The SBA Loan Guaranty Program

Part 1: The 7(a) Program

The 7(a) Program is the primary loan guaranty program of the SBA. Eligible uses for the funds of this program include the acquisition or improvement of assets, refinancing of existing debt, or for working capital. Repayment terms are determined by the actual use of the loan proceeds. Real estate loans can be made for up to a maximum of twenty-five years (twenty years for refinancing existing real estate loans); equipment loans, though usually limited to ten years, can be extended for up to fifteen years or to the expected useful life of the acquired equipment, whichever is shorter; and working capital loans can be extended for a maximum of seven years. 7(a) Program provides for the full amortization of its loans with no prepayment penalties.

Eligibility to participate in the 7(a) Program is determined by the maximum level of either the borrower’s revenues or the total number of employees, according to the Standard Industrial Code (SIC) classification of the business. The SIC classification is a four-digit code used for classifying industries. Although being supplanted by the six-digit North American Industry Classification System (NAICS)), it is still used by the Securities and Exchange Commission (SEC) and other government departments and agencies. Generally, most businesses that produce no more than five million dollars in total revenues or have no more than five hundred employees are eligible for SBA assistance, although the industries that are limited by the number of employees can exceed five million dollars.

Although there is no actual limit on the size of the loan that a lender may grant, most lenders will finance up to $1,000,000 under the 7(a) Program. Lenders are guaranteed by the SBA for up to 75% of the total loan amount (80% for loans under $100,000) up to a maximum guaranty of $750,000.

There are several initiative programs under the umbrella of the 7(a) Program that enable the borrower to obtain higher guarantees if he or she qualifies. These special programs are designed to assist private lenders in accomplishing specific public policy objectives. Categories include:

• 7(a) 11 Program - This loan program is for designated areas of high unemployment or concentrations of low-income individuals.
• Veterans Loan Program - This program is for Vietnam-era veterans.
• Handicapped Assistance Loan Program - Program for business owners who have a permanent mental, physical, or emotional handicap, or for nonprofit workshops operated for the benefit of handicapped individuals.
• Contract Loan Program - Loan program which supplies short-term contract funding for entrepreneurs needing temporary financing during their growth stage.
• Solar Energy and Conservation Loan Program - This loan program is for businesses that design, engineer, or manufacture equipment or systems that convert alternative sources of energy, provide for co-generation of energy, or increase energy efficiency.
• Employee Trust Loan Program - This program is for Employee Stock Ownership Plans (ESOPs) to finance employee-owned businesses.
• Pollution Control Loan Program - Designed for businesses involved in the planning, design, or installation of pollution-control facilities.
• International Trade Loan Program - This loan program is for businesses that pursue international trade opportunities to accommodate their ability to engage in export sales and develop new markets for their products.

For more specific information concerning qualifications and benefits of participation, borrowers who are interested or involved in these economic categories should contact the SBA or their lending institution. In Part 2 of this series, we will discuss the LowDoc and 504 Programs administered by the SBA.