7(a) loans are the most basic and most used type of loan in the SBA's business loan programs. Its name comes from section 7(a) of the Small Business Act, which authorizes the agency to provide loans to American small businesses.

All 7(a) loans are provided by lenders who are called participants because they participate with the SBA in the 7(a) program. Not all lenders choose to participate, but most American banks do. There are also some non-bank lenders who participate with the SBA in the 7(a) program, which expands the availability of lenders making loans under SBA guidelines.

7(a) loans are only available on a guarantee basis. This means they are provided by lenders who choose to structure their own loans by the SBA's requirements and apply and receive a guarantee from the SBA on a portion of this loan. The SBA does not fully guarantee 7(a) loans. The lender and the SBA share the risk that a borrower will not be able to repay in full. The guarantee is a guarantee against payment default; it does not cover imprudent decisions by the lender or misrepresentation by the borrower.

Under the guarantee concept, commercial lenders make and administer the loans; the business applies to a lender for their financing. The lender decides if they will make the loan internally or if the application has some weaknesses which, in their opinion, will require an SBA guarantee. The guarantee which the SBA provides is only available to the lender. It assures the lender that in the event the borrower does not repay their obligation and a payment default occurs, the government will reimburse the lender for its loss up to the percentage of the SBA's guarantee. Under this program, the borrower remains obligated for the full amount due.

All 7(a) loans which the SBA guarantees must meet 7(a) criteria. The business gets a loan from its lender with a 7(a) structure and the lender gets an SBA guarantee on a portion or percentage of this loan; hence the primary business loan assistance program available to small business from the SBA is called the 7(a) guarantee loan program.

A key concept of the 7(a) guarantee loan program is that the loan actually comes from a commercial lender, not the government. If the lender is not willing to provide the loan, even if they may be able to get an SBA guarantee, the agency cannot force the lender to change their mind. Neither can the SBA make the loan by itself, because the agency does not have any money to lend. Therefore, it is paramount that all applicants positively approach the lender for a loan and know the lender’s criteria and requirements as well as those of the SBA. In order to obtain positive consideration for an SBA-supported loan, the applicant must be both eligible and creditworthy.

What SBA Seeks in a Loan Application

In order to get a 7(a) loan, the applicant must first be eligible. Repayment ability from the cash flow of the business is a primary consideration in the SBA loan decision process, but good character, management capability, collateral, and owner's equity contribution are also important considerations. All owners of 20 percent or more are required to personally guarantee SBA loans.

Eligibility Criteria

All applicants must be eligible to be considered for a 7(a) loan. The eligibility requirements are designed to be as broad as possible so that this lending program can accommodate the widest variety of small business financing needs. All businesses that are considered for financing under the SBA’s 7(a) loan program must: meet SBA size standards, be for profit, lack the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment ability. Certain variations of the program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria.

Eligibility factors for all 7(a) loans include: size, type of business, use of proceeds, and the availability of funds from other sources. The following links will provide more detailed information on these eligibility issues.

SIZE
ELIGIBLE AND INELIGIBLE TYPES OF BUSINESS
USE OF PROCEEDS
AVAILABILITY OF FUNDS FROM OTHER SOURCES

Character Considerations

The SBA must determine if the principals of each applicant firm have historically shown the willingness and ability to pay their debts and whether they have abided by the laws of their community. The agency must know if there are any factors which impact on these issues; therefore, a Statement of Personal History is obtained from each principal.

Other Aspects of the Basic 7(a) Loan Program

In addition to credit and eligibility criteria, an applicant should be aware of the general types of terms and conditions they can expect if the SBA is involved in financial assistance. The specific terms of SBA loans are negotiated between an applicant and the participating financial institution, subject to the requirements of the SBA. In general, the following provisions apply to all SBA 7(a) loans; however, certain Loan Programs or Lender Programs vary from these standards. These variations are indicated for each program.

Maximum Loan Amounts
Maturity Terms For 7(A) Loans
Interest Rates Applicable to 7(A) Loans
Percentage of Guarantee on 7(A) Loans
SBA Fees for 7(a) Loans
Prepayment Penalties for SBA 7(A) Loan