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Understanding How the SBA Guarantees Loans
The SBA doesn’t lend money directly, but guarantees a portion of loans made by third-party lenders. The amount the SBA will back is based on the amount of the loan. Here’s a breakdown of how the guarantee works for the SBA 7(a) loan program.
The SBA is not a lender; however, the SBA guarantees certain types of loans that banks and other financial institutions make to small businesses. So, what is the SBA “guarantee”? It’s simply a promise by the SBA to assume the debt obligation if the borrower defaults on their SBA guaranteed loan.
SBA-guaranteed loans can be limited or unlimited in scope. Essentially, if the loan is limited, then the SBA will only guarantee a certain percentage of the loan amount. If it is unlimited, then the SBA guarantees the complete loan amount.
Simply put, if you received approval for an SBA guaranteed loan, the SBA is promising the lending institution that it will repay all or a portion of your debt if you are unable to complete the payments.
An added benefit to borrowers of obtaining an SBA guaranteed loan is that the guarantee allows the banks and other financial institutions to keep SBA loan terms long and SBA loan rates low.
About the SBA Guaranty Fee
When the SBA guarantees a loan, they typically assess a fee known as an SBA guarantee fee. This fee is passed on to the borrower by the lender. Small business owners often find the fees associated with obtaining an SBA loan more attractive than the cost of other capital options.
The SBA guarantee fee can be based on either the dollar amount of the guaranteed portion of the SBA loan, or the repayment term of the SBA loan. The SBA guarantee can be 75% to 85% of your loan and the guarantee fee owed by the borrower can range from 0% to 3.75% of the SBA guaranteed loan amount. The good news is, this fee can be included in the borrower’s overall SBA loan proceeds -- so you don’t have to worry about paying it upfront.
Here’s a couple of examples:
For a $150,000 loan, the SBA guaranty fee is $2,550 or 2% of the guaranteed portion (85%).
For a $5,000,000 loan (75% SBA guaranty of $3,750,000), the loan fee is $138,125 calculated as 3.5% of the first $1 million guaranteed ($35,000) plus 3.75% of the remaining guaranteed amount.
whether the loan is guaranteed by the SBA,
if it is limited or unlimited in scope,
what percentage of your loan is guaranteed,
what your guarantee fee is based on (either term or amount), and
what loan fee percentage are you responsible for paying.
What is the Small Business Administration (SBA) loan guarantee program?
The Small Business Administration (SBA) loan guarantee program is a federal government agency that provides loan guarantees to small businesses and entrepreneurs across the United States. The SBA offers a variety of loan products, including the flagship 7(a) loan program, which guarantees loans for small business borrowers. In 2017, the 7(a) loan program guaranteed more than $25 billion of loans for small businesses. (Source 1, Source 2)
What types of loans are eligible for SBA loan guarantees?
The Small Business Administration (SBA) guarantees many different types of loans to meet the unique needs of most small business owners. The different SBA loans and what they are used for are as follows:
- SBA 7(a) Loan - The standard SBA loan, for up to $5 million in funding.
- SBA 7(a) Small Loan - A smaller, more cost-effective loan than the original 7(a), with funding up to $350,000.
- SBA Express Loan - SBA financing at an accelerated pace. Funding of up to $350,000 with a streamlined application process and a guaranteed response within 36 hours.
- SBA Export Express Loan - Another streamlined loan program, for Export companies looking to secure up to $500,000. Guaranteed response within 24 hours.
- SBA Export Working Capital Loan - Up to $5 million for working capital to be used by export companies.
- SBA International Trade Loan - Long-term financing for growing export companies or exporters competing with imports and foreign competition.
- SBA 504 Loan - Up to $5 million STRICTLY for the purchase, construction, acquisition, rehabilitation, and/or modernization of fixed assets.
In addition to the different types of loans, the SBA also operates using a network of preferred lenders who are able to provide more flexible financing options for business owners. There is also the Veterans Advantage Program that provides reduced fees for the rapidly growing veteran-owned business population. Finally, The SBA has an umbrella program dubbed “CAPLines” which consists of different types of business lines of credit to help small business owners meet their short-term and cyclical working-capital needs.
What are the benefits of an SBA loan guarantee?
The Small Business Administration (SBA) loan guarantee is a promise by the SBA to assume the debt obligation if the borrower defaults on their SBA guaranteed loan. If a borrower defaults on an SBA guaranteed loan, the SBA will repay all or a portion of the debt to the lending institution. This reduces the risk for the lender, making them more likely to approve the loan.
The benefits of an SBA loan guarantee include:
- Reduced risk for the lender, making them more likely to approve the loan.
- The SBA can grant you a tentative approval that you can use as leverage at the bank.
- SBA small business loans are fantastic for business owners who may not qualify for more traditional business loans.
- You can use them to address your biggest concerns as a small business owner, like cash flow problems, payroll, and commercial real estate expenses.
What are the requirements for an SBA loan guarantee?
The requirements for an SBA loan guarantee are that all owners of the business must have at least 20% equity in the company and must provide their names and information in the application paperwork. If the borrower's spouse has at least 5% equity in the company and the combined equity of the borrower and spouse is at least 20%, then the spouse must also guarantee the loan. However, if the borrower is a sole proprietor, they do not need to provide a separate personal guarantee for the loan.
How do I apply for an SBA loan guarantee?
To apply for an SBA loan guarantee, you must first verify your eligibility for the program. You can find the eligibility requirements here. You must also check your credit, as the SBA has no credit requirements, but the lender you work with will. You can find more information about credit requirements here.
Once you have verified your eligibility and checked your credit, you must find a lender or a Certified Development Company (CDC) in your area that offers 504 loans. You can find more information about CDCs here.
You should then get prequalified for the loan. To do this, the CDC will need three years of personal and business tax returns, interim financial documents, and a personal financial statement.
Once you have been prequalified, you can decide on what you are purchasing and begin the application process. You will work with your CDC and/or lender to complete a full SBA loan application. You can download the loan application here.
The application will address your creditworthiness, your business’s eligibility for the 504 loan program, and your business’s current level of indebtedness.
If the SBA guarantee fee is based on the repayment term of the SBA guaranteed loan, any loan with a term of 1 year or less will have a 0.25% guarantee fee, while all other terms begin at 3% and differ based on the amount of the guaranteed portion of the loan. The length of repayment terms can vary and be as high as 10 years for working capital loans or 25 years for commercial real estate loans.
Final Considerations for the SBA Loan Guarantee
The SBA “guarantee” is a promise by the SBA to assume the debt obligation if the borrower defaults on their SBA guaranteed loan. If a borrower defaults on an SBA guaranteed loan, the SBA will repay all or a portion of the debt to the lending institution.
As you go through this process, knowing all the details of your loan is important.
Consider the following when compiling your information:
Having this information will make you better suited to decide if an SBA-guaranteed loan is right for your business.