SBA sets the guidelines that govern the 7(a) loan program. As a lender, these conditions determine which businesses you can lend to and the type of loans you can give.
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The specific terms of 7(a) loans are negotiated between the borrower and the participating lender, subject to the requirements of the SBA. In general, the following provisions apply to all SBA 7(a) loans.
Eligibility requirements
While the vast majority of businesses are eligible for financial assistance from SBA, some are not.
Eligible businesses must:
- Be an operating business.
- Operate for profit.
- Be located in the U.S.
- Be small under SBA size requirements
- Not be a type of ineligible business
- Not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources.
- Be creditworthy and demonstrate a reasonable ability to repay the loan.
Use of loan proceeds
7(a) loans can be used for:
- Acquiring, refinancing, or improving real estate and/or buildings
- Short- and long-term working capital
- Refinancing current business debt
- Purchasing and installation of machinery and equipment
- Purchasing furniture, fixtures, and supplies
- Changes of ownership (complete or partial)
- Multiple purpose loans, including any of the above
Loan amounts
Most 7(a) loans have a maximum loan amount of $5 million. However, 7(a) loans made under the SBA Express and Export Express delivery methods have maximum loan amounts of $500,000.
SBA's maximum exposure (i.e., dollars guaranteed) is $3.75 million. However, 7(a) International Trade loans may receive a maximum guaranty of 90% or $4.5 million. The amount guaranteed for working capital for the International Trade loan combined with any other outstanding 7(a) loan for working capital cannot exceed $4 million.
Percentage of guaranty
For most 7(a) loan programs, SBA guarantees up to 85 percent of loans of $150,000 or less, and up to 75 percent of loans above $150,000. However, SBA provides a 50% guaranty on SBA Express loans. SBA provides a 90% guaranty for Export Express, Export Working Capital Program (EWCP), and International Trade loans.
Maturity terms
The term of a 7(a) loan will be:
- The shortest appropriate term, depending upon the borrower's ability to repay;
- Ten years or less, unless it finances or refinances real estate or equipment with a useful life exceeding ten years. The term for a loan to finance equipment and/or leasehold improvements may include an additional reasonable period, not to exceed 12 months, when necessary to complete the installation of the equipment and/or complete the leasehold improvements.
- A maximum of 25 years, including extensions. (A portion of a loan used to acquire or improve real property may have a term of 25 years plus an additional period needed to complete the construction or improvements.).
Interest rates
Interest rates for 7(a) loans are negotiated between the borrower and the lender, but are subject to SBA maximums, which are pegged to the prime rate or an optional peg rate. Interest rates may be fixed or variable.
SBA publishes the maximum fixed interest rates on SBA’s FTA wiki.
The maximum interest rates for variable 7(a) loans are as follows:
| Loan amount | Max rate |
|---|---|
| $50,000 or less | Base rate plus 6.5% |
| $50,001 to $250,000 | Base rate plus 6.0% |
| $250,001 to $350,000 | Base rate plus 4.5% |
| Greater than $350,000 | Base rate plus 3.0% |
Fees
Fees the lender pays SBA
Lenders must pay an Upfront Fee (also known as an SBA Guaranty Fee) for each loan guaranteed under the 7(a) program but are permitted to pass the cost of the fee on to the borrower.
Lenders must pay the Lender’s Annual Service Fee (also known as the SBA On-Going Guaranty Fee) based on the outstanding principal balance of the guaranteed portion of a loan at the time of SBA loan approval. This fee cannot be charged to the borrower.
SBA publishes the amount of the Upfront Fee and the Lender’s Annual Service Fee each fiscal year for all loans approved during that year through an Information Notice.
Fees lenders and agents may charge the borrower
SOP 50 10 and the regulation at 13 CFR § 120.221 contain information on fees lenders and agents may charge the borrower.
Prepayment penalties
For loans with a maturity of 15 years or longer, prepayment penalties apply when:
- The borrower voluntarily prepays 25 percent or more of the outstanding balance of the loan.
- The prepayment is made within the first three years after the date of the first disbursem*nt of the loan proceeds.
The prepayment fee is:
- During the first year after disbursem*nt, 5% of the amount of the prepayment.
- During the second year after disbursem*nt, 3% of the amount of the prepayment.
- During the third year after disbursem*nt, 1% of the amount of the prepayment.
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Lenders that work with SBA provide financial assistance to small businesses through government-backed loans.
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