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Using A Financing
Mosaic and SBA Guaranteed Loan Programs
There is no better
feeling than getting a company to profitability
and still owning and controlling 100% of your
equity. If you have a scalable company then you
probably have the ability to generate
considerable personal wealth and the freedom to
do as you please with the company moving
forward. Of course this can also get you into
trouble. Taking that company to the next level
will require a different set of skills too. I am
not talking as much about a service business
where your scaling is limited, but one with
product leverage.
One way to do this is to bet on yourself by
using your own personal resources and
bootstrapping, bootstrapping, bootstrapping. See
our complete course on this
here.
Another way is to develop a mosaic of financing
that includes personal resources, friends and
family and then loans. These can be had much
easier using government guarantee programs that
reduce the lenders risk and lower the bar on
what banks need to OK that loan thanks to Uncle
Sam's desire to create jobs.
This Article is from the Small Business
Administration Web site and copied here for your
use.
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Basic 7(a) Loan Program
7(a) loans are the most basic and most used type
loan of SBA's business loan programs. Its name
comes from section 7(a) of the Small Business
Act, which authorizes the Agency to provide
business loans to American small businesses.
All 7(a) loans are provided by lenders who are
called participants because they participate
with SBA in the 7(a) program. Not all lenders
choose to participate, but most American banks
do. There are also some non-bank lenders who
participate with SBA in the 7(a) program which
expands the availability of lenders making loans
under SBA guidelines.
7(a) loans are only available on a guaranty
basis. This means they are provided by lenders
who choose to structure their own loans by SBA's
requirements and who apply and receive a
guaranty from SBA on a portion of this loan. The
SBA does not fully guaranty 7(a) loans. The
lender and SBA share the risk that a borrower
will not be able to repay the loan in full. The
guaranty is a guaranty against payment default.
It does not cover imprudent decisions by the
lender or misrepresentation by the borrower.
Under the guaranty concept, commercial lenders
make and administer the loans. The business
applies to a lender for their financing. The
lender decides if they will make the loan
internally or if the application has some
weaknesses which, in their opinion, will require
an SBA guaranty if the loan is to be made. The
guaranty which SBA provides is only available to
the lender. It assures the lender that in the
event the borrower does not repay their
obligation and a payment default occurs, the
Government will reimburse the lender for its
loss, up to the percentage of SBA's guaranty.
Under this program, the borrower remains
obligated for the full amount due.
All 7(a) loans which SBA guaranty must meet 7(a)
criteria. The business gets a loan from its
lender with a 7(a) structure and the lender gets
an SBA guaranty on a portion or percentage of
this loan. Hence the primary business loan
assistance program available to small business
from the SBA is called the 7(a) guaranty loan
program.
A key concept of the 7(a) guaranty loan program
is that the loan actually comes from a
commercial lender, not the Government. If the
lender is not willing to provide the loan, even
if they may be able to get an SBA guaranty, the
Agency can not force the lender to change their
mind. Neither can SBA make the loan by itself
because the Agency does not have any money to
lend. Therefore it is paramount that all
applicants positively approach the lender for a
loan, and that they know the lenders criteria
and requirements as well as those of the SBA. In
order to obtain positive consideration for an
SBA supported loan, the applicant must be both
eligible and creditworthy.
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WHAT SBA SEEKS IN A LOAN APPLICATION
In order to get a 7(a) loan, the applicant must
first be eligible. Repayment ability from the
cash flow of the business is a primary
consideration in the SBA loan decision process
but good character, management capability,
collateral, and owner's equity contribution are
also important considerations. All owners of 20
percent or more are required to personally
guarantee SBA loans.
ELIGIBILITY CRITERIA
All applicants must be eligible to be considered
for a 7(a) loan. The eligibility requirements
are designed to be as broad as possible in order
that this lending program can accommodate the
most diverse variety of small business financing
needs. All businesses that are considered for
financing under SBA’s 7(a) loan program must:
meet SBA size standards, be for-profit, not
already have the internal resources (business or
personal) to provide the financing, and be able
to demonstrate repayment. Certain variations of
SBA’s 7(a) loan program may also require
additional eligibility criteria. Special purpose
programs will identify those additional criteria
Eligibility factors for all 7(a) loans include:
size, type of business, use of proceeds, and the
availability of funds from other sources. The
following links will provide more detailed
information on these eligibility issues.
SIZE
ELIGIBLE AND INELIGIBLE TYPES OF BUSINESS
USE OF PROCEEDS
AVAILABILITY OF FUNDS FROM OTHER SOURCES
CHARACTER CONSIDERATIONS:
SBA must determine if the principals of each
applicant firm have historically shown the
willingness and ability to pay their debts and
whether they abided by the laws of their
community. The Agency must know if there are any
factors which impact on these issues. Therefore,
a "Statement of Personal History" is obtained
from each principal.
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OTHER ASPECTS OF THE BASIC 7(a) LOAN PROGRAM
In addition to credit and eligibility criteria,
an applicant should be aware of the general
types of terms and conditions they can expect if
SBA is involved in the financial assistance. The
specific terms of SBA loans are negotiated
between an applicant and the participating
financial institution, subject to the
requirements of SBA. In general, the following
provisions apply to all SBA 7(a) loans. However,
certain Loan Programs or Lender Programs vary
from these standards. These variations are
indicated for each program.
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