Understanding the SBA Guarantee Fee
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing.
When the Small Business Administration (SBA) guarantees a loan, it assesses a fee that’s passed on to the borrower by the lender. The SBA guarantee fee covers the government’s cost in the event that the borrower defaults on their loan as the SBA would repay the lender. This guarantee fee helps to keep SBA loan rates low and allows lenders the ability to offer longer repayment terms. Additional fees may also be assessed on your SBA loan depending on any additional services that are a part of the loan approval process.
If you’re planning to apply for an SBA loan, consider using South End Capital. South End Capital offers SBA 7(a) and 504 loans, and they can approve loans for owners with credit scores as low as 650. Getting in contact with a loan officer is an easy process that requires only a few pieces of information.
How the SBA Guarantee Fee Works
The SBA charges a guarantee fee on SBA 7(a) loans. This guarantee insures lenders against loss if the borrower defaults on their loan. The amount of the SBA guarantee fee varies based on the loan amount and also the loan term. SBA guarantee fees are adjusted at the start of each federal fiscal year, which is October 1.
The amount of the SBA guarantee fee is based on two things:
- The SBA loan’s amount: The SBA doesn’t guarantee 100% of your loan. Instead, it guarantees 75% to 85% of your loan, and the guarantee fee is a percentage of that dollar amount. The maximum the SBA will reimburse in a default is $3.75 million, or 75% of a $5 million loan.
- The repayment term of the SBA loan: Any SBA loan of more than $350,000 with a term of one year or less will have a 0.25% guarantee fee, with terms beyond one year having guarantee fees of at least 2.77%.
The SBA guarantee fee for loans over $350,000 can range from 2.77% to 3.75% and can be included in the overall loan proceeds. Loans up to $350,000 don’t have an upfront guarantee fee.
The lender also must pay the SBA an annual service fee of no greater than 0.55% of the guaranteed portion of the loan to continue guaranteeing the loan. This ongoing fee isn’t usually passed on to the lender.
SBA 7(a) Loan Guarantee Fees by Loan Amount
Guarantee Fee | Percent Guaranteed By SBA | |
|---|---|---|
Up to $350,000 | 0% | 85% up to $150,000 75% above $150,000 |
$350,001 to $700,000 | 2.77% | 75% |
$700,001 to $1 million | 3.77% | 75% |
Above $1 million | 3.5% of the first $1 million— 3.75% thereafter | 75% |
SBA 7(a) Loan Guarantee Fee Examples
Loan Amount | Total Amount of the Loan Guaranteed by the SBA | Total Guarantee Fee | Guarantee Fee Breakdown |
|---|---|---|---|
$110,000 | $93,500 (85%) | None | None |
$400,000 | $300,000 (75%) | $8,310 | 2.77% of $300,000 |
$800,000 | $600,000 (75%) | $19,620 | 3.27% of $600,000 |
$2 million | $1.5 million (75%) | $53,750 | 3.5% of the first $1 million plus 3.75% of the rest of the guaranteed portion ($500,000) |
Other SBA Loan Fees
Both the SBA 7(a) loan and the SBA 504 loan have fees that are similar to those found in many types of business loans. Common fees charged in association with an SBA loan include:
- Origination Fee (0.5% to 3.5%): With a loan through the SBA 7(a) loan or 504 programs, a lender may also charge an origination fee to process the loan. Origination fees vary by lender and loan amount.
- Loan Packaging Fee ($2,000 to $4,000): A loan provider will typically charge a packaging fee to cover the effort in packaging your SBA loan application and getting it approved by the SBA.
- Loan Broker Fee (1% to 4%): Broker fees are paid directly to third parties that package your loan or introduce you to the lender who funds your loan. These fees, often charged as service or packaging fees, aren’t standard and require you to directly engage someone to help you get your loan funded. SBA Form 159 must be completed prior to closing on the loan should you pay a broker.
- Loan Servicing Fees: An SBA loan provider may charge ongoing service fees on a monthly or quarterly basis to manage your loan. These fees are generally for services like billing and keeping accurate records of payments made. These vary by lender but generally range from 0.25% to 0.75% of the remaining balance on the loan for each billing cycle.
SBA Loan Closing Costs
In addition to the assortment of SBA loan fees, loan closing costs are often assessed. Common SBA loan closing costs include:
- Appraisal fees: You may need to have an appraisal completed on real estate if you’re using it as collateral or purchasing it with loan proceeds. These fees typically range from $2,000 to $5,000. Appraisals on special use commercial properties could cost as much as $10,000.
- Business valuation fee: If you’re using SBA funds for a business acquisition, you’ll need a valuation of that business. These costs can range from $5,000 to $30,000 or more depending on the business’ size and complexity.
- Phase I Environmental Report fee: If you’re purchasing commercial real estate, or using it as collateral for your loan, many lenders require an environmental report. These reports identify potential or existing environmental issues that may harm the property in the future and cost between $2,000 and $3,000, depending on your state.
- Title fee: When purchasing real estate, you’ll need to make sure the property has a clean title, free of any other claims to it. The title fees, ranging from $1,000 to $2,500, pay for Uniform Commercial Code (UCC) lien searches, buying title insurance, and recording your new title at closing.
- Attorney review fee: In most cases, an attorney will need to review all of the loan documents prior to closing. This review expense ranges from $2,000 to $3,000.
These are all one-time fees that are either charged at closing or financed as part of the loan. To move forward through the loan process, you’ll typically have to pay deposits at different parts of the loan process to show the lender you’re prepared to close the loan.
When SBA Loan Fees Are Paid
SBA loan guarantee fees are added to your total loan balance at closing and repaid as part of your monthly payment. However, the other fees associated with your SBA loan will be paid at varying stages of the loan process. Lenders will generally require you to pay deposits during the lending process that show your commitment to closing your loan.
The deposits typically count as either part of your down payment on the loan or as a prepayment of the fees that are charged at closing. A standard breakdown of when and how fees and deposits are paid is:
Paid as Deposits | Paid at Closing | Rolled Into Your Loan |
|---|---|---|
|
|
|
All of the fees listed as “Paid as Deposits” are typically paid through an additional deposit to the lender if the funds from the initial deposit are insufficient to cover the expenses.
Once you have a pretty good idea of what your loan costs could be and you’re ready to move forward, we recommend considering South End Capital as your loan provider. They can get you funded for working capital or commercial real estate―up to $5 million. If you can’t qualify for SBA financing, South End Capital has other financing options available.
Bottom Line
The SBA charges guarantee fees to lenders in exchange for guaranteeing up to 85% of your loan in the event of a default. These guarantee fees are passed on to you, often financed into your total loan amount. There are also several other fees associated with SBA loans. It’s important to know what fees you may be charged before you apply so that you can accurately predict your loan costs.
