Understanding How the SBA Guarantees Loans

 SBA guaranteed loans: how do they really work? 

The SBA is not a lender; however, the SBA guarantees certain types of loans that banks and other financial institutions make to small businesses. So, what is the SBA “guarantee”? It’s simply a promise by the SBA to assume the debt obligation if the borrower defaults on their SBA guaranteed loan.

SBA-guaranteed loans can be limited or unlimited in scope.  Essentially, if the loan is limited, then the SBA will only guarantee a certain percentage of the loan amount. If it is unlimited, then the SBA guarantees the complete loan amount.

Simply put, if you received approval for an SBA guaranteed loan, the SBA is promising the lending institution that it will repay all or a portion of your debt if you are unable to complete the payments.

An added benefit to borrowers of obtaining an SBA guaranteed loan is that the guarantee allows the banks and other financial institutions to keep SBA loan terms long and SBA loan rates low.

About the SBA Guaranty Fee

When the SBA guarantees a loan, they typically assess a fee known as an SBA guarantee fee. This fee is passed on to the borrower by the lender. Small business owners often find the fees associated with obtaining an SBA loan more attractive than the cost of other capital options. 

The SBA guarantee fee can be based on either the dollar amount of the guaranteed portion of the SBA loan, or the repayment term of the SBA loan. The SBA guarantee can be 75% to 85% of your loan and the guarantee fee owed by the borrower can range from 0% to 3.75% of the SBA guaranteed loan amount.  The good news is, this fee can be included in the borrower’s overall SBA loan proceeds -- so you don’t have to worry about paying it upfront.

Here’s a couple of examples:

  • For a $150,000 loan, the SBA guaranty fee is $2,550 or 2% of the guaranteed portion (85%). 

  • For a $5,000,000 loan (75% SBA guaranty of $3,750,000), the loan fee is $138,125 calculated as 3.5% of the first $1 million guaranteed ($35,000) plus 3.75% of the remaining guaranteed amount.  

If the SBA guarantee fee is based on the repayment term of the SBA guaranteed loan, any loan with a term of 1 year or less will have a 0.25% guarantee fee, while all other terms begin at 3% and differ based on the amount of the guaranteed portion of the loan. The length of repayment terms can vary and be as high as 10 years for working capital loans or 25 years for commercial real estate loans.

Final Considerations for the SBA Loan Guarantee

The SBA “guarantee” is a promise by the SBA to assume the debt obligation if the borrower defaults on their SBA guaranteed loan. If a borrower defaults on an SBA guaranteed loan, the SBA will repay all or a portion of the debt to the lending institution.

As you go through this process, knowing all the details of your loan is important.  

Consider the following when compiling your information:

  • whether the loan is guaranteed by the SBA,

  • if it is limited or unlimited in scope,

  • what percentage of your loan is guaranteed,

  • what your guarantee fee is based on (either term or amount), and

  • what loan fee percentage are you responsible for paying.

Having this information will make you better suited to decide if an SBA-guaranteed loan is right for your business.


To learn more about the SBA 7(a) loan program or to get a free quote, simply click the button below to connect with our partners at lendio!