An Introduction to Small Business Administration Loans

The SBA Web site at www.sba.gov is an excellent resource for small businesses. It's very well organized, easy to navigate, and provides a wealth of information.

SBA Loan Programs
The SBA offers a variety of loan programs to assist small businesses. It's important to note, however, that the SBA is primarily a guarantor of loans made by private lenders and other institutions, and not a lender itself. The SBA's several business loan programs supplement the ability of certain lenders to provide both long- and short-term financing to small businesses that might not otherwise qualify for loans through traditional lending sources. The SBA may not guarantee a loan if a business can obtain funds on reasonable terms from a bank or other source.

There are three basic types of SBA Loan Programs, and several special-purpose categories of Section 7(a) loans, including:

• The Basic Section 7(a) Loan Guaranty Program;
• The Section 504 Certified Development Company (CDC) Program;
• The MicroLoan, a Section 7(m) Loan Program.

The different sections under which SBA loans may be obtained refer to sections of the Small Business Act.

Basic Section 7(a) Loan Guaranty Program
The Basic Section 7(a) Loan Guaranty Program serves as the SBA's primary business loan program to help qualified small businesses obtain financing when the business might not be eligible for business loans through normal lending channels. It's the SBA's most flexible business loan program. The customers for this program are startup and existing small businesses.

Loans under the 7(a) Program are provided by lenders who are called participants because they "participate" with the SBA in this program. Most American banks participate in this program, although not all lenders do. Loans under the 7(a) Program are available only on a guaranty basis, which means that the loans are provided by lenders who have decided to structure their own loans according to the SBA's requirements, and who apply to and receive from the SBA a guaranty on a portion of the loan. This is not a guaranty for the full amount of the loan; the lender and the SBA both share the risk that a borrower will not be able to repay the loan in full. The guaranty protects against payment default.

Under this concept of guaranty lending, commercial lenders make and administer the loans, and the business applies to a lender, not the Government, for the loan. The lender decides if it will make the loan itself or if the application has some weaknesses, which will require an SBA guaranty if the loan is to be made. A borrower must have been turned down for and be unable to obtain a traditional loan. The guaranty on the loan is available only to the lender, not the borrowing business. The guaranty assures the lender that if the borrower does not repay the obligation, the Government will reimburse the lender up to the percentage of the SBA's guaranty. Nevertheless, the borrower remains obligated for the full amount due.