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Basic SBA 7a Loans-What Are its Functions?
Loans referred to as "7 a loans" are loans offered by the Small Business Administration. The SBA 7a loans are considered the most basic loans for small businesses, and as such, are the most often used loan option for those looking to start their own small business.
The loans get their name from the Small Business Act. In section 7a of the act the Agency is authorized to provide loans to "start up" small businesses.
Features of SBA 7a Loans
The 7a SBA loans sport many features that make them appealing to the small business entrepreneur and to lenders alike. First, SBA 7a loan credit is only available on what is called a guarantee basis. This means that the lenders who are offering the loans must structure their loan according to the requirements of the Small Business Administration. In return, the SBA guarantees part of the investment, thus sharing the risk with the lender if the borrower does not repay the loan. This guaranty is against default payment, and is appealing to the lenders.
Even though the SBA is involved in the basic 7a loan, the business owner does not apply with the SBA, but rather with the lending institution that is financing the loan. The lender then has the option to finance the loan on their own or to employ the SBA guaranty program. The lending agency has the ultimate deciding factor. If there is something in the loan application that makes them uncomfortable, they do not have to approve the loan, and the SBA cannot force them to do so. This protects the lender from borrowers who are not credit worthy.
Components of SBA 7a Loans
While the lending institution draws up the actual loan agreement, there are certain general criteria that must be followed for a loan to be considered a 7a loan.
Negotiation of Terms
Terms are negotiated between the lender and the borrower, not the SBA. The lender has control over whether or not the SBA loan program is pursued. They determine the terms of the loan based on the credit rating of the borrower.
Maximum Loan Amounts
Under the SBA 7a loan program, no loan can exceed two million dollars. The SBA can only be liable under the guaranty for $1.5 million. This represents 75 percent of the total cost if the entire 2 million is borrowed.
Maturity
The maturity of SBA 7a loans is based on several factors. The ability to repay the loan is the first factor considered. Then, the agency and lender will look at the purpose of the loan. Finally, they will consider the useful life the assets can play. Some maximums have been set to make things easier. Loans for real estate and large equipment purchases must be repaid within twenty-five years, and working capital loans must be repaid within seven. If there are multiple purposes of the loan, then the maturity is averaged.
Interest Rates
These 7a SBA loans are subject to maximums set by the SBA. Fixed or variable rate loans qualify for SBA guaranty programs. Loans of more than $50,000 must be no more than the prime rate plus 2.25 percent, for maturity of seven years, and prime plus 2.75 percent for longer than seven years. Loans between $25,000 and $50,000 are subject to limits of prime plus 3.25 percent for the shorter loan time, and prime plus 3.75 percent for more than seven years maturity. Finally, loans under $25,000 are set at prime plus 4.25 percent for loans that mature in seven years or less, and prime plus 4.75 percent for longer loans.
Guaranty
The SBA credit guaranty depends on the amount of the loan. For loans under $150,000, they will guaranty up to 85 percent of the value of the loan. For larger loans, they can guarantee up to 75 percent.
SBA Lenders
The lenders who offer SBA 7a loans to their customers are called participants. This is because they choose to participate and to cooperate with the SBA to offer SBA 7a loan credit to their customers. Most American banks are participants in the SBA loan program, but they are not required to be. Also, there are some lenders who are not banks who also participate in the program. A business looking for SBA loans should have no problem finding a participating lender.
Continue to: Choosing SBA Loan Applicants
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