SBA’s guarantee fee: How much do SBA loans cost and why?
In this article, we’re going to explain the SBA loans guarantee fee in detail and discuss how much you’ll typically be charged and why. These guarantee fees are important to be understood before you seek SBA financing in order to fully be aware of all costs associated with a potential loan. When getting an SBA loan there are other fees you’ll be charged on top of the guarantee fees. We’re going to talk about these fees as well, how much they typically are, and when you’ll be responsible for paying them and of course why.
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What Is an SBA Guarantee Fee?
In most cases, the Small Business Administration (SBA) is not a lender. Rather, they guarantee certain types of loans that private lenders make to small businesses. This guarantee is what keeps SBA loans rates so low and the repayment terms so long. When the SBA guarantees a loan, they typically assess a fee, known as an SBA guarantee fee, which is passed on to you by your lender.
The SBA guarantee fee is based on two things:
- The amount of the guaranteed portion of the SBA loan_ the SBA doesn’t guarantee 100% of your loan. Instead, they guarantee 75% – 85% of your loan and the guarantee fee percentage of that amount.
- The repayment term of the SBA loan_ Repayment terms can vary and be as high as 10 years for working capital loans or 25 years for commercial real estate loans. Any loan with a term of 1 year or less will have a 0.25% guarantee fee, while all other terms begin at 3% and differ based on the amount of the guaranteed portion of the loan as explained on how does SBA 7(a) works into SBA’s Financial Management Systems and Strategy?
The SBA guarantee fee can range from 0% – 3.75% and can be included in the overall loan proceeds.
These guarantee fees are only required on SBA 7a loans, but all SBA loans have fees of some sort that are paid to either the lender or the SBA.
In the table below we figure out what you’ll typically be charged in exchange for the SBA guaranteeing your loan. These fees are based on the amount of your loan being guaranteed and reflect an SBA 7a loan.
Guarantee Fees of SBA Loan vs Loan Amount
How SBA Loan Guarantee Fees Work
When an approved lender (Bank) puts an approved loan in front of the SBA for confirmation, they require the lender to pay a fee in exchange for the SBA to guarantee the repayment of up to 85% of the loan. The lenders typically transfer that fee onto the borrower loan, which will be paid back over time as part of the total loan. The lender (bank) must also pay to the SBA an annual service fee of approximately 0.546% as a guaranteed portion of the loan so that the SBA continues guaranteeing the loan as an insurer; this ongoing fee is not usually passed on to the borrower.
The amount of the guarantee fee varies according to how much the SBA is guaranteeing for the lender, the rate is not based on the total size of the loan but on the portion of the loan that the SBA promises to pay in the event of default. The SBA’s guaranteed portion of the loan ranges from 75% – 85%.
However, if the total loan amount is equal to or less than $150,000, the SBA actually waives their guarantee fees; for example:
In spite of 56% of all SBA 7a loans in April 2017 been under $ 150,000, this doesn’t mean that the majority of borrowers haven’t paid fees. Loans under $150K have represented only 9% of the total amount loaned out through the SBA 7a program.
Fees of a Guaranteed portion of the loans
While the SBA guarantee fee is waived for loans under $150,000 as I said above, the fee jumps to 3% of the guaranteed portion of the loan if the SBA loan is between $150,000 -$750,000.
For SBA loans above $750,000, the fee starts at 3.5% of the guaranteed portion of the loan and increases once the size of the loan crosses the $1,000,000 threshold.
For SBA loans above $1,000,000, the total fee for the first $1,000,000 is 3.5% of the guaranteed portions of the loan. Any amount, even just more $ 1 over $ 1 million, will be charged a 0.25% fee on the secured portion of the loan. Both fee amounts are added up to the total warranty fee you will pay.
The following table is an example of the guarantee fee you would pay based on the amount guaranteed by the SBA.
An SBA loan must be approved by the issuing bank, and each bank has its own lending criteria. An SBA Preferred Lender is likely to provide you with better terms and a smoother application and closing process than a bank that is not an SBA Preferred Lender.