The stimulus funds providing fee relief for certain Small Business Administration-backed loans just ran out at noon on Wednesday, a day before the program was due to sunset on September 30, 2021. But there are still extra benefits available to small business borrowers.
On September 7, the SBA issued two policy notices offering details on its plan to waive certain borrower fees on 7(a) loans of $350,000 or less and reduce fees on 504 loans, even after Thursday. In light of the continued difficult position in which many businesses -- particularly in-person operations -- still find themselves, the agency is opting for an extension of the fee waiver.
Per the policy notices, the SBA's fee waiver on 7(a) working capital loans applies to the guaranty portion of a loan, so borrowers with loans of $350,000 would save $7,875. The fee structure for 504 loans is slightly different. They have upfront and ongoing fees which are not related to the guaranteed portion of the loan. While the upfront fee of 50 basis points has not changed, the annual service fee has been reduced from 45.17 to 24.75 basis points. The new fee structures will be effective for the SBA's fiscal year 2022, which starts October 1, 2021 and lasts through September 2022. This means that there is a slight gap for which payments aren't clearly subsidized; it isn't clear if borrowers in the interim will be assessed fees or not, but lenders should not pull loan numbers during this gap.
Even so, the fee waivers certainly make getting a SBA-backed loan more attractive. Here are three things to keep in mind about the offering:
1. The requirements are reduced.
For those who don't already know, $350,000 is a crucial threshold in the world of SBA lending. The SBA is not required to be in the first lien position on all of your assets if your loan is under $350,000. Additionally, if you own a personal home, the SBA is not required to take a lien on it for loans under $350,000. This can be quite appealing for business owners who naturally shudder at the word "lien." You may still have to pay for some other required additions, like appraisals and credit checks, which are necessary functions of a lender's due diligence process.
2. The approvals process is faster.
SBA loans of $350,000 or less are also typically processed a lot faster than larger SBA loans based on these simpler requirements. SBA 7(a) loans can go up to $5 million, SBA 504 loans can go up to $12.8 million or more. Therefore, borrowers should always consider the SBA first before, or hopefully instead of, checking out more expensive private lending options, especially when it comes to loans of $350,000 or less. Think you may need more than that? You can always get another one down the line if you need to.
3. Enhanced guarantees are not included.
The SBA did not extend its enhanced guarantee on these loans. In December 2020, the SBA raised the guarantee to 90 percent for the 7(a) working capital loans. The guarantee percentages after Oct. 1 will revert back to 85 percent for loans of $150,000 and below and 75 percent for loans over $150,000.
While guarantee percentages are not something borrowers typically have to consider, they do affect whether or not a bank or non-bank lender will lend you the money. The guarantee percentage is the amount of the loan that is guaranteed, by the SBA, to the bank if you were to default. Therefore, the higher the guarantee, the safer lenders feel making riskier loans.
While the fee reduction is good news, it shows that we still have not reached the "end" to this pandemic and its repercussions. However, as always, I stress preparedness -- not only for the worst, but also for opportunities, as we look to the future.