SBA Guarantee Fees Lowered for Loans Under $2MM

Background

For SBA 7(a) loans, the SBA charges a guarantee fee to the borrower that helps cover losses that they sustain guaranteeing a portion of the loan for the lender. That keeps the burden of failed loans off the taxpayers back and keeps the system running. Keep in mind that SBA 7(a) loans are generally used to help with starting a business, expanding a business, or acquiring a business especially when there is a lack of collateral from both the business assets and the borrower’s assets.  For this reason, 7(a) loans would be more likely to go into default than conventional business loans available from your local lenders.

Effective October 1st, 2023, for loans under $1MM, the guarantee fee (also called the upfront fee) is 0.00%.

The Change

Effective October 1st, 2023, for loans under $1MM, the guarantee fee (also called the upfront fee) is 0.00% or the guaranteed portion (down from 0.00% - 1.05% depending on size). This means that the cost for borrowing up to $1MM to start, expand, or acquire a business is now a little less expensive.  But wait, that’s not all! Previously, for loans over $1MM the fee was 3.5% for the guaranteed portion up to $1MM and 3.75% for the guaranteed portion over $1MM.  Under the new rule, the guarantee fee for loans $1MM-$2MM  is only 1.45% of the guaranteed portion (up to $1MM) and 1.70% of the guaranteed portion over $1MM.  As a percentage, this is an even bigger discount compared to borrowing last year.  We anticipate these fees will stay in effect at least through July of 2024.

It is now less expensive if you’re looking to buy, start, or expand your business.

What This Means for Me

If you’re looking to buy, start, or expand your business, it has now gotten a little bit less expensive. Is that because interest rates are up? Is that because the administration wants to spark new business activity?  We don’t really know, but we’ll take it! If you’re looking to sell a business, this is probably good news for you as well. These upfront fees are typically rolled into the loan and amortized over the life of the loan. Therefore a 1% - $2.25% reduction in borrowing costs could easily mean a 1% - 2.25% increase in sale price.  Or, alternatively, it could simply increase the ROI for your buyer, potentially increasing the buyer pool and/or making buyers a little more eager to buy your business.

Shameless Plug

If you’re looking to buy, start, expand, or acquire a business, the Business Transitions Advisors at Optimum Transitions by Dillon, Ltd., would love the opportunity to discuss how we might be able to help! Contact us now.