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SBA Loan Guarantee

How does the SBA loan guarantee work?  What is the SBA guarantee fee and how is it calculated?  And why do you need to pay it?  We provide answers and discuss these questions here.

 

First of all its critical to understand that the SBA does not lend any of its own money, nor have they ever.  They actually act like an insurance agency for banks/lenders that lend to borrowers.  The SBA insures banks that if the borrower defaults, that the bank gets its capital back.  

This guarantee is absolutely critical for banks and borrowers that need nontraditional small business financing.  Virtually all of the loans that get funded under the SBA program would not qualify for regularly bank loan programs. One of the primary reasons/examples of this is that with SBA loans you're normally able to receive 80% to 90% loan to value.  Most banks without the guarantee will only go to 65%...

SBA Loan Guarantee Fee      

The SBA charges borrowers a "guarantee fee".  On SBA 7a loans it ranges from 3% to 3.75% of the guaranteed portion of the loan, which is normally 75% of the total loan amount.  So on a $1,000,000 loan, the guaranteed portion is $750,000.  The guarantee fee in this example would be 3.5% or approximately $26,250.  See guarantee fee chart below.

 Loan Amount  Guarantee Fee %
$150,001 - $700,000  3%
 $700,001 - $1,000,000  3.5%
 $1,000,001 +  3.75%
  













The guarantee fee is expensive and many borrowers are surprise to learn about.  Many people think of it as points, which isn't to far from the truth.  But here's a couple of ways to rationalize paying it.  One keep in mind that the fee is mostly financed into the loan amount. And two you most likely don't have any other options, you either eat it or walk from the deal.       

 

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