The SBA 7(a) government-guaranteed loan program is more popular than ever during these times

of economic uncertainty. Today’s financial landscape centers around a constantly changing business

environment that has caused conventional bank lenders to exercise much more caution in granting loans

to small businesses. Businesses can qualify for SBA loans with lower down payments, longer repayment

terms, and easier qualifying criteria than are required for conventional bank loan applications. The SBA

7(a) loan program, once considered the loan product of last resort, has become a much more popular

vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our

economy at this time.

In this eBook, you’ll find answers to the following commonly asked questions:

• WhatisanSBA7(a)loan?

• Howcanasmallbusinesslenderimprovehis/herchancesfor7(a)loanapproval?

• WhatarethemaindifferencesbetweenthecommontypesofSBAloans(504and7(a))?

What is an SBA 7(a) loan?The 7(a) loan program from the United States Small Business Administration is the most common type of

SBA loan, and provides financial assistance for small businesses with special requirements. Commonly

referred to as a “general purpose small business loan”, SBA 7(a) loans may be used for any legitimate small

business expenditure, including but not limited to the following activities:

• Business real estate purchase

• Business real estate new construction, remodeling, or expansion

• Business acquisition

• Partner buyout

• Business equipment acquisition

• Refinancing and debt consolidation

• Business expansion and working capital

What to Consider When Applying for an SBA 7(a) LoanWhile many small business owners understand the basic aspects of the loan application process, including

credit history and repayment ability, they often fail to consider other factors that can influence whether or

not they get approved for the small business loan.

Business Management Experience

The SBA loan application process is one of the most consistent models for approving and declining small

business applications, but SBA lenders are constantly challenged to make their credit approval processes

most effective. Statistics produced by the U.S. Small Business Administration have proven that a primary

reason for a business failure, and a loan default, is inadequate management experience. For that reason,

it is of prime importance for the participating SBA lender to document the SBA loan file with evidence of

business management expertise.

Industry Expertise

The ideal applicant is a business owner who has already produced consistent profits in the business

applying for the loan, or previously in a related industry. The least qualified applicant is a person who

has never owned or managed a business before, or has no experience in the small businesses’ designated

industry. For all the applicants who demonstrate a range of experience between these two extremes, it is

incumbent upon the lender to document their investigation of the applicant’s educational background and

practical experience to successfully manage the business borrowing the SBA loan funds. The body of proof

may include one or more of the following ingredients which sway the loan decision in a positive manner:

• If the primary owner/manager of the company does not have a track record of successful business

management experience, a personal guarantor may be added to the loan, because his or her credentials

display characteristics which are conducive to an effective advisory role in the business.

• The loan application should focus upon the strengths of the primary owner/manager for the

borrowing entity which are relevant to the successful management of the borrowing entity

• The borrower should provide a business plan and financial projections which are so thoroughly

researched and documented that the lender is swayed toward a positive assessment of their

management abilities.

• A new business owner may structure a short term management contract with the seller to assure a

smooth ownership transition.

The borrower may affiliate with a franchise to strengthen the management model for the business. In some

cases, a proven franchise system prefers less experienced franchisees, because they are more trainable for

the franchise management model. SBA lenders research the successes of a franchisor, and they may accept

less experienced borrowers for franchise businesses if the franchise has proven itself.

Industry Expertise

The ideal applicant is a business owner who has already produced consistent profits in the business

applying for the loan, or previously in a related industry. The least qualified applicant is a person who

has never owned or managed a business before, or has no experience in the small businesses’ designated

industry. For all the applicants who demonstrate a range of experience between these two extremes, it is

Level of Investment

Every loan transaction will have a level of investment, on the part of the business owners, with which the

lender finds comfort. Predicting the success of a business, and the resulting satisfactory repayment of a

small business loan, is not an exact science. Every small business lender has its own individual appetite for

the types and sizes of loans it wants to fund. By the same token, each lender will find comfort in granting

the loan based upon the level of investment made by the borrower.

The following are examples of the types of investment that a small business owner may hold in the

business, and that the lender would like to see:

Dollar InvestmentThe lender will compute a debt-to-equity ratio, and compare it to industry averages and other financial

benchmarks, to determine if the borrower has adequate “skin in the game”. Part of that investment

includes a measure of the dollars invested in the business by the owner compared to dollars he has

received from loans.

Collateral InvestmentEven though the lender will look at the borrower’s dollar investment in the business as a measure of contributed equity, the lender will also look at the borrower’s assets offered as collateral for the loan. He may also accept other assets outside the business, pledged as additional collateral, in lieu of more cash contribution.

Seller InvestmentNot all small business lenders will accept seller investment to help a buyer of small business assets to qualify for financing. The Small Business Administration rules, however, allow the SBA lender to accept seller standby financing for a portion of the buyer’s qualifying equity. There is a catch. The seller debt needs to “act like” equity. That means the seller will sign an SBA Standby Agreement agreeing to delay requiring payments until the SBA loan is satisfied first. It also means the SBA lender will have first lien rights on the business assets sold by the selling note holder who is permitted to file a second lien on these assets. The standby creditor earns and accrues interest on his loan, but he receives no cash payment until the SBA loan is paid off first.

What Are the Main Differences Between SBA 504 Loans and SBA 7(a) Loans?

SBA 504 LOAN(Commercial Real Estate &

Equipment only)

SBA 7(a) LOAN(General Purpose)

Loan Size $125,000 to over $13,000,000 $50,000 to $5,000,000

Interest Rate

Fixed rate on SBA 504 second lien debenture which is fully amortized through the term of the loan. Interest rates on 504

loans are set monthly at the time of funding at an increment above the current market

rate for five-year and ten-year U.S. treasury issues. Typically, a variable interest rate is negotiated with bank on first lien bank loan

which is 50% of the total project cost.

Typically, a variable rate adjusted quarterlyFully amortized through the term of the

loan. Interest rates are negotiated between the borrower and the lender subject to SBA

maximum of Prime plus 2.75%

Prepayment PenaltiesPrepayment penalty on SBA debenture is 10%,9%,8%,7%,6%,5%,4%,3%,2%,1%

for first 10 years respectively. Prepayment penalty on bank portion of financing is

negotiable.

Prepayment penalty is 5%,3%,1% for the first three years respectively.

Eligible Business Size

The SBA has established standards for small business size, but there are exceptions for

certain industries. Check with your SBA lender for your business’ SBA loan eligibility. In general, privately-owned, for-profit busi-

nesses are usually eligible, while public and middle market companies are too large.

The SBA has established standards for small business size, but there are exceptions for

certain industries. Check with your SBA lender for your business’ SBA loan eligibility. In general, privately-owned, for-profit busi-

nesses are usually eligible, while public and middle market companies are too large.

Terms Available and Amortization Periods

SBA debenture20 years fully amortized – real estate loan

10 years fully amortized –equipment loan

Fixed interest rateNo balloon payments

First lien bank loan negotiable

SBA debenture20 years fully amortized – real estate loan

10 years fully amortized –equipment loan

Fixed interest rateNo balloon payments

First lien bank loan negotiable

Loan Structure(minimum down payment requirement)

50% bank loan40% CDC loan

10% borrower down payment90% bank loan

10% borrower down

Loan Purpose

Purchase existing buildingLand acquisition and ground up construction

(includes soft cost development fees)Expansion of existing building

Finance building improvementsPurchase equipment

Refinance existing real estate debt

Expand, acquire or start a businessPurchase or construct real estateRefinance existing business debt

Buy equipmentProvide working capital

Construct leasehold improvementsPurchase inventory

Partner buyout

Loan ProgramRequirements

51% owner occupancy required forexisting building

60% owner occupancy required fornew construction

Equipment with a minimum 10 year economic life

51% owner occupancy required forexisting building

60% owner occupancy required fornew construction

All assets financed must be used to the direct benefit of the business

CollateralGenerally, the project assets being financed

are used as collateralPersonal guaranties of the principal owners

of 20% or more ownership are required

Collateral is the subject assets acquired by loan proceeds

May require pledge of personal assets if equity available

Personal guaranties of the principal owners of 20% or more ownership are required

Loan FeesFees are financed in the 504 loan

Fees are negotiated for the 50% bank loan accompanying the 504 loan

The bank does not charge a fee. Instead, the bank collects and remits to SBA a loan

guaranty fee. The fee may be financed in the transaction.

SBA-504 and SBA-7a Comparison

About Bruce HurtaBruce Hurta has extensive experience in Small Business Lending. He served in a number of

commercial lending and banking capacities in his career including President of a Houston-area

community bank for 6 years. Bruce also established and managed the Houston office for a non-bank

small business lending company where he specialized in SBA lending for 14 years.

Bruce spent 4 years as a bank examiner for the Texas Banking Department, 7 years in executive

management at two community banks, and 18 years as a specialty SBA Lender. He is active in the

commercial realtor and business brokerage communities, along with various business and industry

organizations. Bruce is the 2013 president of the Houston Association of Government Guaranteed

Lenders.

In July 2009, he joined Members Choice Credit Union as the Business Lending Manager to lead their

new SBA Lending Program.

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