SBA Regular 7(a) Loan Guarantees
"You can't have everything. Where would you put it?" — Comedian Steven Wright
Effective December 22, 2000, a maximum loan amount of $2 million was established for 7(a) loans but the maximum amount guaranteed by the SBA was generally just $1 million. As of December 7, 2004 the maximum guarantee was raised to $1.5 million. Small loans (those under $150,000) carry a maximum guarantee of 85 percent. Loans greater than $150,000 are guaranteed at 75
Average time for completing a successful 7(a)loan guarantee package is about 25 hours. To get assistance in completing the paperwork, check with your prospective lender or any local municipal, county, or state economic development agencies in your area. Some of these groups will provide no-cost or low-cost assistance in preparing the application. Otherwise, consider engaging one of the various services or professionals that prepare loan packages. For a listing of these services, check your Yellow Pages under "Loans" or request a referral from your lender. The price range for loan packaging is approximately $1,200 — $5,000. To avoid unnecessary expenses, make sure that you have a bank commitment prior to engaging a loan guarantee packaging service. The bank will need only about one-half of the material and information necessary for the SBA requirements.
Loan proceeds may be used to establish a new business or to assist in the operation, acquisition or expansion of an existing business, including working capital; the purchase of inventory, machinery and equipment; and the construction, expansion and rehabilitation of business property. An SBA guarantee is especially helpful to small businesses who need long-term credit for these purposes, but cannot afford the large equity downpayment (often around 30 percent) required by conventional lenders.
Loan maturity varies according to the estimated economic life of the assets being financed and the applicant's ability to repay. In addition, the following maximum maturities apply:
| Purpose |
Loan Life |
| Working capital |
Maturity up to 7-10 years |
| Machinery and equipment |
Maturity up to 10-25 years |
| Building purchase/construction |
Maturity up to 25 years |
When loan proceeds will be used for a combination of purposes, the maximum maturity can be a weighted average of those maturities, which allows for regular, equal payments. Or, it can be the sum of equal monthly installments on the allowable maturities for each purpose, which results in unequal payments.
The interest rate for guaranteed loans reflects prevailing market rates and can either be fixed over the life of the loan or can fluctuate with the market. The maximum interest rate permitted on guaranteed loans is the lowest New York prime rate (as published in the Wall Street Journal) plus up to 2.25 percent for loans with a maturity under seven years and up to 2.75 percent for loans with a maturity of seven years or more. Regular 7(a) guarantees prohibit the use of balloon payments ( a "balloon" is a large, final lump sum payment due after a set time period) or prepayment penalties (a charge for paying off a debt early and reducing the total interest paid on the loan) by the private lender. For complete and up to date details of the 7(a) program see this link.
In an effort to expedite processing of these larger loan applications, the SBA has established special programs for lenders.
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