SBC Loan Programs
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SBA 7(a) Loan Program
The 7(a) Loan Program is the most commonly used SBA program for businesses. It has been set up mainly to assist start-up and existing businesses obtain financing when they may not be eligible through conventional means. The 7(a) loan is derived from section 7(a) of the Small Business Act. This act authorizes the Small Business Administration (SBA), to provide businesses with loans. It is important to understand that SBA itself does not make loans. The Lender will fund the loan, while the SBA guarantees a portion of the loan.
Over the years, the 7(a) loan program has become the most popular and most commonly used loan by lenders. The SBA guarantee brings flexibility to the program. Use of proceeds may include but are not limited to working capital, machinery and equipment purchases, furniture's and fixtures as well as land and building purchases. Loan maturity can be a maximum of 25 years depending on the use of funds. Generally, loan maturity is up to 10 years for working capital and up to 25 years for fixed assets.
Those lenders submitting under the 7(a) program agree to structure loans according to SBA's requirements. By doing this, the lender receives a guaranty from the SBA on a portion of this loan. Even though the SBA does not guarantee the loan 100%, the lender will share the risk that a borrower may not be able to pay the loan in full. In case of any default on the loan by the borrower, the SBA will then pay the guarantee portion back to the lender.
Most American banks participate in the program, as do some non-bank lenders, which expands the availability of loans. Some non-bank lenders may include direct lending institutions. 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.
SBA 7(a) loans have a maximum loan amount of $2 million. SBA may guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. Maximum exposures on SBA loans are $1.5 million. Hence, if a business applies for an SBA-guaranteed loan for $2 million, the maximum guaranty given to the lender will be $1.5 million or 75 percent of the loan amount.
Most businesses are eligible to obtain financial assistance from the SBA. Some of the requirements set forth are that a business must operate for profit; must do business in the United States; have reasonable owner equity to invest; and, use alternative financial resources such as personal assets in obtaining a loan.
SBA loan programs are generally intended to encourage longer-term small business financing. The longer terms help a business get financing, with lower monthly payments making it easier on the business to repay the debt. Loan maturities and terms are based on the ability to repay, the use of the loan proceeds, and the useful life of the assets being financed.
Real Estate may be financed up to 25 years. Machinery, equipment, and working capital or inventory loans will have a term of maximum 10 years.