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When you’re taking out any kind of financing, it’s important to be aware of any and all fees you might be required to pay, in addition to the interest you’ll be paying on the loan over time. Some loans have hefty fees attached, and if you’re not aware of them, you may end up paying more than you anticipate to take out the financing.Even loans backed by the Small Business Administration (SBA) have some fees. These can add to the total cost of borrowing money to grow your business. Before taking out SBA funding like a 504 or 7(a) loan, research all the SBA loan information that will impact what you pay for the loan, including the fee we’ll discuss here: the SBA guarantee fee (or guaranty fee, as the SBA spells it).SBA Guarantee Fee Defined
Just like when you apply for a small business loan with an online lender or a bank and are charged an origination fee to cover administrative costs, the SBA charges a similar fee.Called the SBA guarantee fee, it is designed to help pay for the SBA’s financial assistance programs. This fee may be less than a bank’s origination fee, which can be a flat fee or up to around 3% to 5% of the loan value. The good news is that the lender you apply for the SBA loan with can’t charge a loan origination fee in addition to this SBA guarantee fee. However, it can charge “packaging fees” that are reasonable and similar to those charged for non-SBA loans.What Does the SBA Guarantee Fee Do?
In addition to paying for administrative costs, the SBA loan guarantee may also cover the cost of defaulted loans. Because the SBA guarantees a certain percentage of each loan it backs, if the borrower stops paying the loan, the SBA will pay the lender up to that percent.For the 7(a) program, the SBA guarantees 85% of loans up to $150,000. So if a borrower stops paying on a $100,000 loan, the SBA pays the remainder, up to $85,000 (whatever was still owed after the default).The SBA guarantee fee helps cover this expense.Who Pays the SBA Guarantee Fee?
With many government programs, the taxpayers pay for them through taxes, but the SBA guarantee fee is different. Rather than putting the burden of the cost of running SBA programs on taxpayers, the SBA requires the borrowers to pay for it with each loan they take out.Typically, this fee will be taken out of the loan proceeds you receive, so be aware that if, for example, you’re borrowing $100,000, you’ll receive less than that after the guarantee fee and any lender fees are subtracted.How Much Does the SBA Guarantee Fee Cost?
Some SBA loan programs charge a guarantee fee based on the amount you borrow. A few programs don’t charge them at all. Typically, the shorter the repayment period, the lower the guarantee fee.| Loan Program | Guarantee Fee |
|---|
| 7(a)
SBAExpress
CAPLines
Community Advantage
International Trade
Export Express | (charged on guaranteed portion of loan only)
$150,000 or less = 2% $150,001-$700,000 = 3%
$700,001- $1,000,000 = 3.5%
Any guaranteed portion over $1 million = plus 3.75%
Loans 12 months or less = 0.25%
Ongoing lender fee of 0.55% |
| SBAExpress Loans to Veterans | 0 |
| Export Working Capital Program | Loans 12 months or less = 0.25%
Loans 13-24 months = 0.525%
Loans 25-36 months = 0.80% |
| 504 Loans | Upfront guarantee fee
on a debenture = 0.50%
Annual service fee = 0.4517% of outstanding balance |
SBA Guarantee Fee Examples
Now let’s look at a few examples to give you an idea of what you might pay in guarantee fees.Let’s say you plan to take out a 7(a) loan of $100,000. Because the guarantee fee is 2%, you would pay $2,000 up front as a guarantee fee.Or maybe you want to take out a 7(a) loan of $900,000. Your fee would be 3.5%, making it $31,500. If you’re interested in the Export Working Capital Program and borrow $1 million that you’ll pay back in 12 months, you’d pay .25%, or $2,500. If you took 36 months to pay it back, your fee would jump up to .80%, or $8,000.You can see how even a small increase in percentage can result in a much larger fee, depending on how much you want to borrow and how quickly you can pay it back.The great news is that if you’re a veteran looking at an SBAExpress loan or want a Microloan, you won’t pay any SBA guarantee fee.Do You Qualify for a Reduced SBA Guarantee Fee?
There may be an opportunity for you to get a reduced SBA guarantee fee if your business is located in a rural area or HUBZone (a historically-underutilized business zone). You can see if your business is located in a HUBZone using this mapping tool.Is the SBA Guarantee Fee Tax Deductible?
There are some important tax considerations to be aware of with SBA loans. The first is that you aren’t taxed on any loan you take out. Also, the interest you pay when repaying SBA loans may be tax deductible.And while the guarantee fee isn’t tax deductible, you may be eligible for a state credit, depending where your business operates.Other Loan Fees to Be Aware Of
Earlier we mentioned that the lender can still charge you other “packaging fees” in addition to the SBA guarantee fee. There may be other fees for you to consider as well.If you make a late payment, you may be charged a fee, and if your account didn’t have sufficient funds to make your monthly payment, you may be charged another fee.Some banks may even charge you if you pay your loan off early, so read the fine print before signing your loan agreement. Note if there are any prepayment penalties so you're aware of what you’ll be paying.Lantern Small Business Loans
The SBA offers a variety of low-interest loans, and even with the guarantee fee, you may end up spending the least on an SBA loan compared to all your other financing options.Nonetheless, it’s helpful to know what all your choices are so you can make an educated comparison. Discover all the options you have with Lantern by SoFi. Input a few details and get loan offers from multiple lenders in minutes! The Takeaway
If you’re taking out an SBA loan, you may have to pay an SBA guarantee fee, as well as other fees. Knowing what to expect upfront can go a long way toward helping you keep your funding manageable and your expectations realistic. Be sure that you understand this or any small business funding you apply for in detail before you sign.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. Photo credit: iStock/visualspace
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About the Author
Susan Guillory
Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
