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SBA expands eligibility for 7(a) loans

More small businesses will be eligible for U.S. Small Business Administration-backed loans, meaning greater access toApproved much-needed capital in this tough economy, as a result of a temporary alternate size standard for the agency’s largest lending program.

SBA’s alternate size standard for its 7(a) loan program is going into effect the first week of May and extends through Sept. 30, 2010. As a result of the temporary change, more than 70,000 additional small businesses —including auto and RV dealerships, auto industry suppliers and others — could be eligible to apply for SBA 7(a) loan.

The temporary 7(a) loan size standard will parallel the standard for the agency’s 504 Certified Development Company loan, and will allow businesses to qualify based on net worth and average income. The net worth for the company and its affiliates can’t be in excess of $8.5 million and average net income after federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years can’t be more than $3 million. The alternate size standard is available at the offices of The Federal Register today and will be published as an interim final rule early next week. 

The temporary change to the 7(a) loan size standard is not unprecedented.

SBA took similar actions in 1993, as a result of the recession of the early 1990s, and again in 2005 as part of a program aimed at helping small businesses in the wake of hurricanes Katrina and Rita.

This change also means more small businesses can take advantage of benefits made possible through the Recovery Act. On March 16, the SBA implemented two key provisions of the Recovery Act that raised the guarantee on 7(a) loans to 90 percent and reduced fees for borrowers.  Since then, the agency has seen average weekly 7(a) loan volume increase by more than 25 percent and new SBA loans made by nearly 450 lenders who had not made loans since October 2008.

For more information about SBA’s revisions to its small business size standards. 

What are 7(a) loans?

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.

All 7(a) loans are provided by lenders, who are called participants because they participate with 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 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 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, businesses apply to a lender for their financing, and the lender decides if it will make the loan internally or if the application has some weaknesses which, in its 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. Under this program, the borrower remains obligated for the full amount due.

All 7(a) loans which SBA guaranty must meet 7(a) criteria. The business gets a loan from its lender with a 7(a) structure and the lender gets an SBA guaranty 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) guaranty loan program.

A key concept of the 7(a) guaranty 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 guaranty, the Agency cannot force the lender to change their mind. Neither can SBA make the loan by itself because the Agency does not have any money to lend.

Source: U.S. Small Business Administration. www.sba.gov


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