Small Business Aadministration Loans
|SBA structure | History
| SBA Loan Programs | SBA Loan Industry | Criticism | SBA 7(a)s |
Elegibility | Maturity | Interest Rates | Percentage of Guaranty |
SBA Fees | Prepayment Penalties
Who is Small Business Administration?
The Small Business Administration (SBA) is a United States government
agency that provides support to small businesses.
What is the Mission of SBA?
According to the agency, the mission of the Small Business Administration
(SBA) is "to
maintain and strengthen the Nation's economy by aiding, counseling,
assisting, and protecting the interests of small businesses and by
helping businesses and families recover from economic and other disasters."
The agency is also responsible for providing loans to homeowners
and renters that have been victims of presidentially declared disasters.
Presidential declarations automatically
make disaster assistance available to victims if they meet qualifications.
The Department of Agriculture and state governors also have the
authority to request declarations on areas affected by disasters
in their jurisdictions. Over 80% of the loans
processed by the agency are for home owners and renters.
Structure of the SBA
The SBA is an independent agency that operates under the authority
of the Small Business Act of 1953. The secretary of commerce
delegates small business responsibilities to the SBA. The
organization and management of the SBA consists of an administrator
and deputy administrator, who are appointed by the president and approved
by Congress; field office directors; and administrators for the various
program areas. The SBA also has associate administrators for the following
offices: Disaster Assistance; Field Operations; Public Communications,
Marketing, and Customer Service; Congressional and Legislative Affairs;
Equal Employment Opportunity and Civil Rights Compliance; Hearings
and Appeals; and Management and Administration.
There are also associate administrators for Investment; Small
Business Development Centers; Surety Guarantees; regular Government
Contracting; and Minority Enterprise Development. Assistant administrators
handle International Trade; Native American Affairs; Veterans Affairs;
Women's Business Ownership; and Size Standards, and Technology.
There is an associate deputy administrator for Government Contracting
and Minority Enterprise Development. These offices are then the
backup and resource for over 68 field offices that administer the
programs and monitor loans. The Inspector General Office
audits and maintains the integrity of the loans and the SBA programs.
History of SBA
The SBA was established on July 30, 1953, by the United States Congress
with the passage of the Small Business Act. Its function was to "aid,
counsel, assist and protect, insofar as is possible, the interests
of small business concerns." Also stipulated was that the SBA
should ensure a "fair proportion" of government contracts
and sales of surplus property to small business. This was accomplished
primarily through the Small Business Innovative Research program and
SBA also makes loans directly to businesses and acts as a guarantor
on bank loans. In some circumstances it also
makes loans to victims of natural disasters, works to get government
procurement contracts for small businesses, and assists businesses
with management, technical and training issues.
The SBA has directly or indirectly helped nearly 20
million businesses and currently holds a portfolio of roughly 219,000
loans worth more than $45 billion making it the largest single financial
backer of businesses in the United States.
The SBA has survived a number of threats to its existence. In
1996 the then newly Republican-controlled House of Representatives
planned to eliminate the agency. It survived and went on to receive
a record high budget in 2000. Renewed efforts by the Bush Administration
to end the SBA loan program have met congressional resistance, although
the SBA's budget has been repeatedly cut, and in 2004 certain expenditures
What are SBA Loan programs?
The most visible elements of the administration are the loan programs
it administers. The SBA itself does not grant loans with
the exception of Disaster Relief Loans. Instead, the SBA guarantees
against default certain portions of business loans made by banks and
other lenders that conform to its guidelines. Disaster
Relief Loans are issued directly from the SBA.
Contrary to popular belief, these programs are not generally for
persons with bad credit who can't get bank loans, nor are they primarily
used for startup funding; rather, the primary use of the programs
are to make loans for longer repayment periods and with looser affordability
requirements than normal commercial business loans. Also, a business
can qualify for the loan even if the yearly payment would be the
same as the previous year's profit, whereas most banks would want
payment for a loan to be no more than two-thirds (2/3) of the prior
year's profits for a business. The lower payments, longer terms
and looser affordability calculations allow some businesses to borrow
more money than they could otherwise.
One of the most popular uses of SBA
loans is for commercial mortgages on buildings occupied by a small
business. These programs are chosen because most
bank programs, while having similar payments and rates, require
borrowers to refinance every five years.
Types of Guaranteed Business Loans through banking institutions
- Loan Guarantee Program
- 504 Fixed Asset Financing Program
- Micro Loan Program
- Economic Development Program
- Business Development Program
- Loan Guarantee Program: The 7 Loan
Guarantee Program are designed to help small entrepreneurs start
or expand their businesses. The program makes capital available
to small businesses through bank and non-bank lending institutions.
- 504 Fixed Asset Financing Program: The
504 Fixed Asset Financing Program is administered through non-profit
Certified Development Companies throughout the country. This program
provides funding for purchasing land or construction. Of the total
project costs, a lender must provide 50% of the financing, a Certified
Development Company provides up to 40% of the financing through
a 100% SBA guaranteed debenture, and the applicant provides approximately
10% of the financing.
- Micro Loan Program: Available for up
to $35,000 through non-profit, micro loan intermediaries, to small
businesses considered un-bankable in the traditional banking industry.
• Economic Development Program: SBA partners such as SCORE
and the Small Business Development Centers (SCDC's), operating
in each state provide free and confidential counseling and low-cost
training to small businesses
- 8 Business Development Program: Assists in
the development of small businesses owned and operated by individuals
who are socially and economically disadvantaged.
Homeowners are eligible for long-term, low-interest loans to rebuild
or repair a damaged property to pre-disaster condition. Before making
a loan, the SBA must establish the cost of repairing or rebuilding
the structure (which is determined by SBA's Loan Verification officers
who visit the property), applicant's repayment ability (determined
by applicant's credit worthiness and income) and whether the applicant
can obtain credit in the commercial market (called the credit elsewhere
test). Applicants who do not qualify for disaster assistance
loans are then referred to the Federal Emergency Management Agency
(FEMA) for grants. Although SBA says it won’t
decline a loan for lack of enough collateral, the agency is statutorily
required to ask for whatever collateral is available including the
damaged property a second home or real estate.
Businesses are also eligible for long-term, low-interest
loans to recover from a nationally declared disaster.
The means testing used by the SBA seems variable as a recovering
business may be eligible for a smaller loan shortly after a disaster,
but if the company has not substantially recovered within a short
period of time and within the window in which Disaster Loans are
still available for that area, the business may be granted a subsequent
loan from the SBA for a greater amount. Similar to the
homeowner's loan program mentioned above, a small business owner
must pledge all their personal assets and acquire a similar pledge
from a spouse or partner in the ownership of any shared assets.
If defaulted on the loan the souse or partner must surrender their
value in the asset(s). The total value of an applicant’s assets
is not considered by the SBA therefore a company may be approved
for a loan regardless of if that person has little or great net
Once an SBA guaranteed bank loan is approved, the SBA may mail
closing documents to the applicant for signature. Disbursements
may include an initial unsecured amount of $10,000 and subsequent
disbursements pending upon construction progress and continued insurance
coverage. After final disbursement, the loan is transferred to the
SBA's Office of Capital Assets for management and servicing or collection
in the case of default.
Disaster Relief Loans can take many months to be approved. Often
forms that are submitted to the SBA must travel to multiple locations
and all information provided to them must be verified before any
funds are disbursed. This delay in funding can often result in damage
to the businesses cash flow, credit and ability to maintain the
level of revenue required to repay the loan. The SBA solely determines
the amount of the loan they will approve for a business and the
business will not be notified of the amount of the loan until one
to two business days before the funds are received.
If a business which has a current Disaster Relief Loan defaults
on the loan and the business is closed, the SBA will pursue the
business owner to liquidate all personal assets. The IRS will withhold
any tax refund expected by the former business owner and apply the
amount toward the loan balance. After taking possession of all personal
assets, the SBA may not pursue the former owner for many years allowing
the person to rebuild their personal assets then will renew collection
proceedings through a contracted collection agency.
What is SBA Loan Industry
The SBA loan industry can be divided into distinct categories:
- The largest United States Banks, such as Bank of America and
Wells Fargo, generate the bulk of their SBA loan volume by the
loans, especially the express loan and line of credit, being offered
to those who would be declined for a normal bank loan due to factors
such as length of time in business or slightly stricter affordability
factors. These banks have sophisticated computer systems that
generally makes this process seamless, and are quite different
from other financial institutions who utilize SBA lending for
separate and distinct purposes
- SBA loans are used heavily by banks of all sizes to finance
the purchase or construction of business owner occupied real estate
(i.e. real estate purchased by a business). Many banks only offer
SBA loans for this purpose. In particular, they are using to finance
properties that the bank would consider too risky to finance on
their own, due to them being of a special or environmentally risky
nature that can make their resale value limited; these properties
include Motels, Gas Stations, and Car Washes.
- SBA loans are also used to allow individuals to buy existing
businesses. Since, unlike in real estate transactions, commercial
lenders are allowed to pay a referral fee to business brokers
who help people buy and sell businesses, this segment of the industry
is dominated by smaller banks and standalone finance companies
who engage in this practice.
Why Criticism of SBA
Businesses applying for SBA loans are supposed to be ineligible for
financing elsewhere, as the applicant bank affirms. Designed
to avoid direct competition with banks, this provision allows the
most promising projects to be funded by the private sector, leaving
higher risk projects to be picked up by the government, resulting
in the government holding a higher share of non-performing loans.
Though it accepts higher risk, most SBA borrowers pay their loans;
the same loans that lenders affirm could not receive credit elsewhere.
The Agency has traditionally had a currency rate on its loans of 90%
or more, not meaningfully worse than banks.
Others have attacked the SBA as a fount of
corporate welfare. Despite its expenditures, the SBA aids only 0.4%
of the entrepreneurs in the United States, if one includes
all manner of home-based businesses like lawn-mowing services or
quilting or snow shoveling. However, it is consistently the greatest
provider of small business credit in the country; not all small
businesses seek credit or counseling every year.
The SBA is also one of very few agencies that pays its
own way and does not drain the treasury for its loan programs. Price
Waterhouse affirmed, some years ago, that the tax revenue generated
by only a handful of SBA startup loans more than paid all the operating
expenses for the Agency.
One of the primary uses of SBA funding is for business owners
to get a loan to buy the property their business occupies. Owning
the property and having the business rent the property from the
owner is a form of a tax shelter, so the SBA is criticized for aiding
tax shelters. Of course, legally taking advantage of tax law provisions
is completely ethical.
Various banks are often criticized
for offering or writing fewer SBA loans proportionally than other
banks, which critics see as a sign of discrimination.
However, others counter that SBA loans are equivalent to or many
times worse than what the banks offer themselves, so a customer
of that bank might choose the normal bank product more often than
their SBA product. The SBA has most recently been criticized
for the manner in which it disbursed loans earmarked for businesses
directly affected by the September 11, 2001 attacks. Lax
oversight resulted in widespread abuse of the program as the low-interest
loans were awarded to unaffected business including "Dunkin'
Donuts shops and florists...motorcycle dealers and chiropractors...a
South Dakota country radio station, a Virgin Islands perfume shop
and a Utah dog boutique," many of them unaware of the special
The events of 9/11 had a broad reaching impact on the US economy
and the US Government had determined that specific industries as
a whole were affected such as the Airline and Cruise industry. Travel
by both means dropped dramatically. Two of the five largest cruse-line
operators in the US went out of business as a direct result of the
events of 9/11. One of the two largest operators cut their shore-side
operating budget by 40% for an unspecified period of time. Although
abuses of the SBA Disaster Loan program are expected or known to
have occurred, companies such as a tourist based business in the
US Virgin Islands would have been substantially damaged and may
have gone out of business if not for the program. Similarly, many
businesses in the Miami, FL area that depended on the cruise industry
were substantially damaged from this event in New York. It is known
first hand (my business) was nearly fully dependant on the cruise
industry and sales dropped 95% as a direct result of the event with
no possibility to recover.
What is SBA Basic 7(a) Loan Program?
7(a) loans are the most basic and most used type loan of SBA's business
loan programs. Its name comes from section 7(a) of the Small Business
Act, which authorizes the Agency to provide business loans to American
All 7(a) loans are provided by lenders who are called participants
because they participate with SBA in the 7(a) program. Not all lenders
choose to participate, but most American banks do. There are also
some non-bank lenders who participate with SBA in the 7(a) program
which expands the availability of lenders making loans under SBA
7(a) loans are only available on a guaranty basis. This means they
are provided by lenders who choose to structure their own loans
by SBA's requirements and who apply and receive a guaranty from
SBA on a portion of this loan. The SBA does not fully guaranty 7(a)
loans. The lender and SBA share the risk that a borrower will not
be able to repay the loan in full. The guaranty is a guaranty against
payment default. It does not cover imprudent decisions by the lender
or misrepresentation by the borrower.
Under the guaranty concept, commercial lenders make and administer
The business applies to a lender for their financing.
The lender decides if they will make the loan internally or if the
application has some weaknesses which, in their opinion, will require
an SBA guaranty if the loan is to be made. The guaranty which SBA
provides is only available to the lender. It assures the lender
that in the event the borrower does not repay their obligation and
a payment default occurs, the Government will reimburse the lender
for its loss, up to the percentage of SBA's guaranty. Under this
program, the borrower remains obligated for the full amount due.
All 7(a) loans which SBA guaranty must meet 7(a) criteria. The
business gets a loan from its lender with a 7(a) structure and the
lender gets an SBA guaranty on a portion or percentage of this loan.
Hence the primary business loan assistance program available to
small business from the SBA is called the 7(a) guaranty loan program.
A key concept of the 7(a) guaranty loan program is that the loan
actually comes from a commercial lender, not the Government. If
the lender is not willing to provide the loan, even if they may
be able to get an SBA guaranty, the Agency can not force the lender
to change their mind. Neither can SBA make the loan by itself because
the Agency does not have any money to lend. Therefore it is paramount
that all applicants positively approach the lender for a loan, and
that they know the lenders criteria and requirements as well as
those of the SBA. In order to obtain positive consideration for
an SBA supported loan, the applicant must be both eligible and creditworthy.
What SBA Seeks In A Loan Application?
In order to get a 7(a) loan, the applicant must first be eligible.
Repayment ability from the cash flow of the business is a primary
consideration in the SBA loan decision process but good character,
management capability, collateral, and owner's equity contribution
are also important considerations. All owners of 20 percent or more
are required to personally guarantee SBA loans.
All applicants must be eligible to be considered for a 7(a) loan.
The eligibility requirements are designed to be as broad as possible
in order that this lending program can accommodate the most diverse
variety of small business financing needs. All businesses that are
considered for financing under SBA’s 7(a) loan program must:
meet SBA size standards, be for-profit, not already have the internal
resources (business or personal) to provide the financing, and be
able to demonstrate repayment. Certain variations of SBA’s
7(a) loan program may also require additional eligibility criteria.
Special purpose programs will identify those additional criteria.
Eligibility factors for all 7(a) loans include: size, type of business,
use of proceeds, and the availability of funds from other sources.
The following links will provide more detailed information on these
What are Eligible and Ineligible Types of Business?
Types of Business
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. It
should be noted that some businesses are ineligible for financial
Certain other considerations apply to the types
of businesses and applicants eligible for SBA loan programs.
Business Types and Applicants with
FRANCHISES - are eligible except in situations
where a franchisor retains power to control operations to such an
extent as to be tantamount to an employment contract. The franchisee
must have the right to profit from efforts commensurate with ownership.
RECREATIONAL FACILITIES AND CLUBS - are
eligible provided: (a) the facilities are open to the general public,
or (b) in membership only situations, membership is not selectively
denied to any particular group of individuals and the number of
memberships is not restricted either as a whole or by establishing
maximum limits for particular groups.
FARMS AND AGRICULTURAL BUSINESSES - are
eligible; however, these applicants should first explore the Farm
Service Agency (FSA) programs, particularly if the applicant has
a prior or existing relationship with FSA.
FISHING VESSELS - are eligible; however,
those seeking funds for the construction or reconditioning of vessels
with a cargo capacity of five tons or more must first request financing
from the National Marine Fisheries Service (NMFS), a part of the
Department of Commerce.
MEDICAL FACILITIES - hospitals, clinics,
emergency outpatient facilities, and medical and dental laboratories
are eligible. Convalescent and nursing homes are eligible, provided
they are licensed by the appropriate government agency and services
rendered go beyond those of room and board.
An Eligible Passive Company (EPC) is a small entity which does
not engage in regular and continuous business activity. An EPC must
use loan proceeds to acquire or lease, and/or improve or renovate
real or personal property that it leases to one or more Operating
Companies for conducting the Operating Company's business. The EPC
must comply with the conditions set forth in 13 CFR Sec 120.111.
CHANGE OF OWNERSHIP - Loans for this purpose
are eligible provided the business benefits from the change. In
most cases, this benefit should be seen in promoting the sound development
of the business or, perhaps, in preserving its existence. Loans
cannot be made when proceeds would enable a borrower to purchase:
(a) part of a business in which it has no present interest or (b)
part of an interest of a present and continuing owner. Loans to
effect a change of ownership among members of the same family are
ALIENS - are eligible; however, consideration
is given to the type of status possessed, e.g., resident, lawful
temporary resident, etc. in determining the degree of risk relating
to the continuity of the applicant's business. Excessive risk may
be offset by full collateralization. The various types of visas
may be discussed in more detail with the local SBA office.
PROBATION OR PAROLE - applications will
not be accepted from firms where a principal (any one of those required
to submit a personal history statement, SBA Form 912):
- is currently incarcerated, on parole, or on probation;
- is a defendant in a criminal proceeding; or
- Whose probation or parole is lifted expressly because it prohibits
an SBA loan?
This restriction would not necessarily preclude a loan to a business,
where a principal had responded in the affirmative to any one of
the questions on the Statement of Personal History. These judgments
are made on a case by case evaluation of the nature, frequency,
and timing of the offenses. Fingerprint cards (available from the
local SBA office) are required any time a question on the form is
answered in the affirmative.
What are Ineligible Businesses?
Businesses cannot be engaged in illegal activities, loan packaging,
speculation, multi sales distribution, gambling, investment or lending,
or where the owner is on parole.
Specific types of businesses not eligible include:
REAL ESTATE INVESTMENT firms exist when
the real property will be held for investment purposes - as opposed
to loans to otherwise eligible small business concerns for the purpose
of occupying the real estate being acquired.
OTHER SPECULATIVE ACTIVITIES are those
firms developing profits from fluctuations in price rather than
through the normal course of trade, such as wildcatting for oil
and dealing in commodities futures, when not part of the regular
activities of the business. Dealers of rare coins and stamps are
LENDING ACTIVITIES include banks, finance
companies, factors, leasing companies, insurance companies (not
agents), and any other firm whose stock in trade is money.
PYRAMID SALES PLANS are characterized by
endless chains of distributors and sub-distributors where a participant's
primary incentive is based on the sales made by an ever- increasing
number of participants. Such products as cosmetics, household goods,
and other soft goods lend themselves to this type of business.
ILLEGAL ACTIVITIES are by definition those
activities which are against the law in the jurisdiction where the
business is located. Included in these activities are the productions,
servicing, or distribution of otherwise legal products that are
to be used in connection with an illegal activity, such as selling
drug paraphernalia or operating a motel that permits illegal prostitution.
GAMBLING ACTIVITIES include any business
whose principal activity is gambling. While this precludes loans
to race tracks, casinos, and similar enterprises, the rule does
not restrict loans to otherwise eligible businesses, which obtain
less than one-third of their annual gross income from either: 1)
the sale of official state lottery tickets under a state license,
or 2) legal gambling activities licensed and supervised by a state
CHARITABLE, RELIGIOUS, OR OTHER NON-PROFIT
or eleemosynary institutions, government-owned corporations, consumer
and marketing cooperatives, and churches and organizations promoting
religious objectives are not eligible.
Use of Proceeds
7(a) loan proceeds may be used to establish a new business or to
assist in the operation, acquisition or expansion of an existing
business. These may include (non-exclusive):
- To purchase land or buildings, to cover new construction as
well as expansion or conversion of existing facilities;
- To acquire equipment, machinery, furniture, fixtures, supplies,
- For long term working capital including the payment of accounts
payable and/or for the purchase of inventory;
- To refinance existing business indebtedness which is not already
structured with reasonable terms and conditions;
- For short term working capital needs including: seasonal financing,
contract performance, construction financing, export production,
and for financing against existing inventory and receivable under
special conditions; or
- To purchase an existing business.
Ineligible use of Proceeds
There are certain restrictions for the use of SBA loans. The following
is a list of purposes which SBA loans can not finance:
- To refinance existing debt where the lender is in a position
to sustain a loss and SBA would take over that loss through refinancing;
- To effect a partial change of business ownership or a change
that will not benefit the business;
- To permit the reimbursements of funds owed to any owner. This
includes any equity injection, or injection of capital for the
purposes of the businesses continuance until the loan supported
by SBA is disbursed;
- To repay delinquent state or federal withholding taxes or other
funds that should be held in trust or escrow; and
- For a non sound business purpose.
Availability of Funds from other
The Federal Government does not extend credit to businesses where
the financial strength of the individual owners or the company itself
is sufficient to provide all or part of the financing. Therefore,
the utilization of both the business and personal financial resources
is reviewed as part of the eligibility criteria. If business and
personal resources are found to be excessive, the business will
be required to be using those resources in lieu of part or all of
the requested loan proceeds.
SBA must determine if the principals of each applicant firm have
historically shown the willingness and ability to pay their debts
and whether they abided by the laws of their community. The Agency
must know if there are any factors which impact on these issues.
Therefore, a "Statement of Personal History" is obtained
from each principal.
Other Aspects of the Basic 7(a) Loan
In addition to credit and eligibility criteria, an applicant should
be aware of the general types of terms and conditions they can expect
if SBA is involved in the financial assistance. The specific terms
of SBA loans are negotiated between an applicant and the participating
financial institution, subject to the requirements of SBA. In general,
the following provisions apply to all SBA 7(a) loans. However, certain
Loan Programs or Lender Programs vary from these standards. These
variations are indicated for each program.
Maximum Loan Amounts
SBA's 7(a) Loan Program has a maximum loan amount of $2 million
dollars. SBA's maximum exposure is $1.5 million. Thus, if a business
receives an SBA guaranteed loan for $2 million, the maximum guaranty
to the lender will be $1.5 million or 75 percent. SBAExpress loans
still have a maximum guaranty set at 50 percent
What is the Maturity term for SBA Loans?
SBA loan programs are generally intended to encourage longer term
small business financing but actual loan maturities are based on:
the ability to repay, the purpose of the loan proceeds, and the useful
life of the assets financed. However, maximum loan maturities have
been established: twenty-five (25) years for real estate and equipment;
and, generally seven (7) years for working capital.
working capital purposes will not exceed seven (7) years, except
when a longer maturity (up to 10 years) may be needed to ensure
repayment. The maximum maturity of loans used to finance fixed assets
other than real estate will be limited to the economic life of those
assets - but in no instance to exceed twenty-five (25) years. The
25-year maximum will generally apply to the acquisition of land
and buildings or the refinancing of debt incurred in their acquisition.
Where business premises are to be constructed or significantly renovated,
the 25-year maximum would be in addition to the time needed to complete
construction. (Significant renovation means construction of at least
one-third of the current value of the property.)
When loan proceeds will be used for a combination of purposes,
the maximum maturity can be a weighted average of those maturities,
which results in level payments. Or, it can be the sum of equal
monthly installments on the allowable maturities for each purpose,
which results in unequal payments, with a higher requirement for
repayment during the initial term of the loan.
Interest Rates Applicable to 7A Loans
Interest rates are negotiated between the borrower and the lender
but are subject to SBA maximums, which are pegged to the Prime Rate.
Interest rates may be fixed or variable. Fixed rate loans of $50,000
or more must not exceed Prime Plus 2.25 percent if the maturity
is less than 7 years, and Prime Plus 2.75 percent if the maturity
is 7 years or more.
For loans between $25,000 and $50.000, maximum rates must not exceed
Prime Plus 3.25 percent if the maturity is less than 7 years, and
Prime Plus 3.75 percent if the maturity is 7 years or more.
For loans of $25,000 or less, the maximum interest rate must not
exceed Prime Plus 4.25 percent if the maturity is less than 7 years,
and Prime Plus 4.75 percent, if the maturity is 7 years or more.
Variable rate loans may be pegged to either the lowest prime rate
or the SBA optional peg rate. The optional peg rate is a weighted
average of rates the federal government pays for loans with maturities
similar to the average SBA loan. It is calculated quarterly and
published in the "Federal Register." The lender and the
borrower negotiate the amount of the spread which will be added
to the base rate. An adjustment period is selected which will identify
the frequency at which the note rate will change. It must be no
more often than monthly and must be consistent, (e.g., monthly,
quarterly, semiannually, annually or any other defined, consistent
Percentage of Guaranty on 7A Loans
For those applicants that meet the SBA's credit and eligibility standards,
the Agency can guaranty up to 85 percent of loans of $150,000 and
less, and up to 75 percent of loans above $150,000. This standard
applies to most variations of the 7(a) Loan Program.
SBAExpress loans carry a maximum guaranty of 50 percent guaranty.
The Export Working Capital Loan Program carries a maximum of 90
percent guaranty, up to a guaranteed amount of $1,000,000.
SBA Fees for 7A Loans
To offset the costs of the SBA's loan programs to the taxpayer, the
Agency charges lenders a guaranty fee and a servicing fee for each
loan approved and disbursed. The amounts of the fees are based on
the guaranty portion of the loans. The lender may charge the upfront
guaranty fee to the borrower after the lender has paid the fee to
SBA and has made the first disbursement of the loan. The lender's
annual service fee to SBA cannot be charged to the borrower.
loans approved on or after December 8, 2004, the following fee structure
• For loans of $150,000 or less, a 2 percent guaranty fee
will be charged. Lenders are again permitted to retain 25 percent
of the up-front guarantee fee on loans with a gross amount of $150,000
• For loans more than $150,000 but up to and including $700,000,
a 3 percent guaranty fee will be charged.
• For loans greater than $700,000, a 3.5 percent guaranty
fee will be charged.
• For loans greater than $1,000,000, an additional .25 percent
guaranty fee will be charged for that portion greater than $1,000,000.
The portion of $1,000,000 or less would be charged a 3.5 percent
guaranty fee. The portion greater than $1,000,000 would be charged
at 3.75 percent.
The annual on-going servicing fee for all 7(a) loans approved on
or after October 1, 2006 shall be 0.55 percent of the outstanding
balance of the guaranteed portion of the loan. The legislation provides
for this fee to remain in effect for the term of the loan.
Prepayment Penalties for SBA 7A Loans
a. have a maturity of 15 years or more where the borrower is prepaying
b. the prepayment amount exceeds 25 percent of the outstanding balance
of the loan; AND
c. the prepayment is made within the first 3 years after the date
of the first disbursement (not approval) of the loan proceeds.
The prepayment fee calculation is as follows:
a. A. during the first year after disbursement, 5 percent of
the amount of the prepayment;
b. during the second year after disbursement, 3 percent of the
amount of the prepayment; or
c. during the third year after disbursement, 1 percent of the
amount of the prepayment.