SBA 7(a) Loans: The SBA Guaranty Fee Explained
The SBA 7a Loan White Paper: An Exhaustively Researched Guide to 7a Loans for Borrowers Based on Primary US Government Sources
What does it actually mean when a 7a loan is ‘Guaranteed’ by the SBA?
By Jeff Bardos, CEO, Speritas Capital
January 4, 2021 – Connecticut
Call or text 203-247-4358
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Let’s go straight to the Code of Federal Regulations definitions to answer this one. (13 CFR 120.2(a)(iii)).
What is an SBA 7a guaranteed loan?
The CFR defines this as:
“A guaranteed loan (deferred participation) by which SBA guarantees a portion of a loan made by a Lender.”
“(2) A guaranteed loan is initiated by a Lender agreeing to make an SBA guaranteed loan to a small business and applying to SBA for SBA’s guarantee under a blanket guarantee agreement (participation agreement) between SBA and the Lender. If SBA agrees to guarantee (authorizes) a portion of the loan, the Lender funds and services the loan. If the small business defaults on the loan, SBA’s guarantee requires SBA to purchase its portion of the outstanding balance, upon demand by the Lender and subject to specific conditions. Regulations specific to 7(a) loans are found in subpart B of this part.”
Speritas Capital note: Your lender will pay the guaranty fee to the SBA and pass the cost onto you as one of your loan fees at closing.
The Nuts and Bolts of Calculating your SBA 7a Guaranty Fee
The fee paid to the SBA to provide the Guaranty on your loan will likely be the biggest cost to you at closing.
Note that the fee is calculated based on the guaranteed amount, and not the total loan amount.
What percentage of a loan may the SBA guarantee? (CFR § 120.210)
“SBA’s guarantee percentage must not exceed the applicable percentage established in section 7(a) of the Act. The maximum allowable guarantee percentage on a loan will be determined by the loan amount. Loans of $150,000 or less may receive a maximum guaranty of 85 percent. Loans more than $150,000 may receive a maximum guaranty of 75 percent, except as otherwise authorized by law.”
Fees that the Lender pays the SBA. (CFR § 120.220)
“A Lender must pay a guaranty fee to SBA for each loan it makes. If the guarantee fee is not paid, SBA may terminate the guarantee. Acceptance of the guaranty fee by SBA does not waive any right of SBA arising from a Lender’s negligence, misconduct or violation of any provision of these regulations, the guaranty agreement, or the loan authorization.”
According to SBA Standard Operating Procedures (SOP 50 10 6 updated in October 2020) – “a Lender must pay a fee to SBA for each loan guaranteed under the 7(a) program. This fee is known as the ‘SBA Guaranty Fee.’ The total loan amount determines the percentage that is used to calculate this fee and the guaranty fee is based on the guaranteed portion of the loan and not the total loan amount.“
Speritas Capital note: The borrower pays the fee, customarily out of loan proceeds, and the Lender forwards the amount owed to the SBA within 90 days of closing.
For the purposes of this white paper, we’ll be discussing the fees on SBA loans with maturities over 12 months.
Note that there are special rules and exceptions for qualifying veterans and their spouses, and for HUBzones. SBA 7a loans to this group come with reduced fees. (See below.)
Some of the recent changes to SBA lending and guaranty portions are genuinely confusing, not just to borrowers but to those in the industry as well. Rather than trying to detail out each possible situation, we suggest asking Speritas Capital or your Preferred Lender to accurately calculate your SBA guaranty fee for you.
For further reading we suggest:
Congressional Research Service Report to Congress – Small Business Administration 7(a) Loan Guaranty Program, which is updated every two weeks.
SBA 7a Guaranty Rates by Gross Loan Size
Gross Loan Size $150K or Less
Term: Over 12 months
Guaranteed Portion: 85%
Guarantee Fee: 0%
Gross Loan Size $150K+ to $700K
Term: Over 12 months
Guaranteed Portion: 75%
Guaranty Fee: 3% (of Guaranteed Portion)
Gross Loan Size $700K+ to $5MM
Term: Over 12 months
Guaranteed Portion: 75%
Guaranty Fee: 3.5% of guaranteed portion up to $1,000,000 PLUS 3.75% of the guaranteed portion over $1,000,000
SBA.GOV Footnotes
The SBA specifies the amount of guarantee fees each fiscal year for all loans approved during that year.
For example, the guaranty fee on a $100,000 loan with an 85% guaranty would be 2% of $85,000 or $1,700, of which the lender may retain $425.
For example, the guaranty fee on a $5,000,000 loan with a 75% guaranty (3.75 million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) plus 3.75% of $2,750,000 ($103,125) with totals $138,125.
Questions about SBA 7a Loan Guarantee fees? Schedule a call now, email the author, or call/text 203-247-4358.
SBA GUARANTEE FEE EXCEPTIONS
Exceptions for Veterans and Spouses
The guarantee fee can be ZERO on SBA loans to qualified Veterans & Spouses for express loans under $350K – under special circumstances.
According the the Code of Federal Regulations: (13 CFR 120.220(a)(3))
“For loans approved under section 7(a)(31) of the Small Business Act (SBA Express loans) to veterans and/or the spouse of a veteran. In fiscal years when the 7(a) program is at zero subsidy, SBA will not collect a guarantee fee in connection with a loan made under section 7(a)(31) of the Small Business Act to a business owned and controlled by a veteran or the spouse of a veteran.”
Exceptions for Rural Areas and HUBZones (Historically Underutilized Business Zone)
In order to promote growth in rural areas or HubZones, the SBA will periodically lower or remove guarantee fees for certified Hubzone businesses. Contact your preferred lender for more information.
About the Author
Jeff Bardos, CEO, Speritas Capital Partners
Jeff has over 30 years of experience in the financial services industry. After graduating from the Columbia Business School, he joined the New York Federal Reserve Bank as a senior staff member in Bank Supervision, leading the Bank Analysis department. From the nation’s central bank, Jeff moved into the private sector, working at senior levels in commercial banking, retail banking and risk management. He has also played senior founding roles in several start-ups. Learn more about Jeff.
CONTACT INFO
Jeffrey Bardos
CEO Speritas Capital Partners
Call/text Jeff at 203-247-4358
Email Jeff with your SBA 7a loan financing questions
Schedule a call with Jeff using our online scheduling tool.
Speritas Capital Partners specializes in complex credit, collateral and cash flow situations and we never take upfront fees.
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