As a small business lender, you’ve heard all about the lending programs from the U.S. Small Business Administration (SBA). From the SBA 7(a) program to the 504 program and beyond, SBA loan programs help your institution make even more loans, even when a prospect falls outside your credit box. A major part of what makes this possible is the SBA guarantee.
Working with a lender service provider like Prudent Lenders makes it easy for your institution to administer SBA loan programs and maintain its SBA guarantee. Even still, you’ll want to have a good understanding of the SBA guarantee. You’ll need to know what the SBA guarantee is, how it differs between various SBA loan programs, and the fee structures associated with lenders and borrowers.
In this guide, you’ll learn how your institution can benefit from SBA loan programs and take a deeper dive into the SBA guarantee.
What are the benefits of offering SBA loan programs?
The SBA guarantee is the cornerstone of all SBA loan programs. These programs offer tremendous benefits for borrowers and lenders alike. If you’re working with a client that doesn’t quite meet your institution’s conventional lending criteria, an SBA loan can help you say “yes” to their request. In addition, SBA programs:
- Provide a useful credit enhancement. Offering SBA loan programs can reduce your institution’s risk. You can confidently make more loans that work for your clients now and in the future.
- Allow you to keep the financing door open for small business borrowers. Being able to say “yes” more often will increase your customer loyalty and retention. You’ll build a better relationship with your clients when you can offer them more solutions to fit their needs.
- Enable you to expand your small business portfolio and increase your institution’s profitability.
What is the SBA guarantee?
The SBA guarantee allows your institution to recover a percentage of an outstanding SBA loan balance when a borrower is unable to repay the loan. While you’re likely familiar with the basics of the SBA loan guarantee, there are a few key points worth highlighting. Here’s why SBA guarantees are the hallmark of the SBA program:
- The SBA guarantee reduces your institution’s financial risks. By having a guaranteed percentage of all SBA-backed loans made to small businesses available to your institution (typically covering 50 to 85% of each loan) you can make more loans to clients that might not meet traditional criteria.
- You can expand your portfolio into new industries. As you know, some industries are harder to finance due to their level of risk. For example, restaurants are usually considered riskier because their revenue can be unpredictable and inconsistent. As such, they may have more difficulty qualifying for traditional financing. With the safety net of the SBA guarantee, your institution could make more loans to more industries.
- You’ll provide financing with competitive terms. Even when traditional or conventional funding isn’t an option, you can keep the door open with your client. SBA loans provide competitive terms that are affordable and attractive for any small business owner.
How do SBA guarantees differ between loan programs?
Each SBA-backed program has its own loan-guarantee percentage. The percentage is based on the loan product and the loan amount. The maximum guaranty amount is $3,750,000, unless the loan is approved through a program that allows higher amounts. Here are a few of the SBA guarantee percentages as outlined in the SBA SOP:
|SBA Guarantee Percentage
|SBA 7(a) Loans
Employee Stock Ownership Plan (ESOP)
|85% for loans of $150,000 or less
75% for loans over $150,000
|SBA Express Loans
|90% for loans of $350,000 or less
75% for loans over $350,000, up to $500,000
|Export Working Capital Program (EWCP) Loans
|International Trade Loans
If you’d like to know the loan-guarantee maximum for a particular loan product or situation, get in touch with Prudent Lenders or review the SBA’s SOP.
What are the fees associated with an SBA guarantee?
There are two different fees that come with the SBA guarantee. Both types of fees only apply to the guaranteed portion of the SBA loan. Here’s a short breakdown of the SBA guarantee fees for both lenders and borrowers:
- SBA guarantee fee: This is a one-time fee that lenders can pass on to borrowers. It can be included as a project cost and covered by loan proceeds or paid for by the client directly. The fee is determined by the total portion of the loan that’s guaranteed by the SBA.
- Lender fee: This fee is only paid by you, the lender. It can’t be passed onto borrowers and it’s set at the time of the loan approval. The fee is based on the outstanding principal balance of the guaranteed portion of each loan. As a lender, you’ll pay this fee monthly as part of the 1502 loan-status report. When you work with Prudent Lenders, we can take care of these reports for you.
Typically, when the SBA issues an authorization on a loan, both the borrower fees and lender fees are stated in that authorization. It can also be calculated in E-tran, the SBA’s electronic loan-servicing system. In either case, Prudent Lenders will work with the SBA to get this information for you and your clients.
How can you maintain your SBA guarantee?
As you now know, the SBA guarantee is an important part of the SBA loan programs. In order to maintain that guarantee, you’ll need to make sure that you’re staying in compliance with all SBA rules and regulations. That’s where lender service providers (LSP) like Prudent Lenders come in.
SBA loan programs come with complex rules and regulations that are updated and changed on a regular basis. LSPs stay updated on these changes to ensure that loans are staying in compliance. This protects your guarantee so that you can continue to expand your portfolio and build your client relationships. Working with an LSP saves your team significant time and resources while keeping your SBA loans updated and compliant.
Let us do the heavy lifting
SBA loans can be a big undertaking if your institution has never offered them before. But you don’t have to go it alone! When you partner with Prudent Lenders, you minimize the time and resources spent on learning and applying SBA rules. We offer unparalleled assistance servicing your SBA loan portfolio, including taking the necessary steps to protect your loan guarantees.
Get in touch today if you have questions regarding SBA guarantees or any other SBA-backed loan matter. Not a partner yet? Let’s set up a time to talk! We’ll share how Prudent Lenders can help get your SBA program up and running with no fixed costs.
From processing and closing to servicing your SBA loan portfolio, Prudent Lenders makes it easy for your institution to offer SBA loans.