SBA to Make 6 Months of Loan Payments | O'Keeffe & O'Malley

SBA to Make 6 Months of Loan Payments

Feb 10, 2021

The pandemic has dealt a blow to so many businesses, but there is one bright spot for borrowers with SBA loans that close between February 1, 2021 and September 30, 2021. For anyone who has been hard-hit or is considering a small business loan to take advantage of the resurging M&A market, this is welcome news. For those who qualify, they will:

  • Guarantee fees will be waived and not assessed. This is often the big sticker shock on an SBA loan, as a $5 million SBA loan normally has a $138,000 guarantee fee.
  • Make six months of loan payments (capped at $9,000 per month)
  • Provide a 90% guarantee to the bank making the SBA loan, vs. the traditional 75%, potentially allowing banks to underwrite and close more SBA loans.
  • Allow existing 7(a) loans used for business real estate to be refinanced under the SBA’s 504 Program, which has rates around 3% fixed for up to 25 years for up to 50% of the loan.

Congress charged the SBA with making debt relief payments under Section 1112 of the CARES Act. This six-month relief of principal and interest and fees applies to all 7(a) 504, and Microloans reported in regular servicing status on a loan being fully disbursed prior to September 30, 2021. These two loan types are outlined in the chart below.

To provide an example, on a $2 million SBA loan, the guarantee fee would normally be $53,000 and the payment would be about $22,000 per month. For new SBA loans closed during the allotted time frame, borrowers would save $107,000 ($53,000 in guarantee fee and $54,000 in payments over six months).

In addition, these loans eliminate the risk of renewals, which are common with conventional loans. These loans also have no financial performance covenants.

With these new SBA incentives for borrowers, we have seen more interest from high-net-worth individual buyers seeking to acquire a business. It’s too early to tell what kind of impact these incentives will have, but saving $100,000 on financing costs should be a strong incentive for buyers to move sooner rather than later.

SBA 504 Loan vs. SBA 7(a) Loan At-A-Glance Comparison

SBA 504 LOAN (Commercial Real Estate & Equipment)
90% Fixed-Rate
SBA 7(a) LOAN (General Purpose)
LOAN SIZE Minimum – $125,000
Maximum – $20 million +
Minimum – $50,000
Maximum – $5 million
INTEREST RATE • Fixed • Predominantly variable; some fixed-rate options
TERMS • 25 years – real estate
• 20 years – real estate
• 10 years – equipment
• Up to 25 years – real estate
• Up to 10 years – business acquisition, equipment
• 5 to 7 years – working capital
• Weighted average for mixed-use requests
DOWN PAYMENT • 10% borrower • Minimum 10% borrower (often more)

If you need more information or would like to talk about the loans, please visit our website.