SBA Guaranteed Loans and Fees: What You Should Know

SBA Guarantee Fees Explained

Black business owner using laptop in shop
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Lack of funding is a major problem for many entrepreneurs, which is why the Small Business Administration (SBA) started up its guaranteed loan programs. These programs are intended for small business owners who need cash for a startup, an expansion, or other business undertakings. 

Key Takeaways

  • If you need a small business loan but don’t have collateral, an SBA guaranteed loan may be your best option.
  • SBA will guarantee up to 85% of your loan so that if you default most of the money will be paid back to your bank.
  • In exchange for the guarantee, you will pay 2%-3.5% of the amount that is guaranteed; the amount you pay is based on the amount you borrow (though in some situations the fee is waived).
  • You will have other expenses in addition to your guarantee fees, and it’s important to carefully review the details of your business loan.

What Are SBA Guaranteed Loans?

Valuable assets such as real estate are generally used as collateral for a loan; if you default on the loan, the bank takes the collateral instead. If you don’t have collateral, most banks may turn you down for a loan. However, even if you do have collateral, you might not be eager to risk your home for a business loan. This is when the SBA can be helpful, as it may guarantee bank loans for small business owners who have inadequate collateral—the agency, however, may require a personal guarantee instead.

While SBA guaranteed loans can be a valuable resource, they are not free. SBA guarantee fees, while not terribly high, can be onerous if your loan is relatively large. They include an annual interest fee of up to 3.5% to pay for the guarantee, plus an ongoing service fee of 0.52% of the total outstanding loan balance. In addition, you can’t simply pay off your loan early to avoid fees: the fine print states that you must continue to pay fees—or risk a penalty cost.

For most businesses, startup capital is key. Restaurants, hair salons, and retail shops all need expensive equipment, licenses, and employees to get started. And, if your business begins to succeed, you may need additional capital to hire new employees, expand to additional locations, or increase advertising. That’s where the SBA guaranteed loans and fees come into play.

SBA Guaranteed Loan Example

Here is a hypothetical example of how the SBA’s guaranteed loan program can work for business owners.

Lana completed her culinary degree and wants to buy a small restaurant business from a family member. She still owes money for her student loans and owns nothing except a used car worth $2,000. To take over the restaurant, Lana needs at least $110,000 to pay her relatives and to maintain the business. She applied for a loan at her local bank and was immediately turned down. Not only did she lack collateral, but she also had outstanding student debts—and, as the bank told her, most restaurants fail in the first year. 

The bank, however, offered to go through the SBA 7(a) guaranteed loan program on Lana’s behalf. Here is how it works:

  1. The SBA reviews the loan application from the bank to be sure the business is eligible for a guaranteed loan (some types of businesses, such as nonprofits, do not qualify).
  2. The SBA provides the bank with a written authorization.
  3. The bank issues and services the loan.
  4. The SBA guarantees up to 85% of the loan up to $150,000 in case of default,
  5. As the borrower, Lana pays back the loan in monthly installments, including the fees associated. with all SBA guaranteed loans. Her business assets become collateral for the SBA loan.
  6. Lana will have to pay back her loan within seven years.

What Is an SBA Guarantee Fee?

An SBA guarantee fee is the price you pay the government agency to guarantee your loan. In other words, it’s the cost of being a small business owner who doesn’t have (or doesn’t want to risk) collateral. 

There are some small businesses that may not require large amounts of money to start up or grow. For example, you can go into business as a consultant, writer, or online instructor with just a computer, smartphone, and kitchen table. 

How SBA Guarantee Fees Work

When the SBA charges its fee to provide a loan guarantee, that fee is paid upfront by the lender (your bank). The lender then passes that fee on to you, the borrower. Typically, you’ll repay the loan guarantee fee as part of your monthly loan payments. 

Guarantee fees vary based on the amount the SBA is guaranteeing. Typically, the SBA guarantees between 75-85% of the loan, and here are the related fees:

  • Loans under $150,000 pay 2% of the guaranteed portion.
  • Loans between $150,000 and $700,000 pay 3%.
  • Loans between $700,000 and $1 million pay 3.5% (plus 3.75% over $1 million). 

Lenders are also charged an annual service fee of 0.55% of the guaranteed portion of the outstanding balance of the loan. Borrowers should not be paying this fee, but it’s important to check the small print. 

Your bank may charge an additional 1% on loans under $50,000 and 2% on loans under $25,000. They are also allowed to charge “packaging fees” at the same level that they’d charge for non-SBA loans.

SBA Guarantee Loan Fee Example

To use the Lana example again, let’s say she was planning to borrow $110,000, so she would pay 2% for the SBA guarantee of 85% of her loan. Eighty-five percent of $110,000 is $93,500, and 2% of $93,500 is $1,870.00.  Lana may also owe the following:

  • Business valuation fees (due as a deposit toward the loan)
  • Loan packaging and attorney fees (due at closing)

How To Get a Reduced SBA Loan Guarantee Fee

While SBA does have loan guarantee fees, they do vary depending on the economic forecast and other events. For instance, if economic conditions are favorable, SBA guarantee rates may be lowered or waived—but it’s up to you to check on their status. It’s also possible to reduce your monthly payment under certain circumstances by applying to the lender for interest-only payments during a portion of the loan period.

Frequently Asked Questions (FAQs)

Are there other SBA loan fees in addition to the guarantee fee (like upfront fees)?

There are a number of loan fees depending on what the loan is for. For example, if you’re buying a business or a piece of property, you must pay for them to be assessed or appraised. You’ll also have settlement and legal fees. Your bank may charge “packaging” fees which would be rolled into your monthly payments.

What is the maximum SBA guarantee fee?

The maximum SBA guarantee fee is 3.5% of the guaranteed portion up to $1,000,000 plus 3.75% of the guaranteed portion over $1,000,000.

Are SBA guarantee fees tax-deductible?

Guarantee fees are not tax-deductible, though loan interest may be.