Banks, savings and loans, credit unions, and other specialized lenders participate with the Small Business Administration (SBA) to provide small business loans. Lending partners must execute an SBA Form 750, Deferred Participation Agreement, which establishes the terms under which SBA will guarantee a loan submitted by the lender.
When a Bank applies to the SBA for a guaranty on a proposed loan, it must certify that it will only make the loan if the SBA guarantees it. The SBA then decides whether to guarantee the loan based on the information provided in the loan application.
If a guaranteed loan defaults, the Bank may request that the SBA purchase the guaranteed portion.
When a loan is guaranteed by the SBA, certain conditions are imposed on the Bank. Some of these conditions are related to how the Bank must close and administer the account; others are imposed on the borrower, and pertain to the business or its owner(s). The borrower must agree to these requirements as a condition for obtaining the loan. Virtually all SBA loans are secured. In addition to the Bank’s standard loan documentation, the security agreement will be supplemented by a Small Business Administration Lien Instrument Addendum which will be executed by the Borrower and the Bank. A sample form is included at the end of this Chapter.
The SBA offers its lending partners a variety of methods for applying for a guaranty on proposed loans. The differences are related to the levels of authority and responsibility the lender and the SBA have in making decisions associated with processing, closing, and administering each loan. Lenders are given authority to take on more of these responsibilities based on their experience and performance with the SBA. The better a Bank has conducted its analysis and performed administrative functions in the past, the more likely the SBA will not have to re-analyze or check these factors in the future. For more information on SBA guarantees, contact the local SBA District Office or go to www.sba.gov