No Extension of SBA Loan Fee Waivers…yet
The much hoped extension of the SBA 7a and SBA 504 fee waivers that was included in HR 4213 was cut from that piece of legislation before it passed, but it was added to HR 5297.
However, HR 5297 was voted down last week in the Senate, BUT…this bill is way too important to die and regardless of recess timetables for those in DC it seems that there is enough support from both Republicans and Democrats to get it passed. (I realize that almost every news outlet on the planet has already prounouced the bill dead, and maybe I am being too optimistic here, but I think they will find a way).
Why the 90% Guaranty is More Important Than Fee Waiver
The fee waiver has saved small business owners an awful lot of money since it was passed as part of the Recovery Act, but the 90% guaranty for SBA 7a loans is more important.
SBA fees are typically financed into the loan amount, so while it is very nice that the fee waiver exists, it’s impact is less dramatic than it appears since the additional financed amount of the fee does not significantly impact the monthly payment on the loan.
Both the fee waiver and 90% guaranty have played a role in increasing SBA lending, but it is the higher guaranty that has allowed lenders to make more loans. The fee waiver has served more to get the attention of small business owners and it has been a great way for SBA lenders to tout why now is a great time to apply.
75% vs 90%
The 7a program is (by far) the more utilized SBA loan program because it can be used for “any legitimate business purpose,” and it normally has a 75% guaranty – meaning that if a borrower defaults the lender is covered for up to 75% of the loan amount by the Small Business Administration.
The Recovery Act increased the guaranty to 90% which took a lot more risk out of the process for lenders, and since lenders make premiums on the sale of the guaranteed amount of the loan it increased the amount of profit per loan.
That’s right, SBA lenders make premiums (think cash money right up front) on the sale of the guaranteed portion of a 7a loan and some of these premiums can be quite large because there are lots of buyers for loans guaranteed by the SBA/Federal Government.
So when a bank makes a loan they almost immediately make money on the sale of that loan…and banks needs money.
I will save the nitty gritty details of how this all works for a later post, but just know that a 90% guaranty enables lenders to make more money with less exposure and less reserves and as a result they are more willing to approve good loans vs. just the “easy” loans.
It is not that the higher guaranty gives them the ability to do loans they would not otherwise do, it’s more that it reduces their exposure and reduces the amount of capital they need to lend – something that it is very important to them…and the FDIC.