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A More Affordable SBA Loan
Small Business Administration Temporarily Eliminates Loan Fees


Many small business owners tend to shy away from Small Business Administration loans because of the extra costs and paperwork associated with them. If you’re one such owner, now may be a good time to rethink that strategy.

Thanks to the American Recovery and Reinvestment ACT of 2009, it will now be easier and more economical for some small companies to obtain SBA financing. Effective immediately, upfront fees on 7(a) loans – the most popular SBA loan program – have been eliminated. Borrowers who received 7(a) loans after February 17, 2009, the day the Recovery Act became law, and who were charged these fees are also eligible for a refund.

The SBA's 7(a) loan program is intended to help eligible small businesses that haven’t otherwise been able to get a loan. These businesses have traditionally been required to pay loan guarantee fees between 2% and 3.75% of the guaranteed portion of their loan amount at closing. On a $200,000 loan, that translates to approximately $4,500 on a 7(a) loan figured at 75% guarantee or $3000 on an express loan with a 50% guarantee, in additional upfront costs. So the savings associated with the elimination of these fees can be substantial.

The fees themselves have historically supported the SBA’s loan guarantee program. Through this program, the SBA promises to repay a significant portion of the loan, should the borrower default. This “insurance policy” is designed to encourage lenders to make loans to companies that might otherwise be rejected due to a collateral shortfall or some other weakness in their application.

In addition to eliminating loan fees, Recovery Act provisions are also increasing the government guarantees on SBA 7(a) loans to 90%, up from the normal 75% to 85% guarantee. This is also good news to small business since the higher guarantees are expected to further encourage lenders to make SBA loans, given they’ll have even greater protection against possible loan losses.

Both initiatives are both part of a larger effort by the U.S. government to boost SBA 7(a) lending, which is down 58% this fiscal year, compared with the same period last year.

In many cases, the generally weak state of the economy has made many small businesses more reluctant to take on new debt. In others, credit and lending markets have tightened up dramatically, making it difficult for some businesses to obtain the financing they need to keep their doors open and their employees working. These initiatives are expected to help put much-needed capital in the hands of small business and jump start economic growth.

How to Apply

Historically, only about one in 10 small businesses have sought SBA financing. If you’re part of the other 90%, there are a few things about the 7(a) loan program you should know:

  • 7(a) loans are available through banks and other commercial lenders, with the loan funds coming from the lender, not the government. Companies interested in taking advantage of this program should apply directly to a lender.
  • Loan funds can be used for virtually anything related to the start-up, expansion or operation of a business, including real state, working capital, equipment and other purchases.
  • Upfront fees are also being eliminated on another SBA loan program called CDC/504, being eliminated are 0.5% on the bank’s 50% portion and 1.5% on the CDC/SBA debenture or 40%, but those loans are restricted to the purchase of real estate or major equipment (excluding vehicles).
  • Despite these changes, there is no guarantee that every small business will qualify for an SBA loan. Companies must still meet the lending criteria of both the bank they’re applying to and the SBA.
  • Your lender will decide if it wishes to make the loan internally, or if the application has some weaknesses which, in its opinion, will require the SBA guarantee. If the SBA approves the loan, you still remain obligated for the full amount of the loan.
  • The fee elimination program is currently scheduled to expire on December 31, 2009. While the government could potentially extend it, there is no guarantee. Companies that want to take advantage would be wise to do so sooner, rather than later.

Interested in learning more?


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