7(a) Loan Packaging

What is a 7(a) Loan?
The 7(a) Loan Program is SBA’s primary program for helping start-up and existing small businesses with financing guaranteed for a variety of general business purposes. SBA does not make loans itself, but rather guarantees loans made by participating lending institutions. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender but not to the borrower, who remains obligated for the full debt, even in the event of default.

In addition to EDF’s 504 lending duties, EDF also offers packaging services of 7(a) Loans to lenders all over the State of Michigan.

Typical uses of SBA Guaranty:

  • Insufficient collateral available
  • Start-ups
  • Industry risk
  • Uneven earning performance
  • Longer maturities
  • Smaller down payments

Eligible Types of Business:

  • Organized for profit
  • Located in the US
  • An operating (not passive) business, engaged in an eligible industry
  • Small under SBA size standards
  • Demonstrate a need for credit

SBA Size Standards (For applicant business including any affiliates):

  • Tangible net worth less than $15 million AND
  • Net income (two year average) less than $5 million after tax

Eligible Use of Loan Proceeds:

  • Revolving working capital
  • Permanent working capital
  • Machinery/Equipment/Furniture/Fixtures
  • Purchase land and building, including construction and renovation
  • Business Acquisition
  • Refinancing existing business debts

Ineligible Types of Businesses:

  • Nonprofit organizations
  • Passive investments (apartments/commercial rentals)
  • More than 1/3 of revenue from gambling
  • Private clubs (restricting patronage)
  • Associated incarcerated, on parole, probation
  • Political activities
  • Speculative businesses
  • Lending companies
  • Life insurance companies
  • Company in foreign country
  • Pyramid sales
  • Illegal activity
  • Government agencies
  • Companies indoctrinating religious beliefs
  • Live sexual performances or providing sexual material
  • Prior loss to government

Ineligible Loan Purposes:

  • Shifting bad debt to government
  • Providing/freeing up funds for speculation
  • Conflicts of interest
  • Operations to another country
  • Payments to business owners (except in 100% change in ownership)
  • Passive investments (except holding companies/EPC)
  • Pay delinquent taxes

SBA Loan Guaranty Percentages and Fees:

Gross Loan Amount SBA Guaranty Fee Rate Lender Fee
$150,000 or Less 85% 0% 0.546%
$150,000 ‐ $700,000 75% 3.0% 0.546%
$700,000 ‐ $5,000,000 75% 3.5% 0.546%

Additional 0.25% fee for guaranty amount over $1,000,000
For Short‐term (under 12 months) notes, fee is 0.25%

Maximum loan amount: $5,000,000
Maximum SBA Guaranty: $3,750,000
Maximum SLA loan amount: $350,000

Loan Rates (Base rate + spread below):

Loan Amount Term < 7 Years Term > 7 Years
Up to $25,000 4.25% 4.75%
$25,000 to $50,000 3.25% 3.75%
$50,001 and Above 2.25% 2.75%

Variable Base Rates: WSJ Prime, 1 month LIBOR + 3%, SBA Peg Rate
Fixed Base Rate: SBA Fixed Rate (used only when the rate will be fixed for the entire term of the loan)

Allowable Lender Fees:

  • Lender cannot charge points, commitment fees, etc.
  • Lender may charge reasonable fees for packaging the full 7(a) application. Greater than $2,500 requires itemization of fees and approval by the SBA.

Prepayment Penalties:

  • SBA charges a declining balance prepayment penalty on loans with 15 years or greater maturities of 5‐3‐1%.
  • Lender may not charge their own prepayment penalty.

SBA Loan Terms (The loan term and amortization must be the same. No balloons):

Loan Purpose Max Term
Working Capital 10 Years
FF&E/Machinery 10 years (25 w/justification)
R/E Purchase/Construction 25 years + construction period
Mixed Purpose Weighted average or principal use of proceeds
Refinance R/E, FF&E Remaining useful life of asset

Credit Standards:
Loans Less than or equal to $350,000

  • Pre‐screened via E‐Tran for acceptable credit score
  • Debt service coverage and global CFC great than or equal to 1:1 on historical or projected basis

Loans greater than $350,000

  • Debt service great than or equal to 1.15:1 (EBITDA/DS) on historical and/or projected basis

SBA Collateral Policy:

  • SBA will not decline an application for collateral shortfall alone. However, the applicant must pledge all additional collateral (business/personal) to cover the shortfall. Additionally, life insurance may be required on key persons.
  • Unlimited personal guaranties are required from all principal who own 20% or more.
  • Loans less than or equal to $25,000 – collateral is not required.
  • Loans $25,000 to $350,000 – collateral must mirror policies/procedures for similar sized non‐SBA guaranteed loans and minimally a first lien on assets financed with loan proceeds and a lien on all fixed assets.
  • Loans greater than $350,000 – If a fixed asset does not fully secure the loan, principals must pledge equity in personal real estate unless equity is less than 25% of FMV. Lien may be limited to the amount of the collateral shortfall. Includes jointly held real estate.

Collateral Advance Ratios:

  • New Machinery & Equipment – 75% of Purchase Price
  • Used/Existing Machinery & Equipment – 50% of NBV or 80% of OLV per appraisal
  • Real Estate – 85% of value (appraisal required for loans greater than $250,000)
  • Trading assets (if necessary) – 10% of current book value

EDF 7(a) Loan Packaging Services

  • Fee is 1.5% of the loan amount up to $2,500, charged directly to the borrower
  • Assist with eligibility and loan structure prior to lender approval
  • EDF will work directly with business owner if requested
  • Order IRS tax transcripts and verify to provided tax returns
  • Prepare complete loan package and submit via E‐Tran to SBA
  • Respond to SBA and assist throughout approval process
  • Complete all necessary authorization modifications after approval
  • Prepare all SBA documents required in Authorization and provide a closing checklist to lender
  • Copy entire application to disc and provide to lender

Lender Responsibilities

  • Lender must be approved to participate in 7(a) program
  • Underwriting the business loan remains the responsibility of the lender
  • Lender is responsible for closing the loan according to the conditions of the authorization
  • Ongoing servicing, including 1502 reporting, is responsibility of the lender

Are you ready to begin the process?

 

Please Contact us for more information and terms of repayment!

Amy Dubridge
SBA 7(a) Specialist
Office Phone: (616) 323‐1279
[email protected]