In this article, you will learn the terms you need to know when it comes to SBA 7a loans.
Small business owners and entrepreneurs often have lofty goals, but they aren't always able to fund them due to a lack of financial resources. The SBA 7a loan program of the Small Business Administration is intended to assist aspiring business owners in the process of building their business and it offers a variety of loan options to accommodate a wide range of objectives and requirements.
In short, an SBA 7a loan from the Small Business Administration can help you finance:
- Long- and short-term working capital
- Revolving funds based on the value of existing inventory and receivables
- The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
- The purchase of real estate, including land and buildings
- The construction of a new building or renovation an existing building
- Establishing a new business or assisting in the acquisition, operation, or expansion of an existing business
- Existing business debt under certain conditions (ask an experienced commercial loan advisor for specifics.
It's possible that navigating the world of small business loans will prove to be tough, but in most cases, all that's required is a basic understanding of the language involved. In the following section, you will discover a glossary containing popular terminology used by the SBA, CDCs, banks, and other lending institutions when it comes to the SBA 7a loan program.
Standard 7a loan: This loan, which is typically referred to simply as the 7(a), is intended to provide assistance to proprietors of small businesses and entrepreneurs in the process of securing capital. It accomplishes this goal by providing private lenders with a government-backed assurance that a fixed percentage of the loan will be repaid even in the event that the borrower does not pay back the loan. This lowers the risk for the lender, which increases the likelihood that they would agree to the borrower's request for a loan. The terms and conditions of an SBA 7(a) loan are often comparable to those of loans that are not guaranteed by the SBA.
SBA 7(a) loan programs: There are numerous loan programs available through the SBA 7(a) that are intended to assist small firms in acquiring finance. These funds can be put toward the acquisition of a mortgage on the company's property, the purchase of land on which to build new structures, equipment and heavy machinery, the maintenance and repair of existing assets, as well as the payment of operating expenditures or working capital.
Loans under the 7(a) (they are types of SBA 7a loans):
- Conventional 7(a) loan: By far the most typical type of 7(a) loan. Maximum loan amount is $5 million. SBA guarantees 85 percent for loans up to $150,000 and 75 percent for loans greater than $150,000.
- SBA 7(a) small loan: Has a $350,000 maximum. For loans up to $150,000 and between $150,001 and $350,000, it offers a guarantee of 85% and 75%, respectively.
- SBA Express loan: Has a $500,000 maximum. The SBA review process is expedited under the SBA Express program. Within 36 hours, the SBA will respond to your application.
- Export Express loan: Exporters and lenders can quickly get SBA-backed financing for loans and lines of credit up to $500,000 through the Export Express program. Lenders have their own procedures for evaluating credit and loan documents. Within 24 hours, the SBA will react to your application. Loan guarantee is 90 percent for loans of $350,000 or less, 75 percent for loans more than $350,000.
- Export Working Capital Program (EWCP): Loans for export working capital are available to companies who have the potential for export sales but require more working capital to support those sales. Lenders examine and approve requests before sending them to the U.S. Export Assistance Center office responsible for the exporter's region. Maximum loan amount is $5 million with a 90 percent SBA-guarantee.
- International Trade: Long-term financing is offered by international trade loans to companies that are expanding due to increasing export sales or those have been negatively impacted by imports and need to modernize to compete internationally. International trade loans can be used by businesses for working capital for export operations as well as fixed assets for building, construction, and real estate equipment. Maximum loan amount is $5 million with a 90 percent SBA-guarantee.
- CAPLines: CAPLines is an umbrella initiative that assists small firms in meeting their fluctuating and short-term need for working capital. It is composed of four lines.
- Seasonal CAPLine:The loan proceeds must only be used by borrowers to pay for seasonal increases in accounts receivable, inventories, and, in some situations, related higher labor costs. You can get one that revolves or doesn't.
- Contract CAPLine: The direct labor and material costs related to carrying out assignable contracts are covered by this line of credit. You can get one that revolves or doesn't.
- Builders CAPLine: A small general contractor or builder who is constructing or repairing commercial or residential buildings might use this line of credit to fund direct labor and material costs. The construction project is used as collateral, and there are both revolving and non-revolving loan options.
- Working CAPline: For companies unable to meet the credit requirements for long-term lending, this is an asset-based revolving line of credit. It provides funding for requirements that are cyclical, ongoing, or transient. Short-term assets are converted into cash for repayment and then sent to the lender. Based on existing assets, businesses can draw from this line of credit as needed and repay it according to their cash flow cycle. Firms that extend loans to other businesses typically use this line. The lender may impose additional fees because these loans necessitate ongoing servicing and collateral monitoring.
- The maximum maturity for a CAPLine loan, with the exception of the Builders CAPLine, is 10 years. Loan terms for builders shall not exceed five years. The loan must be guaranteed by the owners of at least 20% of the application business.
7(a) lender: SBA lenders might include banks, credit unions, and other financial organizations. An eligible borrower receives a loan from an SBA 7(a) lender, and the SBA guarantees a portion of the loan in the event of a borrower failure.
7(a) loan borrower eligibility: A borrower must first be determined to be eligible in order to be granted an SBA 7(a) loan. A number of variables that are chosen by the lender and the SBA together determine eligibility.
Before submitting an application, borrowers should confirm that they meet the requirements for the particular 7(a) loan program to which they are applying (best practice: consult an experienced commercial loan advisor).
The intention to conduct a for-profit business with the loan money, reasonable owner equity, a demonstrated need for the loan, and an aim to operate the firm within the United States are some typical eligibility requirements.
7(a) loan disbursement: This is the actual disbursement of the loan proceeds from your lender to you. It may be a lump sum or spread out over time.
7(a) loan down payment: The amount that a small business owner or entrepreneur must pay out of pocket toward their start-up expenses is known as the down payment. The fact that SBA 7(a) loans have lower down payment requirements than many other lending programs is one of the things that makes them so appealing.
Borrower equity: An SBA 7(a) loan is not intended to pay the entire cost of your new company. Borrowers are required to invest their own funds in the business as well; this sum of money is known as borrower's equity. While cash is frequently used as the borrower's equity, under certain accepted circumstances, a borrower may also use borrowed money or non-monetary assets.
Capital: This is the sum of money that is borrowed through the loan and that must be paid back (together with any accumulated interest) when the loan matures. It is also known as borrowed capital.
Collateral: Additional security provided by the borrower in exchange for a loan is known as collateral. This security frequently takes the shape of monetary-valued fixed assets like real estate, machinery, or structures. It is promised with the understanding that if the borrower defaults on the loan, these assets might be sold. For SBA loans under $25,000, lenders are not required to accept collateral. For bigger SBA loans, however, the lending amount must be secured to the fullest extent permitted up to the loan amount.
Fixed assets: These assets, also known as physical assets, are ones that the borrower is likely to hold onto for a while and that aren't readily convertible into cash. Equipment, land, and real estate are a few examples of fixed assets. These are the items the borrower pledged as security in case they weren't able to make their loan payments.
Guarantee: The SBA doesn’t lend money directly, but guarantees a portion of loans obtained through third-party lenders. This safeguards the lender by guaranteeing that, in the event of default, the SBA will assume responsibility for a specified part of the loan. The advantage for small business owners is that it significantly reduces the risk for the lenders, increasing their propensity to grant a loan.
Guaranty fee: This is a fee that the borrower is required to pay; it can be anywhere between.25% and 3.75% of the loan balance. It can be paid for with the proceeds from the loan.
Liabilities: The payable debts owed by a company, such as loans, salaries, mortgages, and deferred payments, are referred to as liabilities. They are subtracted from the total equity of the business owner.
Loan interest rate: This is a fee that a loan's lender assesses, with the precise amount being a portion of the principle. SBA 7(a) loan interest rates are either fixed or variable (they change over time) (based on a maximum rate determined by the Federal Register). The lender determines the type of interest rate for a loan.
Loan-to-cost ratio (LTC): LTC is calculated by dividing the loan amount by the project's overall cost. Lenders can assess the risk of making an SBA loan for land or real estate using this comparison. The LTC ratio is 75%, for instance, if a lender is ready to finance $750,000 for a building project that will cost the borrower a total of $1 million.
Maturity: A loan's maturity is the predetermined date on which the principle and interest must be repaid. SBA loans come with a range of maturity periods, from a maximum of 25 years for real estate loans to a maximum of 10 years for loans granted for inventory or working capital.
Maximum SBA guaranty: The SBA does not make direct loans to borrowers; instead, it backs loans provided by other lenders. Depending on the SBA 7(a) loan category, there are different maximum SBA guaranty amounts. The SBA will only guarantee up to 85% of loans less than $150,000. The SBA guarantees a maximum of 75% of the loan amount for loans over $150,000. Only 50% of Express loans are backed by SBA guarantees. The SBA will only guarantee up to $3.75 million of a 7(a) loan.
Owner equity: Owner's equity is the value of the company's assets less any money required to cover liabilities. Borrowers under the SBA 7(a) loan program are required to have a reasonable owner equity before they may apply for a loan for an investment in a for-profit firm. The down payment paid on the company is the most typical type of owner equity, but other assets may also be taken into account.
Pilot 7(a) loan programs: The SBA may decide to run a pilot loan program in various circumstances to promote growth in a particular industry or geographical area. These loans have unique terms and circumstances that are not included in a typical 7(a) loan. They are only available for a limited time, though the loan will probably mature once the pilot program is discontinued.
Preferred Lenders Program (PLP): This is a unique distinction given to lenders who have a solid grasp of SBA lending guidelines and a track record of effective lending. PLP lenders are more appealing to potential borrowers since they can instantly approve borrower applications.
Specialized lender: Not everyone is a good candidate for traditional loans, particularly small business owners who intend to pay back the capital of their loan with profits from their new venture. In these cases, specialized lenders fill in the blanks by providing adaptable funding options that increase the likelihood of receiving a loan. An example of a specialized lender is the SBA.
State-specific requirements: Despite the fact that the SBA is a federal program, some states may have their own rules on the specifics of how the 7(a) loan is used and any insurance that may be necessary with the loan. Before starting the SBA 7(a) application process, it's crucial to research the particular SBA loan regulations for your state.
Veterans Advantage: This SBA 7(a) permanent program intends to promote small companies that are at least 51% owned by veterans, active duty personnel, their spouses, or widows.