Small Business Loan Guaranty Program 7(a)

Providing guaranteed loans to small businesses unable to secure financing on reasonable terms through normal lending channels; operating through private-sector lenders that provide loans guaranteed by the SBA

Section 7(a) of the Small Business Act authorizes the Small Business Administration (SBA) to guarantee loans to small businesses that cannot obtain financing on reasonable terms through normal lending channels. The SBA basic guaranty program is designed to promote small business formation and growth by guaranteeing long-term loans to qualified firms. Loans are available for many business purposes, such as real estate, expansion, equipment, working capital or inventory.

The SBA can guarantee up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000 (generally up to a maximum guaranty amount of $1 million). The maximum SBA loan size is $2 million. The interest rate is not to exceed 2.75 percent over the prime lending rate, except under limited circumstances. Maturities are up to 10 years for working capital and up to 25 years for fixed assets.

Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process. Good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more equity are required to personally guarantee SBA loans.

The 7(a) Program is the largest of the SBA's financial assistance programs, handling more than 80 percent of all SBA business lending activity. In addition to general financing, the 7(a) program encompasses a number of the SBA's specialized loan programs:

Basic 7(a): Guarantees long-term loans to small businesses that cannot obtain financing on reasonable terms through normal lending channels for uses such as real estate, expansion, equipment, working capital, or inventory.
LowDoc: Designed to reduce the paperwork involved in loan requests of $150,000 or less. The SBA uses a 1-page application and relies on the strength of the individual applicant's character and credit history. The applicant must first satisfy all of the lender's requirements; then the lender may request a LowDoc guaranty.
SBAExpress: SBAExpress encourages participating banks to use their own documentation and procedures to approve, service, and liquidate loans of up to $250,000. In return, the SBA agrees to guarantee up to 50 percent of each loan. This is a pilot program with selected banks nationwide.
CAPLines: Finances small business short-term, cyclical working-capital needs. There are five distinct short-term working capital loans: the Seasonal, Contract, Builder's, Standard Asset-Based, and Small Asset-Based lines. Most SBA regulations governing the 7(a) Program also govern this program. SBA generally can guarantee up to $1 million.
International: Offers long-term financing to small businesses working or preparing to work in international trade, as well as those businesses adversely affected by import competition.
Export: Provides short-term working capital to exporters in a combined working effort of the SBA and the Export-Import Bank.
Prequalification Loans: A pilot loan program enabling the SBA to pre-qualify a guaranty for loans of $250,000 or less before the business owner goes to a bank. This program is designed for women, veterans, minorities, rural businesses, selected industries, and geographical areas.
7(m) Microloan: Available in selected locations around the country, the MicroLoan program provides short-term loans of up to $35,000. If you need a loan for small-scale financing purposes such as inventory, supplies and working capital (but not to pay existing debts), this program may be your answer. MicroLoans are made through SBA-approved nonprofit groups, known as intermediaries, which also provide counseling and technical assistance. Call your local SBA office to locate the nearest SBA-designated group.

Project Examples
A policy of client confidentiality prevents SBA staff from providing examples of loan projects. You can obtain a free copy of "The Resource Directory for Small Business Management," a listing of publications and videotapes available for purchase, from your local SBA office or the SBA Answer Desk (see contact information in this entry).

Eligibility, Uses, and Restrictions
The vast majority of businesses are eligible for financial assistance from the SBA. Applicant businesses must operate for profit; be engaged in, or propose to do business in the United States or its possessions; have reasonable owner equity to invest, and must have used alternative financial resources including personal assets.

Ineligible businesses are those that are engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole. Also ineligible are the following types of businesses: real estate investment; speculative activities; academic schools; pyramid sales plans; illegal activities; charitable or religious activities; or nonprofit institutions.

The Small Business Act defines an eligible small business as one that is independently owned and operated and not dominant in its field of operation. This can vary from industry to industry. Size standards that define the maximum size of an eligible small business are as follows:

Industry	Size
Retail	$6 million to $24.5 million receipts
Construction	$12 million to $28.5 million receipts
Agriculture	$750,000 to $6 million receipts
Wholesale	No more than 100 employees
Manufacturing	500 to 1,500 employees
Service	$6 million to $30 million receipts

Size eligibility should be discussed with the local SBA office staff. Also note that the standards for a particular business may change from time to time and some exceptions do apply.

The proceeds of SBA loans can be used for most business purposes, including the purchase of real estate to house business operations; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery, and equipment; purchase of inventory; and working capital.

Loan proceeds may not be used to finance floor plan needs; purchase real estate where the participant has issued a forward commitment to the builder/developer or where the real estate will be held primarily for investment purposes; make payments to owners or pay delinquent withholding taxes; or pay existing debt unless it can be shown that the refinancing will benefit the small business and that the need to refinance is not indicative of imprudent management.

SBA loans can be used for most business purposes, including establishing a new business; purchasing inventory, furniture, fixtures, machinery, and equipment; buying land for construction; building; financing leasehold improvements; real property; and for use as working capital. In some cases, proceeds may be used for financing certain types of debt. Some restrictions and special circumstances exist.

Contact
Check the telephone directory under "U.S. Government" for the nearest SBA office or call the Small Business Answer Desk (800) UASKSBA.

For the hearing impaired, the TDD number is (704) 344-6640.

Internet
www.sba.gov

7(a) Program:
www.sba.gov/financing/index.html

Last Updated January 24, 2005