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

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

Under the guaranty concept, commercial lenders make and administer the loans. In essence, this means that the BANK will provide the financing to the borrower, NOT the SBA. If the bank is not willing to provide the loan, even if they may be able to get an SBA guaranty, the SBA can not force the lender to change their mind. Neither can SBA make the loan by itself because the SBA does not have any money to lend.

The process:
Reliant Capital Funding sends your application to the bank (lender). The lender decides if they will make the loan internally (conventional loan) or if the application has some weaknesses (or if the borrower lacks experience) which, in their opinion, will require an SBA guaranty if the loan is to be made. The guaranty which 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 SBA's guaranty (see below). Under this program, the borrower remains obligated for the full amount due.

SBA's 7(a) Loan Program has a maximum loan amount of $2 million dollars. SBA's maximum exposure is $1.5 million. Thus, if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.5 million or 75 percent.

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 (principals) 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 in order that this lending program can accommodate the most diverse variety of small business financing needs. All businesses that are considered for financing under SBA’s 7(a) loan program must: meet SBA size standards, be for-profit, not already have the internal resources (business or personal) to provide the financing, and be able to demonstrate repayment. Certain variations of SBA’s 7(a) loan program may also require additional eligibility criteria. Special purpose programs will identify those additional criteria.

Character Considerations:
SBA must determine if the principals of each applicant firm have historically shown the willingness and ability to pay their debts and whether they 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 (Form 912)" is obtained from each principal.

Maturity/Term of Loan:
SBA loan programs are generally intended to encourage longer term small business financing but actual loan maturities are based on: the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. However, maximum loan maturities have been established: twenty-five (25) years for real estate and equipment; and, generally seven (7) years for working capital.

Loans for working capital purposes will not exceed seven (7) years, except when a longer maturity (up to 10 years) may be needed to ensure repayment. The maximum maturity of loans used to finance fixed assets other than real estate will be limited to the economic life of those assets - but in no instance to exceed twenty-five (25) years. The 25-year maximum will generally apply to the acquisition of land and buildings or the refinancing of debt incurred in their acquisition. Where business premises are to be constructed or significantly renovated, the 25-year maximum would be in addition to the time needed to complete construction. (Significant renovation means construction of at least one-third of the current value of the property.) New business acquisition loans would mature after 10 years.

When loan proceeds will be used for a combination of purposes, the maximum maturity can be a weighted average of those maturities, which results in level payments. (this varies from bank to bank)
i.e: Consider the following scenario: Purchase price for a business with property is $1,500,000. The allocations on the contract are as follows: $1,000,000 for the property, $500,000 for the business. Normally, the bank will the weighted average. Since the property is eligible for a 25 year term, and the business is eligible for 10 years, the weighted average would be:
1) Property: $1,000,000/$1,500,000=0.667, 0.667*25 years=16.7 years
2) Business: $500,000/$1,500,000=0.33, 0.33*10 years = 3.3 years
3) 16.7 years + 3.3 years = 20 years. The loan in this scenario would be amortized over 20 years.

SBA Guarantee Fee:
To offset the costs of the SBA's loan programs to the taxpayer, the SBA charges lenders a guaranty fee and a servicing fee for each loan approved and disbursed. The amount of the fees are based on the guaranty portion of the loans. The lender may charge the upfront guaranty fee to the borrower after the lender has paid the fee to SBA and has made the first disbursement of the loan. The lender's annual service fee to SBA cannot be charged to the borrower.

For loans approved on or after December 8, 2004, the following fee structure applies:

• For loans of $150,000 or less, a 2 percent guaranty fee will be charged. Lenders are again permitted to retain 25 percent of the up-front guarantee fee on loans with a gross amount of $150,000 or less.
• For loans more than $150,000 but up to and including $700,000, a 3 percent guaranty fee will be charged.
• For loans greater than $700,000, a 3.5 percent guaranty fee will be charged.
• For loans greater than $1,000,000, an additional .25 percent guaranty fee will be charged for that portion greater than $1,000,000. The portion of $1,000,000 or less would be charged a 3.5 percent guaranty fee. The portion greater than $1,000,000 would be charged at 3.75 percent.

Pre Payment Penalty:
All SBA loans have a standard 3 year Pre Payment Penalty (PPP). If you prepay within the first three years, you are penalized a percentage of the remaining principal that you pay back, as per the following: 5% of remaining prinicpal in the first year, 3% of remaining prinicpal in the second year, and 1% of remaining prinicpal in the third year.

Various parts of this webpage are referenced from the Small Business Administration’s website.