Meet the 7(a) -- the SBA's main loan guarantee program
By Jennie L. Phipps • Bankrate.com

If you want to start a business, but can't quite meet the banker's terms, the Small Business Administration has a number and a letter that can help: 7(a).

The 7(a) loan guarantee program is the backbone of the SBA in fulfilling its mandate to assist America's small businesses. Under the program, the agency guaranteed a record 43,639 loans that totaled $10.15 billion in 1999.

A 7(a) loan is intended to provide capital for businesses that may not have enough collateral for a regular bank loan. Participating banks give the loans, but repayment is guaranteed up to 80 percent by the government. The maximum guarantee amount is for $750,000. The money can be used to buy equipment, for working capital or to buy an existing business. The rate is prime plus 2.75 percent for up to 10 years, although many banks won't go longer than five.

Where to start
If you're interested in a 7(a) loan, the best place to start is the SBA's Web site. It spells out in remarkably unbureaucratic language what kinds of businesses qualify, the terms available and what's expected from applicants.

Potential borrowers can also start by stopping by their local SBA office, where counselors and other staffers offer advice free of charge.

Where it's available, prospective borrowers can also go through the SBA's pre-qualification program, which introduces loan candidates to designated local experts. These intermediaries -- usually Small Business Development Centers -- can assist prospective borrowers in developing viable loan application packages and securing loans. Those deemed creditworthy get a pre-qualification letter for a loan of up to $250,000. It's still up to the bank to decide whether to lend, but it's highly likely that the bank will do business with a pre-qualified candidate.

The pre-qualification program is particularly aimed at groups deemed under-served, such as minorities and women.

Be wary of services that charge a fee to put together a loan application. If you need that kind of help, turn to your accountant, lawyer or SCORE, the Service Corps of Retired Executives, who do this kind of work free of charge. In addition to its nearly 400 local chapters, the agency also offers counseling via e-mail.

Next, find a lender
Once the experts have helped you fine-tune your business plan and figure out how much money you need, the next step is finding a lender.

The SBA will provide a list of active and expert 7(a) lenders. Get it and stick to it -- you'll want a lender with plenty of experience.

Lenders are divided into two categories: certified and preferred. The SBA delegates certain approval responsibilities to certified lenders and gives them a guarantee of a three-day turnaround. Preferred lenders, chosen from the ranks of the SBA's best certified lenders, have full lending authority. If they say you deserve the loan, that's good enough for the SBA.

While there can be advantages to choosing a preferred lender, it's not everything, says Mark Papoccia, vice president of small business banking for Harris Bank, Chicago, an award-winning preferred lender.

Papoccia says that if he was seeking 7(a) loan, he would start by finding a banker with whom he could develop a congenial business relationship. "This is a business of relationships," he says.

First, he'd introduce himself to the small business loan officers at several SBA-approved banks. "I'd tell him what kind of business I was thinking about and use the banker as a sounding board. It's beneficial for the applicant, and it helps the lender get a real understanding from the outset."

He also would join a local business organization or two that bankers also belong to, such as the Rotary or the chamber of commerce. As Papoccia puts it, that will help an entrepreneur "get to the point where he can ask Joe the banker for his candid opinion and expect to get it."

By the time you've invested this kind of time and energy into knowing the banking scene, choosing a lender who is interested in your plans and willing to work with you shouldn't be too difficult.

You also need collateral
But getting to know people and generating good will isn't all it takes. The poet Robert Frost called banks "a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain." That's an eloquent way of saying what cash-strapped entrepreneurs already know: In order to borrow money you have to have some -- even when the government is giving its guarantee that you'll pay it back.

The SBA requires a lender to get as much collateral as it can, but not having quite enough won't kill the deal. This is the key difference between a straight bank loan and one guaranteed by the SBA. The banker offering a loan backed by the SBA has a little more room to say yes, even if the deal isn't perfect from a lender's standpoint.

As Burke says, "Businesses we lend to often lack equity or the kind of track records that would provide them access to traditional financing sources. In our business, character and evidence of good business sense is about 75 percent in approving the deal."

Saying you have both isn't good enough. You'll have to prove it.

Prove it on paper
An experienced SBA lender will let you know exactly what paperwork is required. If you've been through the pre-approval process or have expert help, you may be able to pick up the lender information packet on Friday, fill out the forms, provide the required financial information, drop the finished package off on Monday and get an answer by the end of the week. But most new would-be business owners aren't that savvy.

"We often deal with people who aren't very financially sophisticated. We're willing to work with them as long as we're convinced that they are serious and realistic about the nature of the business and the hard work that's going to be involved," Papoccia says.

Getting a 7(a) loan comes down to being prepared, says Paul J. Lavoie, co-owner of Performance Product Painting Inc. in Auburn, Maine. He and a partner took out a 7(a) loan shortly after starting their commercial painting business. "The people who give out SBA loans are overworked and understaffed," he says. "If you don't have all your eggs in a row, they're going to go on to the next guy, and you can't blame them."

Tom Gillis of Houston, who manufactures expendable products for the oil industry, is glad he made the effort.

"It was worth the struggle through mountains of paperwork, covenants, restrictions and endless proofs of collateral because I got the money I needed," he says.

Two years later, his bank was confident enough in his ability to repay that it gave him a second loan -- this time without any guarantees from the SBA.

Jennie L. Phipps is a contributing editor based in Michigan
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-- Posted: Jan. 31, 2000