What are SBA loans?
SBA loans refer to various small business loans in the US Small Business Administration’s financing program. The Small Business Administration (SBA) provides numerous resources and training assets for small business entrepreneurs. SBA loans are designed to provide financial assistance to small businesses, helping them access the funding they need to grow and succeed.
The SBA loan program is one of its various options, but the SBA does not service the loans or provide funding.
Instead, small business owners apply to an approved SBA lender, which is typically one of three types of financial institutions: a commercial bank, a credit union, or an alternative financing facilitator, such as United Capital Source. To qualify for SBA loans, businesses must meet certain eligibility requirements, which vary depending on the loan type and program.
Lenders must apply to the SBA for approval to offer the loans. The SBA sets lending guidelines and limits the fees that lenders can charge.
One of the most significant aspects of the program is that the SBA partially guarantees the loans, typically between 50% and 85% of the loan amount. In a way, the government agency acts like a co-signer on your loan.
Since the SBA guarantees a portion of the loan, lenders face less risk. Lenders can offer more significant borrowing amounts at the most competitive rates and repayment terms of any business loan product.
This is why the loan program is considered “the gold standard of small business financing.”
The program consists of the following loan packages:
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SBA 7(a) loans (the most common)
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SBA Export loans.
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SBA Export Working Capital Program (EWCP), which focuses on export-related financing and provides assistance to small businesses involved in international trade.
Pros & cons
While SBA loans are the lowest-cost small business financing options, they have drawbacks.
Here are the pros and cons of the program.
Pros:
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High borrowing amounts – up to the maximum loan limits set by the SBA, currently $5 million.
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Low interest rates and extended repayment terms are available because of the SBA guarantee.
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Multiple loan packages are available.
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Depending on the loan, you can use the funds for virtually any business purpose.
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Veteran-owned businesses may qualify for waived or reduced SBA guarantee fees.
Cons:
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Usually requires a credit score of 650-700.
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Tedious application process with exhaustive documentation requirements.
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Most loans require collateral, a personal guarantee, and a down payment of at least 10%.
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It takes a long time to receive funds, between 60 and 120 days.
What is an SBA guarantee fee?
The SBA charges a fee (also called the SBA guaranty fee) for a percentage of the guaranteed portion of the loan. This fee helps cover the SBA’s costs in the event of borrower defaults.
Note: SBA uses “guarantee” and “guaranty” interchangeably, so both are correct. While guarantee is the more common usage, “SBA guaranty” is the alternate spelling used in official documents.
Why does the SBA charge a guaranty fee?
The purpose of the guarantee fee is to help offset the costs incurred by the SBA when it has to pay a guarantee on defaulted loans. Instead of funding the guaranteed portion of the loan with American taxpayer dollars, the SBA charges lenders a fee.
Lenders then pass the fee on to the borrower. Most lenders will package the fee into the loan amount, which is repaid as part of the loan’s repayment term through monthly installments. The length of the repayment term can also affect the calculation of the guarantee fee and the total amount to be repaid.
Other lenders will deduct the fee from the loan amount.
How much are SBA guarantee fees?
The loan amount, the guaranteed percentage, and the loan term determine the SBA guarantee fee. The SBA sets maximum guarantee fees, which are capped at specific dollar amounts based on the size and type of loan.
For example, a $500,000 loan may have a guarantee fee of several thousand dollars, depending on the guarantee percentage and term. The amount disbursed to the borrower may be less than the SBA guarantee fee if the fee is deducted upfront. SBA guarantee fees are generally comparable to those charged on similarly sized non-SBA commercial loans.
SBA guarantee fee by loan amount
For loans of $150,000 or less, the upfront guarantee fee is 2% of the guaranteed portion. The SBA guarantees 85% of loans for amounts of $150,000 or less and 75% for loans between $150,000 and $5 million.
For loans exceeding $ 500,000 with terms of 12 months or less, the guarantee fee is an upfront fee of 0.25%, payable at or before disbursement. For loans over $500k with terms of greater than 12 months, the upfront fee breakdown is as follows:
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$500k-$700k: Guarantee fee is 0.55%.
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$ 700,000-$1 million: The guarantee fee is 1.05%.
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$1 million – $5 million: Guarantee fee is 3.5% of the guaranteed portion up to $1 million and 3.75% of the guaranteed portion over $1 million.
For loans between $150,001 and $700,000, the upfront guarantee fee is 3% of the guaranteed portion. For loans of $700,001 to $5,000,000, the guarantee fee is 3.5% of the guaranteed portion of the loan up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000. These upfront fees are typically paid at closing, and in many cases, the SBA guarantee fee may be deducted directly from the loan proceeds at the time of disbursement.
Guarantee Fee Examples
Here is an example of how SBA guarantee fees are calculated.
Let’s say you took out a loan for $750,000 with a 7-year term. The SBA would guarantee 75% of the loan amount, which is $562,500. You’d have to pay a 1.05% fee of the guaranteed portion, which would be $5,906.25. This guarantee fee is part of the total loan cost, so it’s essential to factor it in when considering your overall financial obligation.
For example, things become more complicated once you borrow over $1 million. If the guarantee portion does not exceed $1 million, you will still pay only 1.05%. However, if you borrowed $2 million, the SBA would guarantee 75% of the loan, which is $1.5 million. In this scenario, the guarantee fee works like this:
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Apply a 3.5% guarantee fee of $35,000 for the first $1 million.
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Apply a 3.75% guarantee fee on the remaining $500,000, which is $18,750.
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The total guarantee fee for borrowing $2 million is $53,750. This fee will also be included in the total cost of your loan.
What are the other SBA loan fees?
Depending on the loan type, the SBA and SBA lenders can charge additional fees. In some cases, a broker may also charge a fee for assembling and submitting your loan application. Some of these fees are paid at disbursement of the loan, meaning when the loan funds are released to you.
SBA 7(a) loan fees
SBA 7(a) loans are the most common, popular, and versatile option.
Packaging fee: The fee a lender charges for putting together the loan package. Lenders can charge a fee of up to $3,000 for loans of up to $350,000. The packaging fee cannot exceed 5% for loans exceeding $ 350,000. The SBA allows a flat packaging fee of $2,500 per loan.
Extraordinary servicing fee: An annual lender fee for monitoring the value of the pledged collateral or other special servicing needs. The fee cannot exceed 2% of the outstanding balance per year.
Out-of-pocket expense fees: Lenders may charge fees for appraising collateral, conducting business valuations, and other related costs. If purchasing real estate, the lender can also charge title fees. Additionally, many loan agreements require an attorney’s review, which may incur an additional fee.
Late Payment Fee: SBA loan payments have a 10-day grace period following the due date. After those 10 days, lenders can charge up to 5% of the amount due as a late fee.
Prepayment fee: This fee only applies to loans with terms of 15 years or longer. The prepayment penalty applies during the first three years of the loan. When applicable, the fee is calculated based on the prepayment amount anytime the borrower pays off 25% or more of the loan within a given year. Prepayment penalties for 7(a) loans are 5% during the first year, 3% the second year, and 1% the third year.
SBA 504/CDC loan fees
SBA 504 loans require working with a Certified Development Company (CDC). The loan is used to purchase commercial real estate, business equipment, or other major fixed assets.
Packaging fee: The CDC charges a fee for processing the loan. It cannot exceed 1.5% of the loan amount. In some cases, the packaging fee may be refunded if the loan application is denied or withdrawn.
Closing fees: The CDC can charge fees for various closing activities, such as appraisals, legal costs, and miscellaneous tasks. The fee amount varies.
Annual servicing fees: An ongoing fee that the CDC charges for costs associated with servicing the loan. The fee amount is 0.4405% of the outstanding loan balance.
Underwriter’s fee: A fee charged for evaluating the loan application. The cost is 0.375% for loans up to 10 years and 0.4% for loans up to 25 years.
Late payment fee: When a borrower makes a loan payment after the 15th of the month, the CDC can charge 5% of the amount due or $100, whichever is greater.
Prepayment fee: This fee applies only to loans with a term of 15 years or longer. You’re subject to a prepayment premium if you pay off the loan in the first half of the loan term.
The premium is based on the remaining principal multiplied by the interest rate. The penalty declines by 10% of the interest rate each year for the first 10 years.
When do I pay SBA loan fees?
The SBA determines program fees each fiscal year, and these fees are uniform across all lenders. Additionally, lenders are required to pay an annual service fee to the SBA, based on the outstanding loan balance, which cannot be charged to the borrower. You’ll pay the loan fees at different stages of the loan process.
Paid as deposits
Fees paid as deposits to the lender include appraisal fees, business valuation fees, and the Phase I environmental fee.
Usually, the deposit counts towards your down payment or is considered a prepayment of some closing costs.
SBA loan closing costs
Loan packaging, title, and attorney fees are usually paid when the loan closes. Certain fees are paid at the time of loan disbursement, which is when the funds are released to the borrower. If the lender deducts the guarantee fee from the loan total, it is also paid at the time of closing.
Ongoing fees
If the lender rolls the guaranty fee into the loan, it’s paid throughout the loan. Essentially, the fee is divided up and added to your scheduled monthly payments.
The extraordinary servicing and annual service fees are assessed and added to your outstanding balance each year.
Frequently Asked Questions
Here are the most common questions about SBA loan fees.
Can SBA lenders charge an origination fee?
According to the SBA, lenders cannot charge a separate loan origination fee on an SBA-guaranteed loan. Additionally, lenders cannot charge an application fee or any other extraneous fees.
Can I get my SBA loan fees waived?
The guarantee fee on SBA 7(a) and 504 loans of $500,000 or less is currently 0%. Veteran business owners can get the guarantee fee waived on SBA Express loans. Additionally, non-7(a) Microloans don’t incur a fee.
Can I deduct SBA loan fees from my taxes?
No, SBA loan fees are not tax-deductible. However, you should be able to deduct SBA loan interest from your taxes. Speak to your accountant or tax expert to ensure your SBA loan interest payments are tax-deductible.
SBA Loan Fees – Final Thoughts
SBA loans remain the most advantageous small business loans when you are eligible. However, before applying, it is essential to understand the total costs and risks involved.
Contact us if you have additional questions about SBA loan costs or if you’re ready to apply for an SBA loan. Our loan experts can find the right loan for your business needs. You’ll receive a comprehensive breakdown of costs, ensuring there are no hidden fees or surprises.
