- SBA guarantee fees are fees that the Small Business Administration charge lenders on government-backed loans. However, lenders often pass this fee to the borrower.
- The loan term and the loan amount are used to determine the SBA guarantee fee.
- You can qualify for a reduced fee if your business is located in a rural area or in underutilized zones called HUBZone.
Small Business Administration (SBA) loans are one of the most preferred financing options because of their competitive rates, which is a result of the government guarantee these loans come with. With this guarantee, the government pledges to cover part of the loan you take out if your business is unable to repay it. The one caveat to this arrangement is the guarantee fees the SBA charges
In this article, we’ll dig deeper into SBA business loans and its guarantee fees – what they are, how they work, and how you can qualify for reduced ones.
What is an SBA guarantee fee?
SBA guarantee fees are a percentage taken from the guaranteed portion of your loan. In essence, the SBA requires lenders to pay a guarantee fee in exchange for backing the loan if a borrower fails to pay it back. However, it’s the borrower who ends up shouldering this cost in most cases as the lender will roll the guarantee fee into your loan amount.
There are two factors that will be taken into account to determine the fee costs:
- Loan term – the longer it takes to repay your loan, the larger the guarantee fee will be.
- Loan amount – the larger the amount you borrowed, the larger the percentage you will need to
Lenders will typically roll this fee amount into your loan but there is also an option to pay it up front.
How to qualify for a Reduced Fee?
When it comes to guarantee fees, there are certain factors that allow you to qualify for a reduced fee. If your business is located in a rural area or a zone that is underutilized or referred to as HUBZones, then you are eligible for fee relief for any type of SBA 7(a) loan under $150,000. All you have to pay is the upfront guarantee fee which is 0.67% of the guaranteed amount.
If your term is more than 12 months, your lender is prohibited from keeping more than 0.67% of your guarantee fee. The SBA has also set forth rules for rural businesses situated in areas classified as mostly rural or rural by the US Census Bureau. You can check Census Bureau’s website to find out if your business and area qualifies. It is also helpful to check if you are in a HUBZone by visiting The SBA’s website.
How do SBA guarantee fees work?
When it comes to SBA guarantee fees, the amount you pay will ultimately depend on your loan terms (size of the loan and the repayment terms), and the lender you choose to work with.
When you (the borrower) are approved for an SBA loan, the SBA guarantees up to 85% of said loan should you default for any reason. That guarantee comes with a fee that the SBA requires the lender to shoulder. However, most lenders will roll this fee into the loan, so you (the borrower) are the one who actually ends up paying for it as its deducted from the loan amount you ultimately receive.
Here are two concrete examples to demonstrate how this would work:
Let’s say you were approved for a $200,000 SBA 7(a) loan with a repayment term of two years. The guarantee fee for a loan of this size would be 3%, but not 3% of the total loan amount, rather 3% of the guaranteed portion (which, in the case of a $200,000 loan will be 75%). Since 75% of $200,000 is $150,000, the guarantee fee would be 3% of $150,000 which is $4,500. The $4,500 would then be deducted from your $200,000 loan.
Let’s say you took out a $1 million SBA loan with a 10-year payment term. The guarantee fee for a loan of this size is 3.5%. Again, this does not mean 3.5% of $1 million, but rather 3.5% of the guaranteed portion (which, in the case of a $1 million dollar loan is 75%). Since 75% of $1 million is $750,000, the guarantee fee would be 3.5% of $750,000 which is $26,250. That $26,250 is what would be deducted from your loan.
Yes, if you decide to increase your loan amount or your payment term, you will incur larger guarantee fees as well.
Lenders will roll your guarantee fee into your loan amount by deducting the fees from the loan amount (so you receive your loan minus the fees).
Additional SBA fees
When taking out SBA loans, there are other fees to keep in mind other than guarantee fees:
- Servicing fee – the annual fee that covers the ongoing overhead costs that are associated with the loan you took out. The cost is 0.5% of your unpaid balance every year.
- Packaging fee – this fee covers the application process, including securing a business plan, filling out forms and consultation. The cost varies. If it is under $50,000, the fee will be 3% of the loan amount, but if it is over $50,000, the fee will be 2% of the first $1 million on top of the additional 0.25% on the rest of your loan.
- Late payment fee – this fee applies to a repayment that is more than 10 days past due. The fee is 5% of the payment amount.
- Extraordinary servicing fee – the lender charges extraordinary servicing fee for servicing needs. It should not be more than 2% per year of the amount that requires special servicing. This covers the total cost of ongoing services including the effort being put in for checking in on the inventory value or accounts receivables.
- Subsidy recoupment fee – this serves as a prepayment penalty imposed on long term loans. If your term is 15 years or longer, you will have to repay 25% of your loan amount.
The Bottom Line
It’s important to think about guarantee fees before applying for an SBA loan as these fees will affect how much money you actually receive from the loan. When figuring out how much you need to apply for, do your due diligence to estimate what the guarantee fees would be so you can make the most informed decision as to whether or not the loan will be of benefit to your business. To do this, factor in your exact loan type, the amount you plan to borrow and the repayment terms.