The Small Business Administration (SBA) is a federal agency that provides various programs to assist the growth and development of small businesses.
SBA-guaranteed loans are made by a private lender and guaranteed up to 80 percent by the SBA, which helps reduce the lender’s risk and helps the lender provide financing that’s otherwise unavailable at reasonable terms.
Essentially, when a qualifying business applies for an SBA loan, it is actually applying for a commercial loan, 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 loans. The Small Business Administration offers a variety of financial programs aimed at helping small businesses succeed.
Guaranteed loan programs – also called SBA loans – are one of these offerings. Several different types of loans are available, including:
It’s important for any business to understand the overall cost of Small Business Administration loans before starting the application process.
The SBA charges a guarantee fee. For loans between $500,000 – $700,000, there is a 3% guarantee fee or 2.25% of the loan amount paid to the SBA. For loans 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 lender will ultimately determine the exact terms. Please find below more information:
The Small Business Administration guarantees a portion of SBA loans. 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 loan amount.
If you plan on taking out an SBA loan that is under $150,000, funding partners can waive the guarantee amount. Any loan 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 loan amount plus the length of the business loan. For instance, if a borrower wishes to take out a $500,000 20-year loan, the SBA will guarantee 75%. The lender 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 loans. This fee takes care of the lending company’s cost of making the loan available to borrowers. They usually take origination fees straight from the loan amount instead of having the borrower pay them directly. So, if the lender 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 loan’s factors, but are decided upon by the lending company themselves.
Two factors comprise the interest rates on SBA loans: a base rate and an allowable spread. One of the three market interest rates 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 interest rates change with the market, the base rate is also subject to change.
In addition to the base rate, the SBA allows lending companies an allowable spread. This means that lenders can add in their own rate in order to determine the final loan rate. Fortunately, the SBA sets a maximum spread so that lending companies don’t set rates on SBA loans too high. The length of the loan determines the maximum spread.
SBA loans that are set to be paid back in less than seven years will have a maximum spread of 2.25%. For loans 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 loan will have a base rate plus an allowable rate of 2.75% or less. The borrower and lending company will negotiate the actual interest rate.
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 loan requirements are that you can demonstrate excellent personal credit, strong business financials, and provide “adequate collateral.” Depending on your lender, 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 loan. If you wa t to know if your business qualifies for an SBA loan contact First Down Funding for a quick and accurate consultation.