The government may back your loan, but it comes at a price.
Small Business Administration (SBA) loans are known for their highly competitive rates, thanks to a government guarantee. This means that the government covers part of your loan if your business can’t pay it back. But it’s not always free: The SBA charges a guarantee fee on many of its loans. How much you pay depends on your loan program, how much you’re borrowing and your term.
What is an SBA guarantee fee?
The SBA guarantee fee is a percentage of the SBA-guaranteed portion of your business loan. Technically, the SBA charges lenders an SBA guarantee fee in exchange for partly backing your loan. However, lenders typically pass this cost on to the borrower. How much the fee costs depends on two main factors:
- Loan amount. Generally, the larger your loan, the larger percentage you’ll pay for the guarantee.
- Loan term. Similarly, the longer you take to repay your loan, the larger the guarantee fee.
You can usually roll the guarantee fee into the total cost of your loan, so you don’t have to pay it up front.
What's the difference between guaranty and guarantee?
When it comes to SBA loans, there’s no difference between guarantee and guaranty. Both an SBA guarantee and SBA guaranty mean that the SBA is responsible for repaying part of your loan if you default. Guaranty is an old term that rarely shows up outside of legalese, though you might find it in some SBA documents. Otherwise, guarantee is much more common.
SBA 7(a) guarantee fees
Here’s what you can expect to pay based on the amount you borrow and your loan term:
|Total loan amount||Guaranteed amount||Loan term||Guarantee fee|
|$150,000 or less||$127,500 or less||12 months+||2% of guaranteed amount|
|$150,001 to $700,000||$112,500.75 to $525,000||12 months+||3% of guaranteed amount|
|$700,001 to $5 million||$525,000.75 to $3.75 million||12 months+||3.5% for the first guaranteed $1 million, 3.75% for all guaranteed portions over $1 million|
|Any amount||Varies||Less than 12 months||0.25% of guaranteed amount|
These guarantee fees don’t just apply to your standard SBA 7(a) loans. You can expect to pay them on the following SBA loans:
- 7(a) loans
- 7(a) small loans
- Express loans
- Community Advantage loans
- International Trade loans
- Export Working Capital loans
- Export Express loans
Can I qualify for a reduced fee?
Businesses located in rural areas or historically underutilized business zones (HUBZones) are eligible for fee relief for any SBA 7(a) loan under $150,000. You’re only required to pay an upfront guarantee fee of 0.6667% of the guaranteed portion. And if your loan term is over 12 months, your lender can’t keep more than 0.1667% of the fee.
According to the SBA, rural businesses are located in areas that the US Census Bureau classifies as “rural” or “mostly rural.” You can find out if your area qualifies on the Census Bureau’s website.
HUBZones are areas that the federal government has singled out for development. You can check if your business is in a HUBZone on the SBA website.
How does it work?
SBA 7(a) guarantee fees can be a bit confusing. The percentage you pay depends on your total loan amount, but your fee is only based on the part that the SBA guarantees. Let’s take a look at a few examples:
Example 1: $200,000 loan
Say a business took out a 7(a) loan of $200,000 with a two-year term. The SBA guarantee fee on loans of that amount is 3%. However, that 3% doesn’t apply to the total $200,000, but to the guaranteed portion only. Since the SBA guarantees 75% of all 7(a) loans over $150,000, the guaranteed portion of that loan is 75% of $200,000, or $150,000.
The SBA guarantee fee is 3% of $150,000, or $4,500.
Example 2: $1 million loan
Say another business took out a $1 million 7(a) loan with a 10-year term. The SBA guarantee fee on loans of that amount is 3.5%. But again, what the business actually pays isn’t 3.5% of $1 million, but 3.5% of the guaranteed portion of the loan. Since the SBA guarantees 75% of all 7(a) loans over $150,000, the guaranteed portion of a $1 million loan is $750,000.
The SBA guarantee fee is 3.5% of $750,000, or $26,250.
Example 3: $5 million loan
Say a third business took out a $5 million 7(a) loan with a two-year term. This is where things get tricky. The SBA guarantee fee on loans over $700,000 is 3.5% for the first $1 million of the guaranteed portion and 3.75% for the rest of the guaranteed portion. Like with the other two examples, the SBA guarantees 75% of a $5 million loan, or $3.75 million.
The SBA guarantee fee is 3.5% of $1 million plus 3.75% of $2.75 million, or $138,125.
Does the SBA charge a guarantee fee on 504 loans?
As of October 2018, the SBA started charging a guarantee fee of 0.5% of the amount funded by the CDC for all 504 loans. They also come with several other fees, some of which work a lot like a guarantee fee.
Can I get an SBA loan with no guarantee fee?
Yes, you can depending on your business and loan type. You won’t have to pay a guarantee fee if you take out:
- Express loans as a veteran-owned business
- Non-7(a) microloans
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Other SBA loan fees
SBA guarantee fees might be the most well known, but they’re not the only ones you need to worry about. Here’s a rundown of some of the fees you can expect with both the SBA 7(a) and 504 loan programs.
SBA 7(a) fees
|Type of fee||How it works||Cost|
|Packaging fee||A fee for helping borrowers put their application together, including filling out forms, making a business plan and consultations.|
|Servicing fee||An annual fee to cover the ongoing overhead costs associated with your loan.||0.55% of the unpaid balance each year.|
|Extraordinary servicing fee||A fee to cover the cost of ongoing services that require extra effort, like regularly checking in on the value of inventory or accounts receivables used as collateral.||Typically up to 2% of the loan amount.|
|Out-of-pocket expense reimbursement||Reimbursement for any expenses associated with preparing the SBA loan application, such as UCC filing fees, postage, environmental impact reports, collateral appraisals and more.||Varies by applicant and lender.|
|Late payment fee||A fee if a payment is more than 10 days past due.||No more than 5% of payment amount.|
|Subsidy recoupment fee||A prepayment penalty on long-term loans. It applies if:|
|Type of fee||How it works||Cost|
|Processing or packaging fee||A fee for helping borrowers put together and process an application.||Up to 1.5% of the CDC portion of the loan.|
|Closing fee||A fee to cover legal services and other costs associated with closing your loan.||Varies by applicant and CDC.|
|Servicing fee||An annual fee to cover the ongoing overhead costs associated with your loan.||0.368% of the unpaid balance each year.|
|Late fee||A fee if you pay after the 15th of the month.||$100 or 5% of the amount due, whichever is greater.|
|Central servicing agent (CSA) fee||An annual fee charged by the company that handles your loan repayments.||0.1% of the loan amount per year, paid in monthly installments.|
|Underwriters’ fee||An upfront fee for processing and evaluating your loan application.|
Whether you’re applying for an SBA 7(a) or 504 loan, you’re likely on the hook for a guarantee fee. But how much you pay depends on your exact loan type, how much you borrow and your term. While the SBA guarantee fee might be the most widely known, it’s possible to end up paying much more in other fees associated with these government-backed loans.