Understanding SBA 7(a) loan fees
by Davidh, Community Moderator
- Created: October 4, 2011, 10:59 am
- Updated: October 5, 2011, 11:07 am
One of the most misunderstood (and vilified) elements in applying for a loan, any loan, are those pesky fees that seem to pop up all over the place and may add up to a significant amount.
If you’re anything like me, they make me cringe, roll my eyes and blow out steam, as I see them as just a cunning way of the bank to get Joe Borrower, that is, me, coming and going. Worst of all, they are unavoidable.
Clearly, understanding those fees will go a long way toward helping you face the loan application process with a clearer view of what you are being charged for, which, hopefully, will help you go through it … in a better mood, at least.
Most common loan fees
Let’s face it: lenders are business people, like you, so they are in the business of making money; they provide a service – a valuable one at that – and charge for it. How reasonable those charges are will always be debatable and not the subject of this post.
While there may be some or even many other fees and charges associated with a loan, these are the ones you will usually see. Several of the fees lenders commonly charge are not permitted when the loan being applied for is an SBA-backed loan. For more information on SBA’s restrictions regarding what fees may or may not be charged by a lender when a lender receives an SBA guaranty on a 7(a) loan, please refer to http://www.sba.gov/sites/default/files/serv_sops_50105c_loan_0.pdf
· Packaging fee - When you apply for a loan, you are required to provide a lot of information about yourself, your business, your finances, etc. which, generally needs to be backed by appropriate documentation. If you receive assistance from a third party or the lender itself in completing the small business application portion of the loan request, you may be charged by the third party or the lender. The fee must be based on an hourly rate and not a percentage of the loan. You must complete a form to identify to SBA who is charging packaging fees and for how much.
· Processing/Application fee –As part of underwriting, there is a credit check of both the owners and the business and maybe even a personal background check. All this information is gathered and processed by lender in order to make sure that the application package has the necessary information for the lender to analyze to identify the probability that the loan will repay in a timely manner. The processing fee compensates the lender for the time, work and expertise required to complete this stage, but SBA does not allow lenders to pass on these fees in connection with a 7(a) loan except for SBA Express, Patriot Express and Export Express loans.
· Underwriting fee – Once your application package is complete, it goes to the underwriting department, where either a person or a committee studies your application package, verifies that all the information you provided is true, assesses the risk the lender would be taking on you and (hopefully) approves or denies your application. SBA does not allow lenders to charge borrowers these underwriting fees in connection with a 7(a) loan.
· Closing costs – Closing costs are usually associated with mortgage loans and include –but are not limited to- expenses such as attorney fees, title search, realtor fees, etc. If your business loan includes a real estate transaction, you will certainly incur in closing costs. Sometimes these are absorbed by the lender or the seller of the property in order to encourage the sale. Under SBA rules, the lender can only charge the borrower fees directly related to the transaction. The lender cannot charge the borrower for the services of the lender’s in-house attorney.
· Maintenance or servicing fees – These are fees the lender may charge on an ongoing basis (monthly, quarterly) to service your loan, i.e., handling payments, sending out notices, responding to inquiries, etc. SBA does not allow lenders to charge borrowers for these fees in connection with a 7(a) loan except in very limited circumstances.
SBA loans and fees
Keeping in mind that SBA does not make direct loans, so when we say SBA loans, we are talking about loans made by SBA-approved lenders but guaranteed by the SBA. With its guarantee, the agency assures the lender that if you default on your loan, SBA will reduce the lender’s loss by reimbursing the lender the agreed upon percentage of the amount owed.
SBA guaranties usually range from 75-85 percent of the total loan amount which substantially enhances the lender’s willingness to make the loan. Now, that guarantee isn’t free for the lender; such an important boost to his lending ability comes with a price tag, which covers a substantial portion of the cost of loans that go bad, thus relieving Joe Taxpayer of that responsibility.
SBA Guaranty Fee– When you get an SBA loan, you usually reimburse the lender for a fee the lender is required to pay to SBA. Think of this fee as “points.” The fee is based on a percentage of the amount of the guaranty that SBA is providing. For example, for a $150,000 loan, the lender normally receives an 85 percent guaranty. The fee is 2 percent of the guaranteed portion or $2,550. Another example is a loan for $5,000,000, for which the lender normally receives a 75 percent guaranty. The fee for this larger loan is 3.5 percent of the guaranteed amount up to $1,000,000 and 3.75 percent of the guaranteed amount over $1,000,000. The fee can be financed, meaning the borrower can add it to the principal amount to be repaid, which substantially reduces its impact.
Understanding the different fees you end up paying for an SBA loan as well as what fees are not permitted to be charged to you by the lender is an important step in applying for an SBA 7(a) small business loan. In the case of SBA loans, those fees are a small price to pay for
1) Making it easier for the bank to lend you the money you need, and
2) Enjoying competitive interest rates and better terms
As the saying goes: “There’s no free lunch,” … but at least, this lunch is a good one.
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