SBA 7(a) Guaranteed Loan Program

I. Loan Amounts Available with an SBA Guarantee

A maximum loan amount of $2 million has been established for SBA 7(a) loans. However, the maximum dollar amount the SBA can guarantee is generally $1.5 million. Small loans carry a maximum guarantee of 85%. Loans are considered small if the gross loan amount is $150,000 or less. For loans greater than $150,000, the maximum guaranty is 75%.

II. What SBA Seeks in a Loan Application

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.

III. Who Is Eligible for an SBA Loan

Although most small businesses are eligible for SBA loans, some types of businesses are ineligible and a case-by-case determination must be made by the Lender. Eligibility is generally determined by following four factors:

TYPE OF ELIGIBLE BUSINESSES - 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 assistance.

SIZE OF BUSINESS - SBA defines an eligible small business as one that is independently owned and operated and not dominant in its field of operation. SBA also states that in determining what is a small business, the definition shall vary from industry to industry to adequately reflect industry differences and therefore developed size standards that define the maximum size of an eligible small business.

As apparent from the following general description of SBA's size standards, most businesses are considered small. However, these represent general definitions that in some cases are further defined by specific SIC code.

Industry 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 your business is close to these standards, size eligibility should be discussed with ACC and possibly the local SBA office. Also, the size standards for a particular business may change from time to time and some 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. In order to be eligible for financial consideration, the applicant must meet the size standard for its primary business activity and the affiliated group must meet the standard for its primary business activity.

USE OF LOAN PROCEEDS - The proceeds of an SBA Guaranteed Loan can be used for most business purposes. These may include 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.

Proceeds of an SBA Guaranteed Loan cannot be used to:

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.)

SPECIAL CIRCUMSTANCES - Certain other considerations apply to the types of businesses and applicants eligible for an SBA Guaranteed Loan, as follows:

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 Farmers Home Administration (FmHA) programs, particularly if the applicant has a prior or existing relationship with FmHA.

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.

Change of Ownership Loans 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 discouraged.

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 Paroled applicants will not be accepted.

IV. 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 not eligible.

LENDING ACTIVITIES including 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 production, 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 authority.

CHARITABLE, RELIGIOUS, OR OTHER NON-PROFIT or government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not eligible.

V. SBA Loan Maturities

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, SBA's maximum loan maturities are: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

Loans for 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.)

VI. Interest Rates Applicable to SBA 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, whether fixed or variable, for 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.

VII. Fees Associated with SBA Loans

To offset the costs of the loan program to the taxpayer, the SBA charges Lenders a guaranty and a servicing fee for each loan approved. These fees can be passed on to the borrower once they have been paid by the Lender. The amount of the fees are determined by the amount of the loan guaranty.

For loans with a maturity of 12 months or less, the guaranty fee is .25 of 1 percent of the guaranteed amount.

Gross Loan Size: $150,000 or less = 1.0% of guaranteed amount. Over $150,000 to $700,000 = 2.5% of guaranteed amount. Over $700,000 to $2,000,000 = 3.5% of guaranteed amount.*

*There is an additional up-front guarantee fee equal to 0.25 percent of the amount by which the guaranteed portion exceeds $1,000,000.

In addition, all loans will be subject to a thirty six basis point annualized servicing fee, which is applied to the outstanding balance of SBA's guaranteed portion of the loan.

VIII. Guaranty Percents

For those applicants that meet the credit and eligibility standards, the SBA can guaranty up to 85 percent of loans of $150,000 and less, and up to 75 percent of loans above $150,000 (generally up to a maximum guaranty amount of $1,000,000).

IX. Prepayment

Effective for all loans approved on or after December 22, 2000, a new prepayment charge paid by the borrower to SBA ("subsidy recoupment fee") has been added for those loans that meet the following criteria:

have a maturity of 15 years or more where the borrower is prepaying voluntarily;
the prepayment amount exceeds 25 percent of the outstanding balance of the loan; and
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:

during the first year after disbursement, 5 percent of the amount of the prepayment;
during the second year after disbursement, 3 percent of the amount of the prepayment; or
during the third year after disbursement, 1 percent of the amount of the prepayment.