for an SBA supported loan, the applicant must be both
eligible and creditworthy.
WHAT
SBA SEEKS IN A LOAN APPLICATION
In order to get a 7(a) loan, the applicant must
first be eligible. Repayment ability from the cash flow of the business is a
primary consideration in the SBA loan decision process but good character,
management capability, collateral, and owner's equity contribution are also important
considerations. All owners of 20 percent or more are required to personally
guarantee SBA loans.
ELIGIBILITY
CRITERIA
All applicants must be eligible to be considered for
a 7(a) loan. The eligibility requirements are designed to be as broad as
possible in order that this lending program can accommodate the most diverse
variety of small business financing needs. All businesses that are considered
for financing under SBA’s 7(a) loan program must: meet SBA size standards, be
for-profit, not already have the internal resources (business or personal) to
provide the financing, and be able to demonstrate repayment. Certain
variations of SBA’s 7(a) loan program may also require additional eligibility
criteria. Special purpose programs will identify those additional criteria
Eligibility factors for all 7(a) loans include:
size, type of business, use of proceeds, and the availability of funds from
other sources. The following links will provide more detailed information on
these eligibility issues.
USE
OF PROCEEDS
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. These may include (non-exclusive):
- To purchase land or buildings, to cover new construction as well
as expansion or conversion of existing facilities;
- To acquire equipment, machinery, furniture, fixtures, supplies,
or materials;
- For long term working capital including the payment of accounts
payable and/or for the purchase of inventory;
- To refinance existing business indebtedness which is not already
structured with reasonable terms and conditions;
- For short term working
capital needs including: seasonal financing, contract performance,
construction financing, export production, and for financing against
existing inventory and receivable under special conditions; or
- To purchase an existing
business.
INELIGIBLE
USE OF PROCEEDS
There are certain restrictions for the use of SBA
loans. The following is a list of purposes which SBA loans can not finance:
- 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 effect a partial change of business ownership or a change
that will not benefit the business;
- To permit the reimbursements of funds owed to any owner. This
includes any equity injection, or injection of capital for the purposes
of the businesses continuance until the loan supported by SBA is
disbursed;
- To repay delinquent state or federal withholding taxes or other
funds that should be held in trust or escrow; and for a non sound business purpose.
AVAILABILITY OF FUNDS FROM OTHER SOURCES:
The Federal
Government does not extend credit to businesses where the financial strength
of the individual owners or the company itself is sufficient to provide all
or part of the financing. Therefore, the utilization of both the business and
personal financial resources is reviewed as part of the eligibility criteria.
If business and personal resources are found to be excessive, the business
will be required to be use those resources in lieu
of part or all of the requested loan proceeds.
CHARACTER
CONSIDERATIONS:
SBA must determine if the principals of each
applicant firm have historically shown the willingness and ability to pay
their debts and whether they abided by the laws of their community. The
Agency must know if there are any factors which impact on these issues.
Therefore, a "Statement of Personal History" is obtained from each
principal.
OTHER
ASPECTS OF THE BASIC 7(a) LOAN PROGRAM
In addition to credit and eligibility criteria, an
applicant should be aware of the general types of terms and conditions they
can expect if SBA is involved in the financial assistance. 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. However, certain Loan
Programs or Lender Programs vary from these standards. These variations are
indicated for each program.
MAXIMUM LOAN AMOUNTS - (UPDATED AS OF 12/8/2004)
SBA's
7(a) Loan Program has a maximum loan amount of $2 million dollars. 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 still
have a maximum guaranty set at 50 percent
INTEREST
RATES APPLICABLE TO SBA 7(a) LOANS
Interest rates are
negotiated between the borrower and the lender but are subject to SBA
maximums, which are pegged to the Prime Rate. Interest rates may be fixed or
variable. Fixed rate loans of $50,000 or more must not exceed Prime Plus 2.25
percent if the maturity is less than 7 years, and
Prime Plus 2.75 percent if the maturity is 7 years or more.
For loans between $25,000 and $50.000, maximum rates
must not exceed Prime Plus 3.25 percent if the maturity
is less than 7 years, and Prime Plus 3.75 percent if the maturity is 7 years
or more. For loans of $25,000 or less, the maximum interest rate must not
exceed Prime Plus 4.25 percent if the maturity is
less than 7 years, and Prime Plus 4.75 percent, if the maturity is 7 years or
more.
Variable rate loans may be pegged to either the
lowest prime 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 be no more often than monthly and must be
consistent, (e.g., monthly, quarterly, semiannually, annually or any other
defined, consistent period).
GUARANTY
PERCENTS
For those applicants
that meet the SBA's credit and eligibility standards, the Agency can guaranty
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
guaranty 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.
FEES
ASSOCIATED WITH SBA LOANS
To offset the costs
of the SBA's loan programs to the taxpayer, the Agency charges lenders a
guaranty fee and a servicing fee for each loan approved and disbursed. The fee
amounts are 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:
ü
For loans of $150,000 or less, a 2 percent guaranty
fee will be charged. Lenders are again permitted to retain 25 percent of the
up-front guarantee fee on loans with a gross amount of $150,000 or less.
ü
For loans more than $150,000 but up to and including
$700,000, a 3 percent guaranty fee will be charged.
ü
For loans greater than $700,000, a 3.5 percent
guaranty fee will be charged.
ü
For loans greater than $1,000,000, an additional .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 annual on-going servicing fee for all 7(a) loans
approved on or after October 1, 2004 shall be 0.5 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:
Beginning October 1, 2004, Comination
financing will no longer be 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
Effective for all
loans where the applications were received by the lender on or after December
22, 2000, a new prepayment charge paid by the borrower to SBA ("subsidy recoupment fee") has been added for those loans that
meet the following criteria:
a. have a maturity of 15 years or more where the
borrower is prepaying voluntarily;
b. the prepayment amount exceeds 25 percent of the
outstanding balance of the loan; AND
c. the
prepayment is made within the first 3 years after the date of the first
disbursement (not approval) of the loan proceeds.
The
prepayment fee calculation is as follows:
a. during the 1st year after disbursement, 5 percent
of the amount of the prepayment;
b. during the 2nd year after disbursement, 3 percent
of the amount of the prepayment; or
c. during the 3rd
year after disbursement, 1 percent of the amount of the prepayment.
Obtained from SBA’s web page
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