Who Qualifies for an SBA 7(a) Loan?

The Small Business Act (SBA) established one of the most basic and most commonly used business loan programs, the SBA 7(a) program. The SBA 7(a) loan is made by a participant (a bank or non bank lender) and is partially guaranteed by the SBA. What this means is that if a borrower is incapable of making a payment and defaults, the SBA will pay the lender a portion of the loan. The borrower is still responsible for the full amount of the loan. This is useful for the borrower because even if the borrower is considered a high risk to the lender, the lender will usually still be willing to loan that borrower a certain amount of money.

One of the first criteria that qualify a borrower for an SBA 7(a) loan is proof that the loan will be used for eligible business purposes. The money can also be used for improving facilities, attaining business acquisitions, machinery and equipment, and working capital just to name a few. If the applicant can show the lender that the SBA 7(a) loan would be used for these purposes, then the lender will be in a better position to accept the loan.

A borrower's character is also an important consideration in determining eligibility for a SBA 7(a) loan. The borrower must have historically shown the willingness and ability to pay their debts and their willingness to abide by the laws of their community. A statement of personal history is obtained from each borrower to determine if their character qualifies. An individual that has recently committed a felony or defaulted on any previous government debt would be ineligible for SBA financing.

One way that a business can exempt itself from the possibility of an SBA 7(a) loan is by applying for the loan as a business investment or speculation. If you cannot show the SBA that the loan will be used for economically worthy reasons, then the SBA will be unable to help your business. However financially promising speculative business endeavors might seem, the SBA is set up to help businesses that will be useful to the community they will be serving.

SBA 7(a) loan applicants must be able to prove that they are a for-profit business. One of the most important things that business needs to do is be well aware of its own abilities as well as the commitments it is going to make and how well it will be able to stay committed. It’s easy to forget that the guarantee that the SBA 7(a) loan comes with is between the SBA and the third party lender and not between the SBA and the borrower.