The Small Business Administration (SBA) is a federal agency that provides various programs to assist the growth and development of small businesses.
SBA-guaranteed funding are made by a private funder and guaranteed up to 80 percent by the SBA, which helps reduce the funder’s risk and helps the funder provide financing that’s otherwise unavailable at reasonable terms.
Essentially, when a qualifying business applies for an SBA funding, it is actually applying for a commercial funding, structured according to SBA requirements with an SBA guaranty. Small business owners and borrowers who have access to other financing with reasonable terms are not eligible for SBA-guaranteed funding. The Small Business Administration offers a variety of financial programs aimed at helping small businesses succeed.
Guaranteed funding programs – also called SBA funding – are one of these offerings. Several different types of funding are available, including:
It’s important for any business to understand the overall cost of Small Business Administration funding before starting the application process.
The SBA charges a guarantee fee. For funding between $500,000 – $700,000, there is a 3% guarantee fee or 2.25% of the funding amount paid to the SBA. For funding of $700,001 to $5,000,000 the fee is 3.5% of the guaranteed portion up to $1,000,000 plus 3.75% of the guaranteed portion over $1,000,000. The borrower and funder will ultimately determine the exact terms. Please find below more information:
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The Small Business Administration guarantees a portion of SBA funding. However, there is a guarantee fee that comes with this benefit that funding partners are responsible for paying. Unfortunately, they have the option to pass this fee onto the borrower. They’re able to add the fee into the overall funding amount.
If you plan on taking out an SBA funding that is under $150,000, funding partners can waive the guarantee amount. Any funding amount over $150,000 could be subject to a fee ranging from 3% to 3.5% of the guaranteed amount. The exact fee amount is dependent on the funding amount plus the length of the business funding. For instance, if a borrower wishes to take out a $500,000 20-year funding, the SBA will guarantee 75%. The funder or borrower would end up having to pay 3% of the guaranteed amount ($375,000). This would bring the guarantee fee amount to $11,250.
In addition to guarantee fees, the Small Business Administration typically adds an origination fee to SBA funding. This fee takes care of the funding company’s cost of making the funding available to borrowers. They usually take origination fees straight from the funding amount instead of having the borrower pay them directly. So, if the funder sets the origination fee to 4% and the borrower is requesting to take out $500,000, the borrower will only be receiving $480,000. Origination fees are not dependent on any of the funding’s factors, but are decided upon by the funding company themselves.
Two factors comprise the cost of working capital on SBA funding: a base rate and an allowable spread. One of the three market cost of working capitals can determine the base rate: the current prime rate, the London Interbank One Month Prime (LIBOR) plus 3%, or the SBA Peg Rate. Since these cost of working capitals change with the market, the base rate is also subject to change.
In addition to the base rate, the SBA allows funding companies an allowable spread. This means that funders can add in their own rate in order to determine the final funding rate. Fortunately, the SBA sets a maximum spread so that funding companies don’t set rates on SBA funding too high. The length of the funding determines the maximum spread.
SBA funding that are set to be paid back in less than seven years will have a maximum spread of 2.25%. For funding that are scheduled to be paid back over the span of seven years or more, the maximum spread will be 2.75%. Using the same example as above, the $500,000 20-year SBA funding will have a base rate plus an allowable rate of 2.75% or less. The borrower and funding company will negotiate the actual cost of working capital.
The SBA determines if a business is eligible depending on what it does to receive income, the business owner’s character, and the business’s location. The most important SBA funding requirements are that you can demonstrate excellent personal credit, strong business financials, and provide “adequate collateral.” Depending on your funder, the SBA might also require a personal guarantee for every owner who owns at least 20% in the business.
More than likely, you’ll need an excellent business credit score as well as good personal credit to qualify for an SBA funding. If you wa t to know if your business qualifies for an SBA funding contact First Down Funding for a quick and accurate consultation.