The 7(a) Loan Guaranty Program is one of the U.S. Small Business Administrations primary lending programs. It provides loans to small businesses unable to secure financing on reasonable terms through normal lending channels.
Since the SBA has no funds for direct lending or grants, the program operates through private sector lenders that provide loans guaranteed by the SBA.
Most lenders are familiar with SBA loan programs, so contact your local lender for information and assistance. However, the SBA offers a variety of management counseling and training services directly through the local district office and via the Internet.
Loan amounts available
While the SBA dictates no specified limit to the total amount of money a business can borrow through an SBA loan program, the government agency will guaranty loan protection of 80 percent of the loan for loans of up to $100,000, and 75 percent for loans of more than $100,000 (up to a maximum guaranty amount of $750,000, or 75 percent of a $1 million loan).
What the SBA wants from you
Repayment ability from the cash flow of your business is a primary consideration in the SBA loan decision process, but good character, management capability, collateral and owners equity contribution are important considerations. All owners with at least 20 percent equity in the company are required to personally guarantee SBA loans to that company.
Who is eligible for an SBA loan
Although most small businesses are eligible for SBA loans, some are not, and a case-by-case determination must be made by the agency. Eligibility is generally determined by four factors:
- Type of business
- Size of business
- Use of loan funds
- Special circumstances
The vast majority of businesses are eligible for financial assistance from the SBA. However, 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 use alternative financial resources first, including personal assets.
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. The SBA has therefore developed size standards that define the maximum size of an eligible small business.
As apparent from the SBAs size standards, most businesses are considered small. However, these represent general definitions that, in some cases, are further defined by specific SIC code.
Industry and Size
Retail and Service $3.5 to $13.5 million
Construction $7.0 to $17.0 million
Agriculture $0.5 to $3.5 million
Wholesale No more than 100 employees
Manufacturing 500 to 1,500 employees
If a potential borrower is close to these standards, size eligibility should be discussed with the local SBA office. standards for a particular business may change and exceptions do apply.
When affiliations exist with other companies (for example, through common ownership, directorships, or by contractual arrangements), the primary business activity must be determined both for the applicant business as well as for the entire affiliated group. To be eligible for financial consideration in that situation, both the applicant and any affiliated group must meet the size standard for their individual primary business activities.
Use of loans
The proceeds of SBA loans can be used for most business purposes, including the purchase of real estate to house the business operations; construction, renovation or leasehold improvements; acquisition of furniture, fixtures, machinery and equipment; purchase of inventory; and working capital.
However, the SBA does put some restrictions on use. Proceeds of an SBA loan cant be used for the following:
- to finance floor plan needs;
- to 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;
- to make payments to owners or pay delinquent withholding taxes;
- to 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. (Proceeds can never be used to reduce the exposure of the participant in the loans being refinanced).
For SBA loan information, contact your local bank or call the SBA Pittsburgh office at (412) 395-6565. Tap a wealth of business assistance information from its Web site at www.sba.gov.
This article was prepared by SBA staff members.