SBA 7[a] Loan Program Law and Legal Definition
The 7(a) loan program is Small Business Administration’s (SBA’s) primary lending programs to provide loans to small businesses that are not able to get business loans on reasonable terms through normal lending channels. Through the 7(a) loan program, the SBA helps start-up and existing small businesses to secure financing when they might not be eligible for business loans through normal lending channels. 7(a) loans are the basic, most commonly used, and most flexible type of loans.
The name of the program is derived from section 7(a) of the Small Business Act. Section 7(a) authorizes SBA to provide business loans to American small businesses. The loan is not provided by SBA directly, it only guarantees a portion of loans made and administered by commercial lending institutions. 7(a) loans guarantee financing for a variety of general business purposes. For example, 7(a) loans may be provided for machinery and equipment, working capital, furniture and fixtures, purchase, renovation, and new construction of land and building, leasehold improvements, and debt refinancing. Generally, the loan maturity is up to 10 years for working capital, and up to 25 years for fixed assets.
The program operates through private sector lenders. Non-bank lenders and most of the American banks participate in the program. Participating lenders agree to structure loans according to SBA's requirements. If the borrower does not repay the loan, the SBA guarantees to pay back a portion of the loan. However, the SBA does not fully guarantee 7(a) loans. The risk is shared between the lender and the SBA. SBA 7(a) loan guaranty is against payment default, and it does not cover imprudent decisions by the lender or misrepresentation by the borrower.
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