How does SBA 7(a) work

Written by Peach Capital

August 17, 2018

How does SBA 7(a) work into SBA’s Financial Management Systems and Strategy?

In this article, we’re going to explain How does SBA 7(a) work into SBA’s Financial Management Systems and Strategy. We will talk about its guarantee fees in detail and discuss how much you’ll typically be charged and why. These guarantee fees are important to be understood before you seek SBA 7(a) financing in order to be aware of all costs associated with a potential loan. When getting an SBA 7(a) loan there are other fees you’ll be charged on top of the guarantee fees. We’re going to talk about these fees as well, how much they typically are, and when you’ll be responsible for paying them and of course why.

What is the Small business administration (SBA)

The U.S. Small Business Administration is an agency of the federal government, established in 1953 to assist Small Business Enterprises with Loans Guaranty; it is Essentially an Insurance Company for loans given by banks to small business owners who just do not meet the level of requirement major banks require to be approved for a business loan.

The strategy adopted by this agency (SBA) is based on loan guarantee program, has a mission to maintain and strengthen the nation’s economy by enabling the establishment and vitality of small businesses, assist in the economic recovery of communities after disasters by providing to eligible and qualified companies a financial guarantee to improve their ability to obtain long-term financing from banks.

SBA’s goals and organization

SBA lending activity shows consistent growth, due to increasing loan levels in small business lending through the  7(a) and 504 loan programs, as well as increases in lending to women, veterans, and socially and economically disadvantaged communities in emerging markets. In FY 2017, the SBA approved more than 68,000 loans in the 7(a) and 504 loan programs, providing more than $30 billion to small businesses and in the process, the agency (SBA) assisted with the creation of nearly 630,000 jobs across the country.

During FY 2017, SBA lending had a significant positive effect on businesses that have historically faced greater challenges in obtaining conventional loans. Minority business owners received a record combined $9.58 billion in 7(a) and 504 approved lending, or 31 percent of SBA’s loan portfolio. 7(a) lending to women-owned businesses grew in total dollar and volume, exceeding $7.5 billion in FY 2017, an increase of $298 million from FY 2016. The 504 lending to women-owned businesses reached $955.2 million, a $277 million increase over the previous fiscal year. Loans to veterans totaled $1.15 billion for the 7(a) and 504 programs.

Even though the SBA conducts many programs to assist small businesses, the focus of this article is on the assistance provided to the SBA 7(a) Loan Guaranty Program, which provides a credit enhancement to participants Banks.

I’m providing this information with one goal in mind; trying to help small business owners understand better the regulations, eligibility, and qualifications so that you will be able to put together an efficient and effective development of commercial loan application (A Commercial is any Loan obtained for a business purpose). These two loan programs are governed by different regulations and distinguished by eligibility standards, restrictions on the use of loan proceeds, repayment terms, and the Borrower owns credit approval process. These two programs are described below in order for the borrower to understand what kind of funding can be obtained through The Small business Administration.

Utility and maturity of SBA 7(a) Loan program

The 7 (a) is the SBA’s primary loan guaranty program; its profitability and flexibility between the borrowers and the banks make this loan as the most recommended by lenders. This loan can be used to purchase a business, improvements of assets, refinancing existing debt, working capital and its repayment terms are determined by the following use of the loan proceeds:


  1. For real Estate purchase, the loan can be extended up to twenty + five years (20-25 years) however usually twenty years has been preferably used for financing real estate loans.
  2. For equipment can be extended up to fifteen years, although generally limited to ten or to the expected life of the equipment purchased, which are generally one shorter than the others.
  3. For Business acquisition, this loan can be extended up to ten years (10 years).
  4. For Working Capital it can be extended up to seven (7) years.

Currently, the SBA guarantees the loans for 75% up to 80% of the total loan amount (80% for loans under$150,000). The maximum amount for this loan is $5 million, but other programs have different maximum amounts. Here’s a breakdown of maximum SBA loan amounts:


  • Standard 7(a) loan – $5 million
  • Export Working Capital Program loan – $5 million
  • Export Express loan – $500,000
  • Small 7(a) loan – $350,000
  • SBA Express loan – $350,000



Special interests

The SBA 7(a) also has outreach resources available for specific special interests which include financing initiatives as well as other services which include:

  • Woman
  • Minorities
  • Veterans
  • Native American

Others eligible to participate in the SBA 7(a)

Eligibility to participate in this program is limited by the maximum level of either the borrower revenues or the total number of employees as defined by the SBA according to NAICS (North American Industrial classification system).

Most businesses that produce no more than $6 Million in total revenues or have no more than five hundred employees are eligible for small business administration assistance, although the industries that are limited by the number of employees can generally exceed $6 Million in revenues.

There are several special-purpose loan programs under the umbrella of this program that enable you to qualify under certain conditions that may not otherwise be available. These special initiative programs are primarily intended to assist the Banks in accomplishing of specific public-policy objectives and involve the following borrower categories:

Community Express_ this program is designed for low and moderate income individuals and new market Business.

Veteran Loan Program_ VBOCs ( Veteran’s Business Outreach Centers) provide counseling and training services to veteran-owned and service-disabled veteran-owned small businesses and entrepreneurs, along with reserve component members starting new small businesses or expanding established small businesses.

Disabled Assistance Loan Program_ according to a 2016 study by the University of New Hampshire’s Institute on Disabilities (IOD), disabled Americans face escalating challenges in finding employment, earning a living, avoiding poverty and staying healthy.

Energy Conservation Loan program_ this program is geared towards businesses in energy efficiency industry

Qualified Employee Trusts Loan Program_ many lenders do not have the legal knowledge or experience to provide loans to irrevocable or living trusts. You need a trust loan from SBA program which is designed to help you when and where you need it most: the process of settling an estate, paying taxes or legal fees, upkeep of a property, and the non-pro rata distributions for a family trust.

Pollution Control Loan Program_ this program is a revolving fund designed to operate in perpetuity to provide low-interest rate loans and other forms of assistance for water resource and ambiance protection and improvement projects. In addition, specialized services are provided for small and hardship communities.

Export Working Capital Program_ the SBA provides several types of export loans, including SBA Export Express loans (up to $500,000), Export Working Capital loans (up to $5 million) fund their export transactions, and/or support business expansion due to exporting success. Centers

International Trade Loan Program _ The International Trade loans (up to $5 million) provides small businesses with enhanced export financing options to develop foreign markets. The SBA provides technical assistance on trade finance and funding questions through staff located in U.S. Export Assistance

Defense Loan and Technical Assistance Program_ DETA is designed to help eligible small business contractor’s transition from defense to civilian markets. The DELTA program provides financial and technical assistance to defense-dependent small businesses that have been adversely affected by defense reduction.

U.S Community Adjustment and Investments Program_ CAIP was established as a result of the North American free trade agreement implementation act passed in December 1993. The community adjustment and investment program use a lending partnership with the department of agriculture and the SBA to jointly provide federal loan guarantees of eligible communities.

CAP lines_ this loan program is designed to help small businesses with short-term and cyclical financing working capital needs.

Non eligible companies

The SBA (7a) is not a program considered eligible to every type of business, although most of the companies are eligible to participate in the SBA loan programs; if your business falls into any of the element on the lists below, you not qualify:

  1. Non Profit Corporations
  2. Gambling and illegal activities
  3. Investments Real property
  4. Pyramid Sales organizations
  5. Speculative types businesses
  6. Lending Institutions
  7. Lewd or prurient goods or services

Borrower Equity Requirements

Lenders are in the business market for lending money, but they want to manage the amount of risk they take on in the process. Before you can get approved for an SBA 7(a) loan, you’ll need to meet the borrower equity requirements by showing the lender that you have invested a certain effort, the percentage of your own money and you own an action plan for your venture.

Collateral for an SBA 7 (a) Loan

Business owners are expected to make all business assets available as collateral for SBA 79(a) loan; the SBA Loan program allows SBA 7(a) to be approved even value of business assets are not high enough to provide sufficient security. So, SBA can register liens on home or other personal property.

SBA won’t turn down loan applicants due to insufficient collateral, as long as they meet all other qualifications.

Fees and penalties prepayment

Lenders can charge borrowers late fees for missed payments, services charge and out of pocket expenses.

The ten (10) years terms of SBA 7(a) or longer are subject to prepayment penalties during the first three years. For loan amount “between” $150,000 to $700,000 the 3% guaranty can be added; 3.5% on loans of $700,000-$1 million and finally for loans between $1 Million – $ 5Million range, 3.5% guaranty fee is charged on the first $1 million plus an additional 0.25% for the remaining total amount.

Last considerations

The SBA 7(a) government-guaranteed loan program is more popular than ever during these times of economic competition where small businesses are willing to become more productive and proactive. A constantly changing business environment has caused conventional bank lenders to exercise much more caution in granting loans to small businesses in America. Businesses can qualify for SBA loans with lower down payments, longer repayment terms, and easier qualifying criteria that are required for conventional bank loan applications. The SBA loan program, once considered the loan product of last resort, has become a much more popular vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our economy at this time.


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