Learn more about SBA loans
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
