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.
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 would be one of three types of financial institutions: a commercial bank, a credit union, or an alternative financing facilitator like United Capital Source.
Lenders must apply to the SBA for approval to offer the loans. The SBA sets lending guidelines and limits what lenders can charge.
One of the most significant aspects of the program is that the SBA partially guarantees the loans, usually between 50%-85% of the loan. 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:
- SBA 7(a) loans (the most common).
- SBA CDC/504 loans.
- SBA Express Loans.
- SBA Export loans.
- SBA Disaster loans.
- SBA Microloans.
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:
- High borrowing amounts – up to $5 million.
- Low interest rates and extended repayment terms because of the SBA guarantee.
- Multiple loan packages are available.
- Depending on the loan, you can use the funds for virtually any business purpose.
Cons:
- Usually requires a credit score of 650-700.
- Tedious application process with exhaustive documentation requirements.
- Most loans require collateral, a personal guarantee, and a down payment of at least 10%.
- Takes a long time to receive funds – between 60 and 120 days.
What is an SBA guarantee fee?
The SBA charges a fee for a percentage of the guaranteed portion of the loan.
Note: SBA uses “guarantee” and “guaranty” interchangeably, so both are correct. While guarantee is the more common usage, the SBA uses guaranty on several documents.
Why the SBA charges a guaranty fee
The purpose of the guarantee fee is to help offset the costs when the SBA has to pay a guarantee on defaulted loans. Instead of funding the guaranteed portion of the loan from the American taxpayer, 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 monthly fee.
Other lenders will deduct the fee from the loan amount.
How much are SBA guarantee fees?
The SBA guarantee fee depends on the loan amount, the guaranteed percentage, and the loan term.
SBA guarantee fee by loan amount
There is no guarantee fee for loans of $500,000 or less. The SBA guarantees 85% of loans for $150,000 or less and 75% for loans between $150k-$5 million.
For loans over $500k with terms of 12 months or less, the guarantee fee is 0.25%. For loans over $500k with terms of greater than 12 months, the fee breakdown is as follows:
- $500k-$700k: Guarantee fee is 0.55%.
- $700k-$1 million: Guarantee fee is 1.05%.
- $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.
Guarantee Fee Examples
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 $5906.25.
Things get more complicated once you’re borrowing over $1 million. If the guarantee portion does not exceed $1 million, you still only pay 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:
- Apply a 3.5 % guarantee fee for the first million, which is $35,000.
- Apply a 3.75% guarantee fee on the remaining $500,000, which is 18,750.
- The total guarantee fee for borrowing $2 million is $53,750.
What are the other SBA loan fees?
Depending on the loan type, the SBA and SBA lenders can charge additional fees.
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 $3,000 for loans up to $350k. Packaging fee cannot exceed 5% for loans over $350k.
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 can charge fees for appraising collateral, business valuations, and other costs. If purchasing real estate, the lender can also charge title fees. In addition, many loan agreements require an attorney review, which can cost an additional fee.
Late payment fee: SBA loan payments have a 10-day grace period after 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. When applicable, the fee applies any time the borrower pays off 25% of the loan or more within a given year. The penalties are:
- 5% of the prepayment amount during the first year.
- 3% of the prepayment amount during the second year.
- 1% of the prepayment amount during 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.
Closing fees: The CDC can charge fees for various closing activities like appraisals, legal costs, and miscellaneous tasks. The fee amount varies.
Annual servicing fees: An ongoing fee 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 past the 15th of the month, the CDC can charge 5% of the amount due or $100, whichever is greater.
Prepayment fee: Only applies 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?
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. 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. In addition, lenders cannot charge an application fee or other extraneous fees.
Can I get my SBA loan fees waived?
The guaranty fee on SBA 7(a) and 504 loans for $500k or less is currently 0%. Veteran business owners can get the guarantee fee waived on SBA Express loans. In addition, non-7(a) Microloans don’t have 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. But before applying, you should know 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 a small business loan. Our loan experts can find the right loan for your business needs. You’ll get a complete breakdown of costs, so there are no hidden fees or surprises.
