SBA 7(a) Loan Program

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A lot of businesses are eligible for the SBA's 7(a) loan program. The first consideration is geography. In order to receive an SBA loan guarantee, the business must be in the U.S. or a U.S. governed territory. It must also be for profit. The owner or owners must invest their own equity in the company (and they must have equity to invest) and they must first seek other sources of funding. That's why the bank that turns you down for a loan can also turn around immediately and be the originator on an SBA guaranteed loan.

These loans are a big source of funding for franchisees. The SBA program also provides some protection if you are considering a franchise. In some cases, franchisors may offer businesses that are essentially equivalent to paying for a job because the level of control by the franchisor is extreme. The franchisee must have an opportunity to profit from hard work and ownership. Consider it a red flag if you are offered the chance to invest in a franchise that is not eligible for SBA guaranteed loans.

The SBA generally follows public policy that is defined as being "good" for the people of the United States. Thus, it is possible to fund a recreational facility such as a country club with an SBA guaranteed loan. However, country clubs are known for their tendency to exclude certain groups of the public from membership. Any recreation facility backed with an SBA guarantee must be either open to the general public or have membership that is not selectively enforced against defined categories of people.

SBA loans can be used to invest in real estate as long as the property is used to benefit the small business that has received the loan. It is also possible for a holding company to receive a loan for purchase or lease of real estate. It must be owned by the same people who own the business and in the same ownership proportions. Real estate loans can be used only for buying property, improvements or refinancing purposes. If a holding company owns the property, the operating company must have a lease to use the facility that is at least as long as the term of the loan. The operating company must also be responsible for meeting the terms of the loan.

Since the SBA will guarantee 75% of a loan up to a total risk of $750,000, many lenders simply cap their loan amounts at $1,000,000. As many small businesses have found, getting an SBA guaranteed loan can be difficult. The primary consideration is whether the business itself will be able to repay the loan. This is relatively easy to project with an established business, difficult with a new one. The SBA also considers the 4 C's of credit--character (your credit history) , collateral (does the business have anything that can be sold to pay off the loan), capability (do you have experience in this business? How well do you manage?) and contribution (how much of your own money have you put into this business?) If you own 20% or more of a company, you will be required to personally guarantee an SBA loan.

The SBA has provided the means for many small businesses to get a start and to expand their businesses. It can be an essential part of your financial planning and you'll have your best chances for succeeding in getting an SBA guaranteed loan if you understand what they want so that your business meets their requirements. When you're starting up, it's also important to make sure that your bank participates with the SBA program if you think you may want to get an SBA guaranteed loan in the future.

Find the Small Business Administration on the web at http://www.sba.gov/.

-Cindy Nemeth-Johannes

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