7 (a) Small Business Loans

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The U.S. Small Business administration (SBA) provides an option for small businesses to obtain financing via business loans under the 7(a) loan category by giving the commercial lending institution a guarantee for a portion of the loan amount and reimbursing the defaulted amount in case the borrower is unable to repay the loan as per schedule. Although 7(a) loans are commonly referred to as government loans or business loans, commercial lenders give them out based on a guarantee by the SBA, which is a government loans agency.

How do 7(a) loans benefit small businesses?

Small businesses often face difficulties in obtaining loans to meet their financing requirements for their business activities as they do not have a credit standing compared to bigger and better-known businesses. The loan name is derived from section 7(a) of the Small Business Act, which permits the SBA to guarantee a portion of the loan given to the small business, thereby reducing the commercial lenders’ risk. In case there is a default in repayment, the SBA reimburses the commercial lending institution for the loan amount.

For what purpose can 7(a) loans be used?

The 7(a) loan category is relatively flexible and can be used to meet a wide range of business activities such as purchase of furniture and fixtures, machinery and equipment, fixed assets such as land and building or for working capital and even debt refinancing in special circumstances.

What are the different types of 7(a) loans?

There are basically four different types of 7 (a) loans – express loans, export loans, rural advantage loans and special purpose loans. Each of these types is further divided into sub categories to meet specific requirements. Express loans are a means of obtaining finance quickly through an expedited application and approval procedure. As the loan name suggests, export loans can be used to finance export-related activities of a small business. Rural advantage loans are mainly for small businesses based in rural areas and offer quick sanctions of smaller amounts. The special purpose loans are for purposes such as enforcing pollution control guidelines, providing ESOP financing, or similar special needs.

The 7(a) loan category is designed to help small businesses get financed easily. Since the SBA acts as the guarantor, they are considered to be government loans. However, in actuality, the commercial lending institution disburses the loan and hence the small business has to meet certain eligibility criteria laid down by both the SBA and the lender in order to get the loan.