A small franchisee? Take your money! (part 2: 7(a) Loan Guaranty)
I’m continuing describing the 7(a) Loan Guaranty by the SBA. By the way the strange name of the program is not really so strange. It comes from the legislation, the section 7(a) of the Small Business Act.
One of the most important things to learn about this program is guaranty itself. Who provides it? When? Are there any limitations?
1. The SBA doesn’t guaranty the full amount of 7(a) loans. The lender and the SBA share the risk that the borrower will not be able to repay the loan in full. The SBA takes the responsibility to cover the loan payments in the case of payment default. The guaranty doesn’t include imprudent decisions made by the lender or misrepresentation by the borrower.
2. The SBA provides the guaranty that is only available to the lender. It means that according to this program, the borrower remains obligated for the full loan amount due either to the bank or to the government. The program assures the lender that in the event the borrower does not repay his or her obligation and a payment default occurs, the government will reimburse the lender for its loss (up to the percentage of the SBA’s guaranty fixed in the loan agreement).
3. The SBA doesn’t provide guaranties to all small business companies. The applying company needs to understand that the Agency will check both eligibility and being creditworthy. Also they will determine if the company can prove the willingness and ability to pay its debts and whether it abided by the laws of its community. I’ll write more about the factors of eligibility later but here I need to say that any prospective borrower has to understand that the SBA takes into consideration that for some reasons commercial banks and other financial institutions are not willing to lend you money. If means that something is not so good in your idea, or you personal credit history, or something else. Maybe you may think how to improve the situation yourself at first?…
(to be continued)