SBA

Small Business Administration

7A Loan Program

Ron Johnson: Many entrepreneurs lack the financial resources to start or expand the small business themselves. They often combine what they have with other sources of financing. Hi, I’m Ron Johnson from the U.S. Small Business Administration, your small business resource. SBA’s business loan programs provide a key source of financing for viable small businesses that have a real potential, but may not qualify for loans from traditional sources.

With me today to discuss SBA’s primary business loan program, also known as 7A is Jim Hammersley. He is the director of SBA’s loan division. Thanks for being with us today, Jim.

Jim Hammersley: Thank you.

Ron Johnson: What is this 7A loan program?

Jim Hammersley: The 7A loan program is a program where SBA puts a federal guarantee on a loan made by a private sector lender, typically a bank, to a qualifying small business. The purpose of the guarantee is to encourage the lender to make a loan to a small business that would not quite qualify under their conventional standards but has a viable business and a well-thought out business plan.

Ron Johnson: What does SBA look for when approving a loan?

Jim Hammersley: Well, first and foremost, we look for borrowers that are of good character. Secondly and in perhaps, most importantly from the small business owner standpoint, we look for a small business owner who has put together a well-thought out and well-reasoned business plan. And SBA does offer assistance in putting business plans together on our website as well as to small business development centers.

Ron Johnson: Can you tell us Jim, what does a small business need to qualify for 7A loan?

Jim Hammersley: To qualify, you need to put your financial statements together and go talk to your local lender. That is the first place to start. Once you get over and talk to the lender, they may decide that your business needs SBA assistance in order for them to make a loan. If that is the case, they will look to make sure that you have adequate equity in putting the business.

We do look for collateral. We look to make sure that any assets that the business owner has are pledged. We feel it is important that if the taxpayers are going to be supporting a business loan, that the business ownership put everything they have into it as well. But the key item when SBA looks at a credit is to make sure that their cash flow after the loan is made is adequate to cover the debt service. We are not collateral-based lenders. We look to make sure you have adequate cash flow to cover the debt service.

Ron Johnson: You mentioned lenders. What is their role in the approval process?

Jim Hammersley: In most loans, the SBA guarantees. The lender now does the credit decision and decides whether to approve the loan or not. We have delegated the credit decision to preferred lenders, to SBA express lenders, and that encompasses most SBA participating lenders.

Ron Johnson: What about the interest rates and fees?

Jim Hammersley: The interest rates are going to be typically prime-based. Most 7A loans are variable interest rates based on the Wall Street Journal Prime. There is an upfront guarantee fee that is charged to the borrower that ranges from two percent to three to three-and-a-half percent, depending on the size of the loan. The banker also pays SBA a fee each month, but that fee is not charged back to the borrower.

Ron Johnson: SBA loan guarantees are generally intended to encourage long-term small business financing. How are the actual loan maturity dates determined?

Jim Hammersley: The loan maturity dates are based on the use of proceeds of the loan. One of the two benefits of the SBA program is the loan can go for up to 25 years if real estate is involved. Even on items such as working capital and other typical short-term type uses of credit, the SBA loan can go for up to seven years. That is a very valuable thing to the small business owner because the longer term can reduce the payment and make the loan more affordable.

Ron Johnson: If your small business is ready to expand, check out SBA’s financing information and other advice at www.sba.gov. SBA also has district offices serving every state and U.S. territory. Counseling and training services are provided by SBA’s resource partners such as SCORE, with more than 10,000 counselors nationwide. Over 1,000 Small Business Development Centers and more than 90 Women’s Business Centers. SBA - helping small businesses start, grow, and succeed.

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