Like so many small business owners, access to capital is a major concern. There are many avenues to obtain funding for your operations and one is the Small Business Administration. The SBA offers small business funding through a variety of programs such as disaster loans, bonds, and microloans; one of their larger programs is the 7(a) Loan Program. According to the study, Small Business Administration 7(a) Loan Guaranty Program [pdf], by the Congressional Research Service, “in 2011 the SBA approved 53,706 7(a) loans amounting to more than $19.6 billion.”
Of all the loan programs, the 7(a) Loan Program is the most basic and commonly used. Its name comes from section 7(a) of the Small Business Act[pdf] and was created to help small businesses obtain financing when they are denied loans through other forms of lending. Specifically, the program offers financing to businesses with special requirements.
There are several different areas of the 7(a) Loan Program which include:
- Special Purpose Loan Programs: This loan program was created to assist small businesses who have been negatively affected by the North American Free Trade Agreement (NAFTA), to assist businesses with an Employee Stock Ownership Plan, and to businesses trying to reduce their environmental impact. This is done through four programs, the CAPLines Program, Community and Adjustment Investment Program (CAIP), Pollution Control Loans, and the Employee Trusts Program.
- Export Loan Programs: Through the Export Express Loan Program, Export Working Capital Program (EWCP), and the International Trade Loan Program, the SBA helps small businesses develop or expand their export activities. With the Export Express Program, business owners can get streamlined financing of up to $500,000 and funds must be used for export development. The SBA EWCP provides working capital for business operations such as export orders, export receivables or letters of credit. The International Trade Loan Program offers term loans for fixed assets and working capital to help the borrower be in a better position to compete.
- Rural Business Loans: These loans are given to qualified business owners through the Small/Rural Lender Advantage (S/RLA) initiative and the Business and Industry (B&I) Guaranteed Loan Program. According to the SBA, “The S/RLA initiative is designed to accommodate the unique loan processing needs of small community/rural-based lenders by simplifying and streamlining loan application process and procedures, particularly for smaller SBA loans.” The SBA backs the B&I Guaranteed Loan Program, offered through the U.S. Department of Agriculture, which gives business owners financing for working capital, machinery and equipment, buildings and real estate, and certain types of debt financing.
- Advantage Loan Initiatives: In February 2011, the SBA introduced the Small Loan Advantage and Community Advantage initiatives which are aimed at increasing the number of loans for business owners in underserved communities. The Small Loan Advantage initiative gives borrowers access to low-dollar loans of up to $250,000 and will be approved in no more than 10 days. As described by the SBA, “Community Advantage is a pilot initiative aimed at increasing the number of SBA 7(a) lenders who reach underserved communities…which were previously not able to offer SBA loans.” The SBA offers a list of Community Advantage Approved Lenders.
- Express & Pilot Programs: The SBAExpress and Patriot Express programs offer streamlined and expedited loan procedures. These loans are offered to specific groups such as active duty military personnel, veterans, and borrowers from distressed communities. With the SBAExpress program small business owners can take advantage of the SBA’s accelerated review turnaround time and lower interest rates. The Patriot Express Pilot Loan initiative is for qualified military community members wanting to establish or expand small businesses.
Are You Eligible for a 7(a) Loan Program?
There are several eligibility requirements for applicants seeking a loan from the SBA 7(a) Program. While each loan program has specific requirements, there are several that are required of the applicants applying to any of the 7(a) Loan Programs.
To be eligible for an SBA 7(a) loan you must:
- be located in the U.S.
- be a for-profit operating business
- qualify as small under SBA’s size requirements
- demonstrate need for the loan
- show proof that you were denied funding through other means
You must also be a creditworthy applicant to be considered for any type of loan. Dun & Bradstreet Credibility Corp. offers small businesses credit building and monitoring services to help make you a creditworthy applicant. In addition, you must be able to show past earnings, projected cash flow, and future prospects. Lenders will also take into consideration your:
- character and reputation
- experience and depth of management
- strength of business
- ability to repay the loan
- potential for long-term success
- nature and value of collateral
Are you thinking of using the SBA 7(a) program? Tell us about your experience in the comments!