7(a) loans are the most basic and most often used of those in the SBA’s business loan program. The purpose of this loan is to help start-up and existing small businesses with financing, guaranteed for a variety of general business purposes.
The first thing you should understand about this loan is that the SBA does not make loans itself, but rather guarantees loans made by participating lending institutions. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender but not to the borrower, who remains obligated for the full debt, even in the event of default.
All 7(a) loans are provided by lenders who participate with SBA in the program. While not all lenders choose to participate, the majority of American banks do. These lenders are called participants, and offer the loan under a guarantee basis. This means they are provided by lenders who choose to structure their own loans by SBA’s requirements and receive a guarantee from SBA on a portion of this loan. The lender and SBA, then, share the risk of any potential default. The guarantee only covers payment default; it does not cover imprudent decisions by the lender or misrepresentation by the borrower. (more…)