Government-backed SBA financing is offered to small businesses in order to make small business financing available with lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans. Small businesses can use SBA financing to buy a building for their business, to construct a new building, to remodel the facility, to buy new equipment, to acquire a business, to buy out a partner, to obtain working capital for expansion, or to refinance existing debt for better repayment terms.
Because the SBA 7(a) loan program gives participating lenders a 75-85% government guaranty on the loan to help encourage more loan approvals, the borrower must pay an SBA guaranty fee to the SBA. The SBA guaranty fee may seem higher than conventional loan fees; therefore small businesses need to justify the cost. Following is how the SBA guaranty fee is calculated:
Total Loan Amount Guaranty Fee*
$150,000 or less 2.0%
Over $150,001 to $700,000 3.0%
Over $700,001+ 3.5%
* Fees apply only to guaranteed portion of loan. The SBA loan has a government guaranty of 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000 up to $5 million.
Here are some of the reasons a small business might benefit from paying the SBA guaranty fee and obtaining financing through the SBA 7(a) government-backed small business loan program:
1. SBA financing provides a long term repayment program. Real estate loans are repaid over 25 years, and non-real estate loans are repaid over 10 years. For small business real estate debt, conventional bank financing typically offers a 10-20 year repayment amortization; however, a balloon feature requires refinancing in 1, 3, or 5 years, along with additional closing costs and origination fees. SBA loans, therefore, do not have renewal risk like most conventional bank loans. A small business owner may have a hard time predicting his likelihood of approval for a loan renewal, or the economy might be affecting his business performance at that time, and he does not know if the bank management will be the same or look at his loan in the same way at the time of renewal. Long term financing can be a strong positive benefit of SBA financing to eliminate renewal risk and to keep payments as low as possible due to the longer repayment amortization.
2. SBA financing requires lower down payments, and it preserves cash for working capital in the business. Working capital financing can sometimes be the most expensive form of bank financing. If a small business can preserve working capital for operations, by putting a lower down payment on their new building, this can be a significant borrowing cost saving, or it might merely make working capital available that would otherwise be difficult to qualify to borrow.
3. In a time of economic uncertainty, or in situations of uncertainty such as business startup, small businesses have problems qualifying for conventional bank financing. The partial SBA government guaranty on a small business loan request is often just the right amount of incentive to cause a lender to approve a loan request that they could not otherwise get comfortable with.
In the final analysis, small businesses are providing the fuel for economic stimulus, and SBA loans are providing financing terms which could not otherwise be offered through conventional means. A cost/benefit analysis will often make the SBA guaranty fee look like a small price to pay for accommodating the small business’ need for funding a project which will enhance the small business return more than the cost associated with it.