Regular 7(a) Loan Guarantees
"You can't have everything. Where would you put
it?" — Comedian Steven Wright
Effective December 22, 2000, a maximum loan amount of $2
million was established for 7(a) loans but the maximum amount
guaranteed by the SBA is generally just $1 million. Small loans
(those under $150,000) carry a maximum guarantee of 85 percent.
Loans greater than $150,000 are guaranteed at 75 percent.
Unfortunately, because the amount of the loan guarantee is
greater than in the LowDoc program,
the amount of paperwork to obtain this type of guarantee is also
greater. (Those familiar with the program facetiously refer to
it as the "HighDoc" program.) Turnaround time on these
applications can range from several weeks to months.
While most entrepreneurs can complete a LowDoc application
themselves, with the assistance of the private lender, a Section
7(a) loan guarantee application is considerably more
complicated. Average time for completing a successful loan
guarantee package is about 25 hours. To get assistance in
completing the paperwork, check with any local municipal,
county, or state economic development agencies in your area.
Some of these groups will provide no-cost or low-cost assistance
in preparing the application. Otherwise, consider engaging one
of the various services or professionals that prepare loan
packages. For a listing of these services, check your Yellow
Pages under "Loans" or request a referral from your
lender. The price range for loan packaging is approximately
$1,200 — $5,000. To avoid unnecessary expenses, make sure that
you have a bank commitment prior to engaging a loan
guarantee packaging service. The bank will need only about
one-half of the material and information necessary for the SBA
Loan proceeds may be used to establish a new business or to
assist in the operation, acquisition or expansion of an existing
business, including working capital; the purchase of inventory,
machinery and equipment; and the construction, expansion and
rehabilitation of business property. A SBA guarantee is
especially helpful to small businesses who need long-term credit
for these purposes, but cannot afford the large equity
downpayment (often around 30 percent) required by conventional
Loan maturity varies according to the estimated economic life
of the assets being financed and the applicant's ability to
repay. In addition, the following maximum maturities apply:
||Maturity up to 7-10 years
|Machinery and equipment
||Maturity up to 10-25 years
||Maturity up to 25 years
When loan proceeds will be used for a combination of
purposes, the maximum maturity can be a weighted average of
those maturities, which allows for regular, equal payments. Or,
it can be the sum of equal monthly installments on the allowable
maturities for each purpose, which results in unequal payments.
The interest rate for guaranteed loans reflects prevailing
market rates and can either be fixed over the life of the loan
or can fluctuate with the market. The maximum interest rate
permitted on guaranteed loans is the lowest New York prime rate
(as published in the Wall Street Journal) plus up to 2.25
percent for loans with a maturity under seven years and up to
2.75 percent for loans with a maturity of seven years or more.
Regular 7(a) guarantees prohibit the use of balloon payments ( a
"balloon" is a large, final lump sum payment due after
a set time period) or prepayment penalties (a charge for paying
off a debt early and reducing the total interest paid on the
loan) by the private lender.
In an effort to expedite processing of these larger loan
applications, the SBA has established special
programs for lenders.