SBA Regular 7(a) Loan Guarantees

Under the SBA 7(a) loan programs, small loans (those under $150,000) carry a maximum guarantee of 85 percent. Loans greater than $150,000 are guaranteed at 75 percent. There is 90 percent guarantee for international trade loans and a 100 percent guarantee loans to purchase dealer inventory that can be titled, such as boats, cars, and motorcycles. The maximum guaranty for most loans is capped at $3.75 million, annually.

Preparation. 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, ask your lender or search online for "SBA loan preparation services." 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.

Use of Funds. 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, but no more than the economic life of the asset
Building purchase/construction	Maturity up to 25 years

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. Although the interest rate is negotiated between the borrower and the lender, the interest rate is capped. The base rates are pegged to the prime rate, the LIBOR rate or an optional rate. (Plus, the SBA prohibits extraneous fees.)

These are the maximum interest rates for fixed rate loans:

• Loans greater than $50,000
• Base rate plus 2.25 percent if the maturity is less than seven years
• Base rate plus 2.75 percent if the maturity is seven years or more
• Loans between $25,000 and $50,000
• Base rate plus 3.25 percent if the maturity is less than seven years
• Base rate plus 3.75 percent if the maturity is seven years or more
• Loans of $25,000 or less
• Base rate plus 4.25 percent if the maturity is less than seven years
• Base rate plus 4.75 percent, if the maturity is 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.

The bill also empowers SBA to set up a Secondary Market Lending Authority that would make direct loans to broker-dealers that participate in the secondary market for SBA-guaranteed 7(a) loans. These broker-dealers would use the funds to purchase SBA-backed loans from commercial lenders, assemble them into pools and sell them to investors in the secondary loan market. This program may help address some of the issues facing the secondary market for SBA loans and may ultimately help SBA lenders make new loans to borrowers.

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.