Under 7(a), the Agency guarantees loans to small businesses that cannot obtain financing on reasonable terms through traditional financing channels.
To be eligible, the business must be operated for profit and not exceed the SBA’s size standards, which are based on NAICS codes. The SBA determines if the business meets the agency’s size standards based either on the average number of employees for each pay period during the preceding 12 months or on sales averaged over the previous 3 years. Generally, size standard maximums are 500 employees for manufacturers, 100 employees for wholesalers, $2.5 million in annual receipts for service companies and $5 million in annual receipts for retailers. There are higher exceptions to these levels in some cases. Some types of businesses are not eligible, such as businesses engaged in lending, real estate development, pyramid schemes, gambling, illegal operations, speculation or investment. All loans must be used for sound business purposes.
A 7(a) loan may be used for most business purposes including start-up, expansion, equipment purchases, debt refinancing, working capital, inventory or real estate acquisition and improvement. Repayment terms will generally be up to 7 years for working capital and inventory, up to 10 years for machinery and equipment (can stretch to 15 years if there is useful life to support it), and up to 25 years for real estate. The only SBA loans that will contain a prepayment penalty are those with a term of 15 years or longer. The interest rate is negotiated with the Bank and may be either fixed or floating, but generally may not exceed 2¼% over the prime lending rate for loans of less than 7 years and 2¾% over the prime lending rate for loans of 7 years or greater. Rates may be slightly higher for loan amounts under $50,000.
Generally, the SBA will guarantee 85% on loans of $150,000 or less and 75% on loans greater than $150,000, up to a maximum guarantee of $1 million. Exceptions to this are noted under the specific programs listed below. The SBA also charges a Guarantee Fee, which is calculated based on the loan amount and maturity. The Guaranty Fee is calculated as follows:
2% of the guaranteed amount for loans of $150,000 or less (loan amount X 85% X 2% = SBA Guaranty Fee)
3% of the guaranteed amount for loans over $150,000 and up to $700,000 (loan amount X 75% X 3% = SBA Guaranty Fee)
3.5% of the guaranteed amount for loans over $700,000 (loan amount X 75% X 3.5% = SBA Guaranty Fee; maximum fee is $35,000).
Borrowers must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all principals owning 20% or more of the business. Liens on personal assets of the principals also may be required. Typically, the Bank will require at least 25% cash injection for all startups.