Fees associated with SBA 7(a) loans and the SBA Guaranty Fee changes that will be put into place on SBA 7(a) loans as of October 1, 2018
The SBA Guaranty fee is a cost incurred by the borrower that is paid directly to the federal government at loan closing.
Who pays the fee?
The lender either collects the fee from the borrower or takes it out of the loan proceeds at the time of closing.
What is a guaranty fee? What is the purpose of the fee?
This fee helps the US government manage and fund the SBA programs and helps defray the cost of losses that occur when borrowers default on loans when their business fails.
Can the fee be waived?
In the past, all SBA Guaranty fees were waived SBA 7(a) loans of $150,000 and below. This waiver was changed to loan amounts of $125,000 and below just over a year ago. As of this fall (starting October 1, 2018), there will be NO waivers of the SBA Guaranty fee on any SBA 7(a) loan amounts, regardless of how small.
What does this mean? How does one figure out what the SBA Guaranty fee amount will be? Are there any exceptions to the rules? What are any other fees that should be expected with respect to SBA loans?
These are common questions borrowers ask and should consider carefully when looking into financing for their businesses.
Understanding common SBA Loan fees
Fees #1 – Consultation Fees
Fees can be a wide range depending on your loan amount and your needs. If you are working with a consultant or loan broker, there may be a fee of $2,500 or 2% of your loan amount up to $2,500. Any amount over $2,500 requires a fully itemized invoice outlining each specific service provided, the time it took to perform the service and other details. It can be extremely helpful to consult with a business loan broker or business financing advisor/consultant. They can help you with your application to provide an easier route to approval with the right lender match for your file. A good advisor/consultant will know the best lenders for your particular industry or franchise and for the specific details that make up your financial portfolio. Additionally they should be able to advise you on what the lender match for your file will require with respect to your business plan and financial projections. Good advisors will know how to help you with these requirements for a smooth process through underwriting. They may also be able to advise you on how to register your legal business name in your State and can share information on setting up an LLC, C Corporation or S Corporation as well as how to get the EIN from the IRS.
A very important additional service that not all brokerage firms provide is protection of your personal credit. It is wise to work with a firm that allows you to provide your own credit reports for pre-qualification. Firms that pull your credit or allow multiple lenders to pull your credit can cause serious damage to your credit reports by creating multiple inquiries that ultimately lower your credit scores. If you can work with a firm or consultant that knows the right lender for your project and can help protect your personal credit, it is well worth the fee and also provides the added benefit of time saved in searching for a lender on your own. A good consultant or business loan broker will also usually wait to invoice you for their time until you have a commitment letter from a lender. You should not have to pay for a service unless the end result is a true loan approval. A true underwriting approval is a commitment to lend. Be careful about those who hand out pre-approvals too easily. You should not have to pay for a pre-approval. A pre-approval simply means that your file appears to be one that will get an approval and that your file is credit worthy to submit an application for underwriting to a lender. Be very cautious with a firm that collects a fee prior to underwriting approval (or a commitment to lend) and does not have very specific written details about the return of fees should the loan not get an underwriting approval.
Fees #2 – Bank Fees
A second fee is one that the lender collects to underwrite and close a loan application. This is commonly called a lender packaging fee. Some lenders take the fee from loan proceeds upon funding. Others charge the fee up front as a good faith deposit that a borrower is serious about moving forward with the underwriting process. It takes time and effort for the lender underwriting team to analyze a file. It makes perfect sense that they would collect the fee up front as they are performing work on behalf of the borrower to offer an approval and a commitment to lend. This fee is commonly up to $2,500 but can be lower for smaller loan amounts. Good lenders should provide a written policy about the return of the fee within a few days, should an application be declined. It is common to expect a small cost for the credit pull done at underwriting, if one is required. If the packaging fee is collected prior to underwriting, the remaining balance after covering the cost of the credit pull should be returned to the borrower within a few days if their loan application is not approved.
Should the borrower have a qualified veteran status, many lenders will discount or waive their packaging fee. Your Business Financing Advisor should be able to help you understand which lenders offer these discounts or fee waivers for veterans. A good business loan broker or business financing advisor/consultant should also follow suit and offer some type of discount to veterans. It makes good sense to honor the service that has been given by the individual or their spouse in serving our country in one of the branches of our military. Be cautious of brokerage firms that expect only the lenders to offer discounts when they do not offer discounts to veterans themselves. For more information about veteran status qualification and documentation requirements view the Attachment to SBA Form 1353.3 (4-93) MS Word Edition; previous editions obsolete.
Fees #3 – Closing Fees
Closing costs can be made up of the following items: title searches and filings, lien filings, business evaluation appraisals, commercial real estate appraisals, surveys, environmental analysis reports, construction/build out oversight/management costs, wire transfer fees, SBA Guaranty fees. Many of these fees vary, depending on the project. Obviously if the business is leasing and not buying a space there would be no fees for appraisals or surveys. If a business does not require a commercial space or office the fees are reduced even more. It is a good idea to get an estimate from the lender on what the average fees will be for your particular project so that you have a good understanding of what to expect. Some fees can come from the loan proceeds upon the closing of the loan and others will need to be paid by the borrower during the closing process (before the loan can fund).
The SBA Guaranty fee is one that will now be part of the costs associated with every SBA loan as there are no longer any waivers at lower loan amounts. Starting October 1, 2018 through to September 30, 2019, there will be a 2% SBA Guaranty Fee on all regular 7(a) loans up to and including $150,000. Fees are effective for the entire fiscal year to maintain the estimated costs of the program, unless subsequent Congressional acts modify the program’s effective subsidy costs. There is one exception to this change. For loans of $150,000 or less that have the physical address of the operating concern located in a rural area or a historically underutilized business zone (HUBZone) as determined by the SBA, the SBA Guaranty Fee can be reduced to .6667%. For all SBA Express loans (a type of 7(a) loan) that are made to veteran-owned small businesses, the upfront guaranty fee will be zero in accordance with section 7(a)(31)(G) of the Small Business Act. There is no additional fee relief available for 7(a) loans approved in Fiscal Year 2019. Unless you are a veteran or obtain the veteran status fee relief for specifically an SBA Express loan, there is no waiver of the SBA Guarantee fee. Those who have veteran status waivers for the SBA Express loan are NOT eligible for the same waiver for the Standard SBA 7(a) loan.
For higher loan amounts the SBA Guaranty Fees are as follows: For loans of $150,001 to $700,000 the SBA Guaranty fee will be 3% of the guaranteed portion of the loan. For loans of $700,001 to $5,000,000 the SBA Guaranty fee will be 3.5% of the guaranteed portion of the loan up to $1,000,000, plus 3.75% of the guaranteed portion of loans over $1,000,000. Another important note for veteran owned businesses: For Standard SBA 7(a) loans (not Express loans) that are between $150,000 and $350,000 the one-half SBA Guaranty Fee waiver or discount has been eliminated. Starting October 1, 2018, there will be no veteran fee waiver or 50% discount for any SBA 7(a) loans that are not true SBA Express Loans. Some lenders absorb the cost or a portion of the cost of the SBA Guaranty fee on behalf of their veteran borrowers. This is not the norm, but is a possibility with lenders that have strong military ties.
Calculating the SBA Guaranty fee
How does one figure out the actual SBA Guaranty fee cost? First you must determine the type of SBA loan you are considering. For SBA 7(a) Express Loans the guaranteed portion of the loan is 50%. For Standard SBA 7(a) or SBA 7(a) Small Loans the guaranteed portion is 85% up to $150,000 and 75% for loans greater than $150,000. You can read about each loan in the SBA 7(a) program at: https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans
Once you know the SBA Guaranty percentage you will take your loan amount (for example: $150,000 Standard SBA 7(a) loan and multiply it times the Guaranty percentage (85%). This gives you $127,500 (the guaranteed portion of the loan). Then you multiply it times the fee percentage. In this case the fee for $150,000 is 2%, which equals $2,550. This is the SBA Guaranty fee you will pay at closing. The lender will either collect it from you along with other closing fees or it will come out of the amount of funds that are wired into your business bank account when the loan is closed and funded.
A second example to clarify a different loan type: $100,000 SBA Express Loan: This loan has an SBA Guaranty percentage of 50%. 50% of 100,000 is $50,000. The SBA Guaranty fee for this loan amount is 2%. $50,000 multiplied by .02 is $1,000 (SBA Guaranty fee).
A final example just for further clarification, using a different loan amount: $725,000 Standard SBA 7(a) loan. The guaranteed portion of this loan amount is 75%. $725,000 multiplied by .75 equals 543,750. The percentage fee at this loan amount is 3.5%. $543,750 multiplied by .035 equals $19,031.25 (SBA Guaranty fee). Some lenders will allow you to roll the fees into the loan amount when they are calculating your total project cost and expected equity injection. It is a good idea to ask about the SBA Guaranty fees upfront to see what is possible for your project. Your business financing advisor/consultant or loan broker should be able to help you with this discussion with their lender partners.
Consult with a professional about SBA loans
Please reach out to us here at Key Commercial Capital with any questions or concerns. We will be happy to help you obtain the clarifications you require and to spend time explaining the process and requirements to you. It is our pleasure to help educate and inform our clients about important details with respect to SBA loans and lenders. We always offer discounts to those with veteran status and borrowers will likely find our fees to be lower than other firms they may have spoken to in the past. It is our goal to be upfront, honest and to offer a service that is “Just Better”.