Small Business Administration loans

Small Business Administration Basic 7(a) Loan

Of all the small business loans offered by the SBA, the most commonly used is the basic loan, known as an “7(a) Loan”. The name refers to the specific section of the Small Business Act.  This section authorizes the SBA to provide small businesses loans in the United States.

The Small Business Administration does not actually lend money to small businesses itself. Rather, it provides a program wherein its shares the risk of non-payment with banking and non-banking lenders who choose to participate in the program.  The lenders must agree to structure their loans in accordance with SBA guidelines. Lenders are also required to apply to the SBA and be accepted before they may receive a guaranty for a portion of a small business loan. Under this program, it is the lender who makes and administers the loan.

Applying for basic small business loans

First of all, you must contact a commercial lender who participates in the Small Business Administration program to apply for a 7(a) loan. Generally speaking, the majority of banks in the United States do participate, as well as many non-banking lenders. Next, a lender will review your application and decide whether it thinks it is necessary to apply for an SBA guaranty. You are still obligated to repay the full amount of any loan, but the fact that the SBA guaranties a portion of the loan is an incentive for a lender to take a greater risk.

It is important to note that under the SBA program, if a lender decides not to approve the loan the SBA cannot force a lender to lend the money. With this in mind, an applicant should be sure they meet SBA and lender requirements before applying for a loan. Similar to a standard loan, an applicant must be eligible and have decent credit.

Are you eligible for a basic small business loan?

When deciding upon eligibility, the SBA and lender will factor in an applicant’s business cash flow, character, management skills and collateral, among other considerations. Being that lenders rely heavily on credit reports provided by Equifax, Trans Union, and Experian, it is a good idea to purchase a copy of your credit report. Look for any errors before applying for a small business loan. In addition, you will also want to pay particular attention to your credit score as calculated by these agencies. In the event that your score in not in a desirable range, you may want to try to improve your score before applying for a loan. Take time to learn how to improve your score.

Prequalification Program

In addition to its basic loan program, the SBA works with Small Business Development Centers to offer prequalification certificates. A Small Business Development Centers help borrowers put together an attractive loan package, with the intention to develop a complete business plan. Equally important, they also take steps to ensure the application meets all requirements and is credit worthy.

The Prequalification Loan Program is especially intended for business owners who are:

  • low income
  • disabled
  • starting a new business
  • veterans
  • exporters
  • in a rural or specialized industry

In any event, once a loan application is complete, if the organization believes the loan will be approved, it will submit the package to the SBA for expedited consideration. This does NOT decrease the SBA’s normal processing time.

If after the application has been analyzed the SBA it feels that the loan application has merit, it will issue the borrower a certificate/letter of guaranty that they can then take to a lender. The development center will many times provide the borrower with a list of lenders offering competitive rates.

Non-profit Small Business Development Centers working with the SBA do not charge a fee for loan packaging, however for-profit organizations will charge a fee.

Related resources:

Find a Small Business Development Center by State

SBA Microloan Program

For businesses that are just starting out or trying to grow, an SBA microloan may be the answer. The SBA works with non-profit community based lenders to offer small loans averaging $13,000 and not exceeding $35,000. Applications are made directly to the lender and all decisions regarding the loan are made by the lender as well.

Terms, Interest Rates, and Fees:

Although a microloan must be paid off within six (6) years, terms vary depending on the lender, business plan and the size of the loan. Interest rates, though they vary as well, are usually between 8 – 13%. Most lenders will require some type of collateral as well as a business owner’s personal guarantee.

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