When securing a Small Business Administration loan, you must pay an SBA guarantee fee.
- What SBA guarantee fees are
- How they work
- How much it costs for an SBA guarantee fee in 2019
- What other SBA fees you may encounter
- How SBA fees are paid
What Is an SBA Guarantee Fee?
When a lender approved by the Small Business Administration (SBA) extends you a loan, the federal agency agrees to back a portion of the loan. This guarantees your lender will be repaid part of what you borrowed if you default on your loan. By making this guarantee, the SBA puts itself at risk of having to pay money to your lender.
To offset this risk, the SBA charges your lender a fee based on a percentage of your loan amount.
Most lenders pass this fee on to you through your loan repayments. In effect, you’re paying the SBA an “insurance” fee, passed on via your lender, for the risk they’re taking in guaranteeing your loan.
How Do SBA Guarantee Fees Work?
SBA guarantee fees are a function of the way SBA guaranteed loans work. When the SBA backs a loan from a financial provider, it guarantees a percentage of the loan.
Under the SBA’s most popular loan program, Standard 7(a) loans, the SBA guarantees up to 85% of the loan for loans up to $150,000 and up to 75% for loans exceeding this amount. This guarantee reduces risk to lenders, providing an incentive for them to extend loans at low rates capped by an SBA-approved maximum.
While this arrangement lowers the risk for lenders, it puts the SBA at risk.
The amount of risk the SBA takes on by backing a loan varies directly with the amount of the loan, the percentage of the loan the SBA guarantees and the term of the loan. The greater the loan amount, and the higher the percentage of the amount the SBA guarantees, the more the SBA stands to lose if the borrower defaults. Additionally, the longer the term of the loan, the higher the odds a financial emergency will arise before you can repay the entirety of your loan.
Accordingly, SBA guarantee fees vary with the size of your loan, as well as the term length of your loan. In general, as your loan amount and term length go up, so does your guarantee fee. For example, for 7(a) loans, the SBA uses a tiered system to scale loan size to guarantee fee percentages. After your loan size increases beyond a set threshold, you enter the next tier and your guarantee rate goes up. Additionally, loans with terms of 12 months or less have lower fees than those with longer terms.
SBA Guarantee Fee Examples
The best way to illustrate how SBA guarantee fees work is to use some specific examples. Nearly all SBA 7(a) loans require guarantee fees. SBA 7(a) Standard Loan, SBA 7(a) Small Loan and SBA Express Loan guarantee fee rates use the same scale. Other SBA loans such as Certified Development Company (CDC)/504 loans may require guarantee fees.
We’ll illustrate a few of the most common guarantee fees:
SBA 7(a) Guarantee Fee Rates: Loans Up to $150,000
SBA guarantee fee 2019 rates for 7(a) loans use different scales for loans with terms of 12 months or less versus those with lengthier terms. For loans with a maturity of 12 months or less, the SBA assesses an upfront guarantee fee of 0.25% of the guaranteed portion of the loan. This applies to loans of all amounts, including those of $150,000 or less.
For loans with terms longer than 12 months in amounts of $150,000 or less, the SBA assesses a fee of 2% of the guaranteed portion of the loan. The lender may retain no more than 25% of this, meaning that a guarantee fee representing at least 1.5% of the guaranteed portion of the loan must be remitted by the lender to the SBA.
To illustrate, consider a loan of $120,000 with an 85% SBA guarantee. The guaranteed portion of this loan is $102,000. If the loan has a term of less than 12 months, the guarantee fee would be 0.25% of $102,000, or $255. With a longer term, the fee would be 2% of $102,000, or $2,040.
SBA 7(a) Guarantee Fee Rates: 7(a) Loans of $150,001 to $700,000
For 7(a) loans of $150,001 to $700,000, guarantee fees are 0.25% of the guaranteed portion of the loan for terms up to 12 months and 3% of the guaranteed portion for loans longer than 12 months.
For example, a loan of $500,000 with a guarantee of 75% and a term of 10 months would have a fee of 0.25% of 75% of $500,000, equal to 0.25% of $375,000, or $937.50. For a loan of the same amount with a term of 2 years, the fee would be 3% of 75% of $500,000, or $11,250.
SBA 7(a) Guarantee Fee Rates: 7(a) Loans from $700,001 to $5,000,000
For 7(a) loans from $701,000 to $5,000,000, guarantee fees are 0.25% of the guaranteed portion of the loan for terms up to 12 months and 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.
For example, for a loan of $900,000 with a guarantee of 75% and a term of 9 months, the guarantee fee would be 0.25% of 75% of $900,000, or 0.25% of $675,000, equal to $1,687.50. For the same loan with a term of 15 months, the fee would be 3.5% of 75% of $900,000, or $23,625.
For a loan of $2,000,000 with a guarantee of 75% and a term of 9 months, the guarantee fee would be 0.25% of 75% of $2,000,000, equal to 0.25% of $1,500,000, or $3,750. For the same loan with a term of 15 months, the fee would be 3.5% of 75% of the first $1,000,000, or $26,250, plus 3.75% of 75% of the second $1,000,000, or $28,125, for a total of $54,375.
SBA CDC/504 Guarantee Fee Rates
The SBA’s CDC/504 loan program includes two different types of loans. CDC/504 loans typically are given for business expansion, but the program also includes a special program for refinancing debt.
The SBA contributes up to 40% of costs for CDC/504 loans and loans up to $5,000,000. For both types of CDC/504 loans, guarantee fees are set at an upfront fee of 0.50%. For instance, for a $2,000,000 loan financed 40% by the SBA, 0.50% would be $4,000.
Other SBA Loan Fees
SBA guarantee fees are but one fee you might be required to pay when securing an SBA loan. Here are some other fees you might encounter. Not all of them will apply to all SBA loans.
If you’re using property as collateral on an SBA loan, you may need to pay a fee to get the property appraised.
Phase I Environmental Fees
If you’re using commercial property as collateral for your loan or if you plan to use your loan to purchase commercial real estate, your lender may charge you for getting a Phase I environmental site assessment (ESA) completed. A Phase I assessment is a preliminary step in the process of doing due diligence on real-estate properties for existing or potential environmental contamination. If a site is determined to be contaminated, a more detailed Phase II investigation begins.
Business Valuation Fees
If you plan to use your SBA loan to acquire another company, you’ll need to pay a fee to get the value of that business assessed.
Loan Packaging Fees
Lenders often charge a packaging fee for the service of processing your loan and submitting it to the SBA.
If you’re using your loan to purchase real estate, you will need to pay for a title search to make sure the property is free of any other claims.
Attorney Review Fees
You typically will need to pay an attorney to review all your loan documents before closing.
Lenders typically charge an origination fee, which is a fee that covers the cost of processing your loan. However, SBA guidelines prohibit separate origination fees.
How SBA Fees Are Paid
SBA fees get paid at different points in the loan process. During the application process, the following fees may get paid as deposits:
- Appraisal fees (can also be paid at closing)
- Phase I environmental fees
- Business valuation fees
At closing, you may pay:
- Appraisal fees (also can be paid during the application process)
- Loan packaging fees
- Title fees
- Attorney review fees
Finally, while paying your loan, guarantee fees usually get rolled into your payments.
While SBA fees might seem costly out of context, the bigger picture is that they help secure funding to finance your business. Your loan provides you with capital many times the amount you pay in fees, and this goes into funding your business and generating profit. From this perspective, SBA fees represent an investment in your business.