SBA 7(a) Loans: What to Do and What to Avoid

Banker Resource
July 12, 2013 — 1,172 views  
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An SBA 7(a) loan is not a loan in the typical sense of the word. They are guarantees offered by SBA while banks and other financial institutions offer the loan. If the borrower defaults, the government guarantees the loan. This loan is ideal for start-ups or small companies willing to expand their business. The SBA 7(a) loan guarantees can mean the difference between fulfillment and non-fulfillment of your dream but they come with several strings attached.

Be Patient

Patience is the first thing you will need when applying for SBA 7(a) loan because it means getting involved with the official and the government paperwork, which entail time. If you are mentally prepared for the time-consuming process and remain patient, you will probably eventually manage to get the much-needed loan. However, if you lose patience and quit your application, all your efforts will be lost. The loan takes anywhere up to a month or more to get approved, provided all your paperwork is completed in time. 

SBA Loan May Have a Higher Interest Rate

Much against the common perception, the SBA 7(a) loan is not cheaper simply because they come as SBA 7(a) loan guarantees from the government. The interest rates on this form of loan are higher than the traditional loans that do not come with SBA guarantees. However, along with the higher interest rates, there are some benefits that cannot be overlooked. In addition to the higher interest rates, you have to pay some fees like annual services fee and guarantee charges against the loan that SBA guarantees. 

Personal Guarantee

SBA 7(a) loan is given to businesses and not individuals. The maximum loan amount offered is $2,000,000, while the maximum guarantee under SBA 7(a) Loan Guarantees is for the amount of one million dollars. The small business that may not be able to access funds through traditional lending channels can go for SBA 7(a) loans. However, you will require personal guarantees for SBA loan in any case. If your spouse is also a partner in your venture, both of you will need to sign the personal guarantee papers. Anyone with 20 percent stake in the venture will need to sign the personal guarantee bond. If in case your business assets are not adequate against the loan, your personal assets or jointly owned assets will be considered.    

The Loan Amount May be Credited in Installments

The SBA 7(a) loan amount offered to you may not be a one-time payment from the lender. The lender will require you to submit invoices and purchase orders against which they will release the funds in installments. The lending intuition may even issue two-party checks to the vendor and the borrower. The borrower then carries the check to the vendor to obtain the materials they want to purchase. In some cases, the borrower may have to provide the actual cancelled checks to the lender before the fund amount is released to him. In other words, he may have to use his savings before he gets the funds. 

It is evident that SBA 7(a) loan program is an excellent instrument for small businesses that may not get loans from the traditional sources. Also, they come with SBA 7(a) Loan Guarantees. However, there are several conditions associated with this type of loan and the application process may be cumbersome and time-consuming. Yet these loans serve small start-ups the best.

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