SBA 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 requirements.

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 lenders.

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:

 
Purpose Loan Life
Working capital Maturity up to 7-10 years
Machinery and equipment Maturity up to 10-25 years
Building purchase/construction 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.