SBA 7(a) Paperwork Explained: Draft Authorization
The Draft Authorization is a living document and a specific contract between your lender and the SBA. It’s a written agreement providing the terms and conditions under which SBA will guarantee your business loan, and will outline the specific conditions which must be met to keep the SBA guaranty. The draft authorization can be considered a “map” to your loan -- a tool, a guide, and a reference.
There are two keys to the SBA 7(a) Draft Authorization: the National 7(a) Authorization Boilerplate (a master document), and the SBA Authorization Wizard (a tool). You can always email the SBA with specific Boilerplate or Wizard concerns.
Required Consistency in the 7(a) Draft Authorization
It’s crucial to keep all of your information consistent across the loan system, legal documents, loan documents, credit approval, and your loan authorization. Make sure that the following information matches everywhere it’s required:
- Interest rate
- Adjustment period
- Required collateral
- Required guarantors
- Use of proceeds
You’ll also need to make sure the information in the Authorization is consistent with the information in the SOP requirements. Pay special attention to consistency for the following:
- Required borrowers
- Required guarantors (any individual or entity with at least a 20% stake)
- Maximum loan amounts
Keeping the SBA in the Loop
Even though the loan authorization is a living document, SBA approval will be necessary for any changes to the loan amount or the guaranty percentage. You’ll also need to notify and get approval from the SBA for any changes such as cancelling your loan, changing the maturity date, or changing any names or addresses.
The Highest Standard: Draft Authorization Boilerplate
The National Authorization Boilerplate specifies the mandatory standard language for all 7(a) Authorization conditions across the country. The Boilerplate is a great reference document; you’ll find descriptions of regulations, standard operating procedures (SOPs) and relevant notices in gray boxes above each section. No alternate Boilerplate language may be used; the carefully manicured language in the official 7(a) Authorization Boilerplate mustn’t be changed.
The Boilerplate will be used during to start and then to service the loan; the Authorization for 7(a) loans should use the pre-approved Boilerplate conditions, and the SBA will need to review and approve any Draft Authorization that doesn’t exactly follow the standard Boilerplate language. If your lender chooses to use either SBA Express or Export Express for a 7(a) small loan, they must still include the paragraphs found in the form for that particular program.
Essential Ingredients for a SBA 7(a) Draft Authorization Boilerplate
There are nine sections of the Boilerplate:
- Statement of Guaranty Fee: The guaranty fee may be calculated automatically by using the loan amount and the guaranty percentage.
- Ongoing Servicing Fee: The ongoing servicing fee is known as the “1502 fees,” due every month through the SBA’s fiscal transfer agent
- Lender Requirements: Outlines your lender’s responsibilities and any conditions required by the SBA to be met. This includes closing the loan according to the terms and conditions of the Authorization, gathering all valid and enforceable documents for your loan, getting the correct signatures, and confirming security interests.
- SBA Forms: Requires Note 147, Guaranty(ies) - Form 148, Settlement Sheet - Form 1050, Compensation Agreement - Form 159, Equal Opportunity poster (to be given to you)
- Lender Contingencies: The date of final disbursement is most often 6 to 12 months based on the specific loan requirements
- The Note: Lists the loan maturity date, repayment terms (which must EXACTLY match – verbatim - the Boilerplate conditions that appear in the Authorization), any required state-specific options, and any pre- or late payment requirements. A “subsidy recoupment fee” may also apply, but only for loans with a maturity at or above 15 years.
- Use of Proceeds: Lists how funds are to be used; multiple uses may be listed. All disbursement documentation and receipts must match the approved use of proceeds. No loan funds may be used to pay outstanding taxes and must also Loan funds must benefit you or your company.
- Collateral Conditions: All available collateral must be included as collateral. For each class of collateral, your lender must also secure an “enforceable security interest.”
- Additional Conditions: This includes flood insurance, hazard insurance, life or disability insurance, and workers’ compensation along with any liability, malpractice, or state-specific insurance required.
At the back of the Boilerplate is a “Borrower’s Certification,” which serves as a closing document. While the contract is technically between the SBA and your lender, you’ll need to initial and sign to confirm that you’ve received it. The SBA will prepare it for you.
We’re Off to Meet the Wizard
The Boilerplate has also been programmed into a Word Wizard (“Wizard”). The Wizard is a technical tool for Authorization preparation. It requires a one-time entry of lender information and updates any time information changes. The Wizard will automatically insert a list of required forms into the Authorization as needed to ease the process. While lenders are encouraged to use it, they’re not required to, and are permitted to automate the Boilerplate using other software.
It’s important to be using the latest version of the Wizard. While the Boilerplate is continually updated to reflect policy changes, the Wizard is also updated, and reflects technical fixes and programming updates. Your lender should know that they have 30 days to upgrade to the new version every time and update is made by the SBA.
The Wizard includes six unique sections:
- Loan Information: Includes basic borrower details. Covers Boilerplate sections A through E
- Repayment Terms: Provides details of loan terms. Covers Boilerplate section F
- Use of Proceeds: Each item needs to have its own line item; do not bundle any uses together. Covers Boilerplate section G
- Collateral: Real estate, business assets, machinery and equipment, inventory, intangibles, life insurance cash value. Cover Boilerplate section H
- Additional Conditions I and II: Details on protecting your loan and your ability to repay it. Covers Boilerplate Section I.
- Signatures: You’ll sign a certification including all of the required Authorization provisions. Includes Boilerplate section I.
And don’t forget Appendix A through D: Appendix A (standard collateral conditions), B (state-specific options), C (FAQs), and D (Sample Loan Agreement and Sample Borrower’s Certification).