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SBA 7(a) Loan Program
 Basic 7(a) 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. The SBA can not make the loan by itself because the Agency does not lend money.

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

Eligibility factors for all 7(a) loans include: Size, Type of Business, Use of Proceeds, and the availability of Funds from other sources.

TYPES OF BUSINESS ELIGIBLE:

FRANCHISE Financing - is eligible except in situations where a franchisor retains power to control operations to such an extent as to be tantamount to an employment contract. The franchisee must have the right to profit from efforts commensurate with ownership.

CHANGE OF OWNERSHIP - Loans for this purpose are eligible provided the business benefits from the change. In most cases, this benefit should be seen in promoting the sound development of the business or, perhaps, in preserving its existence. Loans cannot be made when proceeds would enable a borrower to purchase: (a) part of a business in which it has no present interest or (b) part of an interest of a present and continuing owner. Loans to effect a change of ownership among members of the same family are discouraged.

MEDICAL FACILITIES - hospitals, clinics, emergency outpatient facilities, and medical and dental laboratories are eligible. Convalescent and nursing homes are eligible, provided they are licensed by the appropriate government agency and services rendered go beyond those of room and board. & More…

INELIGIBLE BUSINESSES:

REAL ESTATE INVESTMENT firms exist when the real property will be held for investment purposes as opposed to loans to otherwise eligible small business concerns for the purpose of occupying the real estate being acquired.

CHARITABLE, RELIGIOUS, OR OTHER NON-PROFIT or charitable institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not eligible. & More…

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):

1. To purchase land or buildings, to cover new construction as well as expansion or conversion of existing facilities.
2. To acquire equipment, machinery, furniture, fixtures, supplies, or materials.
3. For long term working capital including the payment of accounts payable and/or for the purchase of inventory.
4. For refinancing existing business indebtedness, which is not already structured with reasonable terms and conditions.
5. 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.
6. 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 can not GUARANTY:

1. To refinance existing debt where the lender is in a position to sustain a loss and SBA would take over that loss through refinancing.
2. To effect a partial change of business ownership or a change that will not benefit the business.
3. 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.
4. To repay delinquent state or federal withholding taxes or other funds that should be held in trust or escrow.
5. For a non sound business purpose.

INTEREST RATES APPLICABLE TO SBA 7(a) LOANS

Interest rates 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 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." An adjustment period 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).

Maximum Loan Amounts

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.

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 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 25 percent of the up-front guarantee 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 .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.

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.

PREPAYMENT PENALTIES

Effective for All Loans where the applications were received by the lender on or after December 22, 2000, a new prepayment fee paid by the borrower to SBA has been added.

The prepayment fee applies, if the following criteria exist:
A. Loans which have a maturity of 15 years or more and the borrower is prepaying voluntarily.
B. The prepayment amount exceeds 25 percent of the outstanding balance of the loan.
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 first year after disbursement, 5 percent of the amount of the prepayment.
B. During the second year after disbursement, 3 percent of the amount of the prepayment.
C. During the third year after disbursement, 1 percent of the amount of the prepayment.

Particular Types of SBA 7a Programs

SBA LowDoc

• The maximum loan is $150,000.
• The purpose of the loan is to start or grow a business.
• The existing business employs no more than 100 people, has average annual sales for the preceding three years not exceeding $5 million, and the business including affiliates; the business and its owners have good credit; and the business owners are of good character.
• Guaranty fee is 2 percent of the guaranteed portion. Lender is permitted to retain 25 percent of this fee.
• To secure the loan, the borrower must pledge available business and personally owned assets. Loans are not declined by SBA when inadequate collateral is the only unfavorable factor- it is up to the Lender.
• Personal guaranties of the principals are required.
• Length of time for repayment depends on ability to repay, and the use of the loan proceeds.
• Maturity is usually 5 to 10 years. For fixed-asset loans, it can be up to 25 years.
• No revolving lines of credit allowed.
• Credit decision is by SBA Credit Scoring system.

SBA Express

• The maximum loan is $350,000.
• The government guarantee is up to 50%.
• Lenders may charge up to 6.5 percent over prime rate for loans of $50,000 or less and up to 4.5 percent over the prime rate for loans over $50,000
• Revolving loans up to 7 years with maturity extensions permitted at the outset.
• Lenders are not required to take collateral for loans up to $25,000. Lenders may use their existing collateral policy for loans over $25,000 up to $150,000. For Loans greater than $150,000, follows SBA's general collateral policy.
• Credit decision is by Lender.

CommunityExpress

CommunityExpress is a pilot SBA loan program that was developed in collaboration with the National Community Reinvestment Coalition (NCRC) and its member organizations. Under the pilot, which is available to selected lenders, an SBAExpress like program will be offered to pre-designated geographic areas serving mostly Low and Moderate Income areas and New Markets small businesses.

• The maximum loan is $250,000.
• Revolving loans up to 7 years.
• Lenders are not required to take collateral for loans up to $25,000. Lenders may use their existing collateral policy for loans over $25,000 up to $150,000. For Loans greater than $150,000, follows SBA's general collateral policy.
• Follows Standard SBA Guaranty Percent.
• Credit decision is by Lender.




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