This article explains the components of the Basic Section 7(a) Loan Guaranty Program, including maturity of the loans, negotiation of terms, maximum loan amount and guaranty, fees associated with SBA loans, interest rates, and prepayment penalties.
Maturity of Basic 7(a) Loans
Loan maturity under the Basic Section 7(a) Loan Program is based on several factors, including the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. Loans for working capital will not exceed seven years, except where a longer maturity rate is required to accomplish repayment. The maximum maturity of loans to finance fixed assets other than real estate is limited to the economic life of those assets, but in no instance will that be longer than 25 years. A 25-year maximum generally applies to the acquisition of land and buildings, or the refinancing of debt incurred in their acquisition.
Negotiation of Terms
The negotiation of the specific terms of a 7(a) loan is a matter between the lending institution and the borrower, subject to the requirements of the SBA.
Maximum Loan Amount and Guaranty
The maximum amount of a loan available under the SBA's Basic 7(a) Program is $2 million, with the SBA's maximum exposure at $1.5 million. For example, if a business receives an SBA guaranteed loan in the amount of $2 million, the maximum guaranty to the lender is $1.5 million, or 75 percent. These amounts are subject to change.
Small loans have a maximum guaranty of 85 percent. A loan is considered small if the gross loan amount is $150,00 or less. For loans greater than $150,000, the maximum guaranty is 75 percent. The Export Working Capital Loan Program allows a maximum of a 90 percent guaranty, up to a guaranteed amount of $1.5 million. For more information go to www.sba.gov/financing/sbaloan/7a.html.
Fees Associated with SBA Loans
The SBA charges lenders a guaranty and servicing fee for each loan approved. This is to offset the costs of the SBA Loan Programs to the taxpayers. Once these fees have been paid by the lender, they may be passed on to the borrower. The amount of these fees is determined by the amount of the loan guaranty. For more information on fees, go to www.sba.gov/financing/subfiles/sba_7a_fees.html.
Certain fees associated with loans are prohibited from being charged to SBA Loan applicants, including processing fees, origination fees, application fees, points, brokerage fees, and bonus points. Under the Export Working Capital Loan Program, a commitment fee may be charged.
Interest rates are negotiated between the borrower and the lender, subject to SBA maximums, which are pegged to the Prime Rate. The interest rate may be fixed or variable, and will be based on both the amount and length of the loan. For more information on interest rates for Section 7(a) Loans, go to www.sba.gov/financing/subfiles/7a_interest_rates.html.
A prepayment charge paid to the SBA by the borrower applies to those loans that meet the following criteria:
- A maturity of 15 years or more, where the borrower is voluntarily prepaying;
- The prepayment amount exceeds 25 percent of the outstanding balance of the loan;
- The prepayment is made with the first three years after the date of the first disbursement of the loan.
The calculation for the prepayment fee is:
- 5 percent of the amount of the prepayment during the first year after disbursement;
- 3 percent of the amount of the prepayment during the second year after disbursement;
- 1 percent of the amount of the prepayment during the third year after disbursement.
SBA Section 7(a) Loan Guaranty Programs for Special Needs
The SBA offers programs for special needs under its 7(a) Loan Guaranty Program. In most cases, the guidelines for the Basic Program governs these programs, including the rules, regulations, interest rate, and fees.
The Special Programs include:
- Export Working Capital Loan (EWCL);
- Export Express;
- International Trade Loan (ITL);
- Defense Loan & Technical Assistance (DELTA);
- Community Adjustment & Investment Program (CAIP);
- Qualified Employee Trusts Loan;
- Pollution Control Loan;
- CAPLines Loan.
Export Working Capital Program (EWCP)
The EWCP is a combined effort of the SBA and the Export-Import Bank, and was developed to provide short-term working capital for exporters where that capital is not otherwise available on reasonable terms. There is a one-page application form, with a usual turnaround time of 10 days or less.
To qualify for this program, in addition to the eligibility requirements for the Basic Section 7(a) Program, an applicant must be in business for a full year prior to submitting the application, although the requirement may be waived if the applicant has sufficient export trade experience.
The proceeds of an EWCP loan must be used to finance the working capital needs of the exporter, either in single or multiple transactions. Proceeds may not be used for the following: to finance professional export marketing advice or services; foreign business travel; participation in trade shows or U.S. support staff overseas; and may not be used to pay owners, delinquent taxes, or existing debt.
There are five unique requirements for an EWCP Loan, as follows:
- An applicant must submit cash flow projections to support the loan and the ability to repay.
- After receiving the loan, the recipient must submit continual progress reports.
- The SBA does not prescribe the Lender's fees.
- The SBA does not determine the interest rate for the EWCP.
- The SBA guarantees up to 90 percent of an EWCP Loan, up to $1.5 million.
Regarding collateral, a borrower under the EWCP must give the SBA a first security interest equal to 100 percent of the EWCP guaranty amount, and the collateral must be located in the United States. For more information, go to www.sba.gov/financing/loanprog/ewcp.html.
The SBA Export Express Program combines the SBA's small business lending assistance with its technical assistance program, to help small businesses obtain adequate export financing. Specifically, the Export Express Programs helps small businesses with exporting potential that need funds to purchase or produce goods, and/or provide services, for export.
In addition to the normal eligibility requirements for one of the SBA Loan Programs, a borrower under the Export Express Program must also have been in business for at least 12 months (not necessarily 12 months in an exporting business), and demonstrate that the loan proceeds will enable the business to enter a new export market or expand an existing export market. For more information, go to www.sba.gov/financing/loanprog/exportexpress.html.
International Trade Loan Program (ITL)
The ITL was developed to assist small businesses preparing to engage in, or already engaged in, international trade, or a small business adversely affected by competition from imports. To qualify under this program, a business must establish the following:
- The loan will significantly expand or develop an export market;
- It is currently adversely affected by import competition;
- It will upgrade equipment or facilities to improve its competitive position;
- It will provide a business plan that reasonably projects export sales sufficient to cover the loan.
Loan proceeds from an SBA International Trade Loan cannot be used for debt payment. Only collateral located in the United States, its territories, and possessions is acceptable under the ITL Program. For more information, go to http://www.sba.gov/financing/loanprog/tradeloans.html.
Defense Loan and Technical Assistance (DELTA) Program
The DELTA Program was designed to help eligible small business contractors transition from defense to commercial markets. The Program provides both financial and technical assistance to defense-related small businesses that were adversely affected by defense reductions.
This Program can be used in conjunction with both the 7(a) and 504 Loan Programs. In addition to the eligibility requirements for those programs, to qualify for the DELTA Program, a small business must obtain at least 25 percent of its revenue from the Department of Defense or a defense-related contract or subcontract in any one of five prior operating years. Small businesses wishing to take advantage of the DELTA Program must also meet at least one of the program's policy objectives: job retention, job creation, or plant retooling and expansion.
Community Adjustment & Investment Program (CAIP)
This program is designed to assist communities adversely affected by the North American Free Trade Agreement (NAFTA). To be eligible under this program, the business must be located in a county designated as being negatively affected by NAFTA, based on job losses and the county's unemployment rate. Eligibility has recently been expanded to include defined areas within a county, which will allow the SBA to act quickly under certain circumstances, such as where a plant closes.
CAIP is available for use both with the Section 7(a) and Section 504 Loan Programs with a job creation component. Under the Section 7(a) Loan Program, one job must be created for every $70,000 guaranteed by the SBA. Under the Section 504 Loan Program, one job must be created for every $50,000 guaranteed.
As of February 2004, more than 230 counties in 29 states have been designated as eligible for funding under the CAIP Program. See www.sba.gov/financing/caipeligibleareas.pdf for a list of these counties.
Qualified Employee Trusts Loan Program
This program provides financial assistance to Employee Stock Ownership Plans. To qualify under this program, the employee trust must be part of a plan sponsored by the employer company, and qualified under regulations of the Internal Revenue Service Code (Employee Stock Ownership Plan, or ESOP), or by the Department of Labor (the Employee Retirement Income Security Act, or ERISA). If the plan is covered by ERISA, the employee trust must also secure an exemption from the Department of Labor's regulations prohibiting certain loan transactions.
Pollution Control Loan Program
Pollution Control Loans are a special-purpose program under the Section 7(a) Loan Program. The special purpose is to provide financing to small businesses for the planning, design, or installation of a pollution control facility, which must prevent, reduce, abate, or control any form of pollution, including recycling.
Proceeds under this program may be used only for fixed assets; otherwise, this program follows the Section 7(a) guidelines.
CAPLines Loan Program
CAPLines is an umbrella program consisting of five types of loans to assist small businesses in meeting their short-term and cyclical working-capital needs. Except for the Small Asset-Based Line, a CAPLines loan can be for any dollar amount not exceeding the SBA limit.
The five types of loans include:
- Seasonal Line for advances against anticipated accounts receivable and inventory;
- Contract Line for financing direct labor and material costs associated with performing assignable contracts;
- Builder's Line for small builders or general contractors constructing or renovating commercial or residential buildings;
- Standard Asset-Based Line for an asset-based revolving line of credit for businesses unable to meet credit standards for long-term credit;
- Small Asset-Based Line for an asset-based revolving line of credit of up to $200,000.
Each of these lines of credit has a maturity of up to five years, but a shorter period may be established, depending on the individual business's needs. Owners of a business holding at least a 20 percent ownership interest will generally be required to guaranty these loans. The nature and value of a business's collateral will be a factor in granting a loan under this program.