The SBA 7(a) loan program, once considered the loan product of last resort, has become a much more popular vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our economy at this time. In this eBook, you'll find answers to the following commonly asked questions: What is an SBA 7(a) loan? How can a small business lender improve his/her chances for 7(a) loan approval? What are the main differences between the common types of SBA loans (504 and 7(a))?

2. The SBA 7(a) government-guaranteed loan program is more popular than ever during these times
of economic uncertainty. Today’s financial landscape centers around a constantly changing business
environment that has caused conventional bank lenders to exercise much more caution in granting loans
to small businesses. Businesses can qualify for SBA loans with lower down payments, longer repayment
terms, and easier qualifying criteria than are required for conventional bank loan applications. The SBA
7(a) loan program, once considered the loan product of last resort, has become a much more popular
vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our
economy at this time.
In this eBook, you’ll find answers to the following commonly asked questions:
• What is an SBA 7(a) loan?
• How can a small business lender improve his/her chances for 7(a) loan approval?
• What are the main differences between the common types of SBA loans (504 and 7(a))?
What is an SBA 7(a) loan?
The 7(a) loan program from the United States Small Business Administration is the most common type of
SBA loan, and provides financial assistance for small businesses with special requirements. Commonly
referred to as a “general purpose small business loan”, SBA 7(a) loans may be used for any legitimate small
business expenditure, including but not limited to the following activities:
•
Business real estate purchase
•
Business real estate new construction, remodeling, or expansion
•
Business acquisition
•
Partner buyout
•
Business equipment acquisition
•
Refinancing and debt consolidation
•
Business expansion and working capital

3. What to Consider When Applying for an
SBA 7(a) Loan
While many small business owners understand the basic aspects of the loan application process, including
credit history and repayment ability, they often fail to consider other factors that can influence whether or
not they get approved for the small business loan.
Business Management Experience
The SBA loan application process is one of the most consistent models for approving and declining small
business applications, but SBA lenders are constantly challenged to make their credit approval processes
most effective. Statistics produced by the U.S. Small Business Administration have proven that a primary
reason for a business failure, and a loan default, is inadequate management experience. For that reason,
it is of prime importance for the participating SBA lender to document the SBA loan file with evidence of
business management expertise.

4. Industry Expertise
The ideal applicant is a business owner who has already produced consistent profits in the business
applying for the loan, or previously in a related industry. The least qualified applicant is a person who
has never owned or managed a business before, or has no experience in the small businesses’ designated
industry. For all the applicants who demonstrate a range of experience between these two extremes, it is
incumbent upon the lender to document their investigation of the applicant’s educational background and
practical experience to successfully manage the business borrowing the SBA loan funds. The body of proof
may include one or more of the following ingredients which sway the loan decision in a positive manner:
•
If the primary owner/manager of the company does not have a track record of successful business
management experience, a personal guarantor may be added to the loan, because his or her credentials
display characteristics which are conducive to an effective advisory role in the business.
•
The loan application should focus upon the strengths of the primary owner/manager for the
borrowing entity which are relevant to the successful management of the borrowing entity
•
The borrower should provide a business plan and financial projections which are so thoroughly
researched and documented that the lender is swayed toward a positive assessment of their
management abilities.
•
A new business owner may structure a short term management contract with the seller to assure a
smooth ownership transition.
The borrower may affiliate with a franchise to strengthen the management model for the business. In some
cases, a proven franchise system prefers less experienced franchisees, because they are more trainable for
the franchise management model. SBA lenders research the successes of a franchisor, and they may accept
less experienced borrowers for franchise businesses if the franchise has proven itself.

5. Level of Investment
Every loan transaction will have a level of investment, on the part of the business owners, with which the
lender finds comfort. Predicting the success of a business, and the resulting satisfactory repayment of a
small business loan, is not an exact science. Every small business lender has its own individual appetite for
the types and sizes of loans it wants to fund. By the same token, each lender will find comfort in granting
the loan based upon the level of investment made by the borrower.
The following are examples of the types of investment that a small business owner may hold in the
business, and that the lender would like to see:
Dollar Investment
The lender will compute a debt-to-equity ratio, and compare it to industry averages and other financial
benchmarks, to determine if the borrower has adequate “skin in the game”. Part of that investment
includes a measure of the dollars invested in the business by the owner compared to dollars he has
received from loans.
Collateral Investment
Even though the lender will look at the borrower’s dollar investment in the business as a measure of
contributed equity, the lender will also look at the borrower’s assets offered as collateral for the
loan. He may also accept other assets outside the business, pledged as additional collateral, in lieu
of more cash contribution.
Seller Investment
Not all small business lenders will accept seller investment to help a buyer of small business
assets to qualify for financing. The Small Business Administration rules, however, allow the SBA
lender to accept seller standby financing for a portion of the buyer’s qualifying equity. There is a
catch. The seller debt needs to “act like” equity. That means the seller will sign an SBA Standby
Agreement agreeing to delay requiring payments until the SBA loan is satisfied first. It also means
the SBA lender will have first lien rights on the business assets sold by the selling note holder who
is permitted to file a second lien on these assets. The standby creditor earns and accrues interest on
his loan, but he receives no cash payment until the SBA loan is paid off first.

6. What Are the Main Differences Between
SBA 504 Loans and SBA 7(a) Loans?
SBA-504 and SBA-7a Comparison
SBA 504 LOAN
SBA 7(a) LOAN
Loan Size
$125,000 to over $13,000,000
$50,000 to $5,000,000
Interest Rate
Fixed rate on SBA 504 second lien
debenture which is fully amortized through
the term of the loan. Interest rates on 504
loans are set monthly at the time of funding
at an increment above the current market
rate for five-year and ten-year U.S. treasury
issues. Typically, a variable interest rate is
negotiated with bank on first lien bank loan
which is 50% of the total project cost.
Typically, a variable rate adjusted quarterly
Fully amortized through the term of the
loan. Interest rates are negotiated between
the borrower and the lender subject to SBA
maximum of Prime plus 2.75%
Prepayment Penalties
Prepayment penalty on SBA debenture is
10%,9%,8%,7%,6%,5%,4%,3%,2%,1%
for first 10 years respectively. Prepayment
penalty on bank portion of financing is
negotiable.
Prepayment penalty is 5%,3%,1% for the
first three years respectively.
Eligible Business Size
The SBA has established standards for small
business size, but there are exceptions for
certain industries. Check with your SBA
lender for your business’ SBA loan eligibility.
In general, privately-owned, for-profit businesses are usually eligible, while public and
middle market companies are too large.
The SBA has established standards for small
business size, but there are exceptions for
certain industries. Check with your SBA
lender for your business’ SBA loan eligibility.
In general, privately-owned, for-profit businesses are usually eligible, while public and
middle market companies are too large.
SBA debenture
20 years fully amortized – real estate loan
10 years fully amortized –
equipment loan
Fixed interest rate
No balloon payments
First lien bank loan negotiable
SBA debenture
20 years fully amortized – real estate loan
10 years fully amortized –
equipment loan
Fixed interest rate
No balloon payments
First lien bank loan negotiable
50% bank loan
40% CDC loan
10% borrower down payment
90% bank loan
10% borrower down
(Commercial Real Estate &
Equipment only)
Terms Available and
Amortization Periods
Loan Structure
(minimum down payment requirement)
Loan Purpose
Loan Program
Requirements
Collateral
Loan Fees
(General Purpose)
Purchase existing building
Land acquisition and ground up construction
(includes soft cost development fees)
Expansion of existing building
Finance building improvements
Purchase equipment
Refinance existing real estate debt
Expand, acquire or start a business
Purchase or construct real estate
Refinance existing business debt
Buy equipment
Provide working capital
Construct leasehold improvements
Purchase inventory
Partner buyout
51% owner occupancy required for
existing building
60% owner occupancy required for
new construction
Equipment with a minimum 10 year
economic life
51% owner occupancy required for
existing building
60% owner occupancy required for
new construction
All assets financed must be used to the
direct benefit of the business
Generally, the project assets being financed
are used as collateral
Personal guaranties of the principal owners
of 20% or more ownership are required
Collateral is the subject assets acquired by
loan proceeds
May require pledge of personal assets if
equity available
Personal guaranties of the principal owners
of 20% or more ownership are required
Fees are financed in the 504 loan
Fees are negotiated for the 50% bank loan
accompanying the 504 loan
The bank does not charge a fee. Instead,
the bank collects and remits to SBA a loan
guaranty fee. The fee may be financed in the
transaction.

7. About Bruce Hurta
Bruce Hurta has extensive experience in Small Business Lending. He served in a number of
commercial lending and banking capacities in his career including President of a Houston-area
community bank for 6 years. Bruce also established and managed the Houston office for a non-bank
small business lending company where he specialized in SBA lending for 14 years.
Bruce spent 4 years as a bank examiner for the Texas Banking Department, 7 years in executive
management at two community banks, and 18 years as a specialty SBA Lender. He is active in the
commercial realtor and business brokerage communities, along with various business and industry
organizations. Bruce is the 2013 president of the Houston Association of Government Guaranteed
Lenders.
In July 2009, he joined Members Choice Credit Union as the Business Lending Manager to lead their
new SBA Lending Program.
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