Borrowing Under the SBA’s 7(a) Lending Program: Three Factors to Bear in Mind

July 7, 2017

By Dana E. Livne

As an entrepreneur or a small business owner, you know that access to capital is a crucial component in both the setting up and growing of your business. Capital is necessary at every stage, for example, enabling your business to order goods before you expect to be paid, paying for accumulating overhead costs, investing in client development and marketing, etc. -- having access to capital is the lifeline for your business. However, entrepreneurs and small business owners often find that it is not easy to secure traditional bank loans and rely on personal and business credit cards and other high interest loans for budding or even established small businesses.

The 7(a) lending program offers low-interest loans to small business owners. The SBA teams up with banks and other financial institutions and provides a great alternative to traditional borrowing banks. 7(a) loans have a maximum loan amount of $5 million and there is no minimum loan amount. The SBA reports that the average 7(a) loan amount in fiscal year 2015 was $371,628.

From a bank’s perspective, 7(a) loans are a low-risk alternative to the high transactional costs and uncertainties of traditional lending. Lenders can use 7(a) loans to fund working capital and general business needs of small businesses, with the SBA providing a guarantee to help the lender if the borrower defaults, so even if the borrower cannot make its repayment, the lender’s risk is lower as it stands to lose only a small amount.

The SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. The SBA’s maximum exposure amount is $3,750,000. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3,750,000, or 75 percent.

However, securing capital through the 7(a) program can be challenging. Here are three factors to bear in mind:
  1. There are certain restrictions. For example, the SBA will not provide capital if the small business owner can obtain credit elsewhere.
  2. The application for the loan can be technical. Banks need to have all documents set out in the regulations completed prior to closing a 7(a) loan if they want their guarantee to be enforced. If any document required by the SBA is not submitted, it can be disqualifying. For example, check to see if a landlord’s waiver or third-party consent is required.
  3. The SBA will be closely scrutinizing your business’s legal agreements as part of your application. Therefore, it is important to ensure that documents, such as your operating agreement if you have a limited liability company, or your bylaws if you have a corporation, have been carefully drafted to demonstrate your business’s qualification for the program.
For more information on how PilieroMazza can help your business grow, please contact our corporate and business practice group.

About the Author: Dana Livne is a corporate specialist with PilieroMazza in the Business and Corporate Group. She may be reached at dlivne@pilieromazza.com.
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