7(a) Loan Programs: Dangers

The 7(a) loan is the most common loan guaranteed by the Small Business Administration. When the federal government guarantees a loan, it does not administer the funding itself. Instead, the government provides a guarantee to a private lender saying that it will reimburse the lender if the borrower defaults on the loan. This guarantee makes the loan more affordable for borrowers, but it also comes with a number of drawbacks. 

Owners Must Personally Guarantee the Loan

To be eligible for SBA loans, all owners of a business must apply. The loan will primarily be considered against the current profits and cash flow of the business. However, the loan will also rely on the financial stability of all those on the application. Anyone who has a 20% stake or more in the company will need to personally guarantee the loan. 

When you personally guarantee a loan, you provide your signature stating you will make all payments and pay off the loan on time. If this does not occur, your personal financial record will show the infraction. The report will not distinguish whether it was you who failed to pay or a partner. All owners will be held equally liable for repaying the loan.

Lengthy Character Requirements

The character of each borrower will be considered with an SBA loan. As with all loans, how a person has performed when handling past debt is an important criteria. The SBA will take this much further than other types of lenders, though, and have character requirements. If a person on the application has a criminal record, regardless how small, they may be denied acceptance by the SBA.

This means that a "Statement of Personal History" is required by all principal owners of the company. The Administration has the right to investigate this statement for accuracy. Inquiries into your criminal record, personal relationships, school records and other information may be sought by the administration. This type of application process is much more invasive than a bank or lender would typically undergo. Your partners may have to find out personal information about you in order for the loan to be approved.

Defaults Prevent Future Government Secured Loans

When you default on a government-secured loan, you can say goodbye to your chances of getting another similar loan in the future. This means you have to be beyond positive this is the business you feel has the best chance of success and is most deserving of the loan out of any future or past option you may pursue. If you believe the business has a slight chance of success, risking your name and status with the SBA in order to fund the business is not a good idea.