More than 5,000 financial institutions participated in the PPP, but fewer than 1,700 lenders provided 7(a) loans in fiscal year 2020.
The SBA loans available for lenders to offer to small business customers aren’t just limited to standard loans under the SBA’s flagship 7(a) loan guaranty program, named for Section 7(a) of the Small Business Act of 1953 (P.L. 83-163, as amended). The SBA also has other 7(a) programs offering streamlined or expedited loans for specialized borrowers. These programs include SBAExpress and Export Express loans.
However, as lenders learned during the PPP, all SBA loans come with detailed technical requirements for underwriting, servicing, and liquidation, so lenders need to understand the particulars.
SBA 7(a) loans – terms and rates
SBA 7(a) loans have a maximum term of 10 years, except for some loans financing/refinancing real estate or equipment, which can be up to 25 years.
Interest rates on SBA 7(a) loans can be fixed or variable, and current rates are posted on the website of Colson Services, the SBA’s 7(a) Fiscal and Transfer Agent (FTA). However, note that in August, the SBA is transitioning its Fiscal Transfer Agent (FTA) for the 7(a) loan program from Colson Services to Guidehouse, a Chicago-based management consulting firm that will migrate the technology programs to SBA’s Capital Access Financial System (CAFS). Guidehouse will assume operational support services for loan servicing, collection, accounting, and reporting from 7(a) lenders and will serve as the Transfer Agent/Paying Agent for the Secondary Market. The change is intended to improve security, integration, reporting features, and validation to improve accuracy. Current and prospective SBA 7(a) lenders will be able to find out information about the program and the transition on the new SBA FTA wiki.
Meanwhile, the maximum allowable fixed interest rates on 7(a) loans as of June 2021 were:
- 25% for loans of up to $25,000
- 25% for loans over $25,000 up to and including $50,000
- 25% for loans over $50,000 up to and including $250,000
- 25% for loans of more than $250,000.
Maximum allowable variable interest rates are determined by a formula based on three acceptable base rates:
- the lowest prime rate (3.25% in June 2021)
- LIBOR plus 300 basis points (3.09% in June 2021)
- an optional SBA peg rate, which is a weighted average of rates the government pays for similar maturity loans (1.38% in the third quarter of FY2021).
SBA 7(a) loans’ allowed use of proceeds
In general, borrowers may use SBA 7(a) loan proceeds to establish a new business or to help with operating, acquiring, or expanding an existing business. Specifically, some of the allowed uses of 7(a) loan proceeds include:
- new construction
- purchase land or buildings
- purchase equipment, fixtures, lease-hold improvements, inventory, supplies, and raw materials
- long- and short-term working capital
- refinance debt for compelling reasons
- seasonal line of credit
For a small business to be eligible for an SBA 7(a) business loan, it must:
- be engaged in, or plan to do business in, the United States
- qualify as a small business, as defined by the SBA
- be a for-profit operating business (except for loans to eligible passive companies and businesses engaged in specified industries, such as insurance companies and financial institutions primarily engaged in lending)
- demonstrate a need for the desired credit
- be certified by a lender that the desired credit is unavailable to the applicant on reasonable terms and conditions from nonfederal sources without SBA assistance
- not be delinquent on any existing debt obligations to the U.S. government
SBAExpress loans can be used for the same reasons as 7(a) loans, but they feature an accelerated turnaround time for SBA review. However, borrower debt restructure cannot exceed 50% of the project, and the SBAExpress loans may be used for revolving credit. SBAExpress lenders may charge borrowers somewhat higher variable interest rates than those allowed for regular 7(a) loans. Congress used relief bills to temporarily increase the SBAExpress loan limit from $350,000 to $1 million (reverting to $500,000 on October 1, 2021) and to increase the guaranty rate for loans of $350,000 or less from 50% to 75% in FY2021.
Export Express loans provide exporters SBA-backed financing for loans and lines of credit up to $500,000. Lenders use their own credit decision process and loan documentation, allowing a streamlined method for approval.
Export Working Capital loans are up to $5 million and are for terms of up to 12 months. They are for exporters needing additional working capital to support sales. Lenders and borrowers negotiate the interest rate and there is no SBA maximum interest rate.