SBA LOAN

Basic 7(a) Loan Program

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.

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.