What is an SBA Guarantee?
Understanding how SBA loan guarantees work, what percentage the SBA guarantees, and why this matters for your business loan.
An SBA guarantee is a promise from the U.S. Small Business Administration to repay a portion of your loan if you default. The SBA does not lend money directly; instead, it guarantees loans made by approved banks and lenders, reducing their risk.
How the SBA Guarantee Works
When a lender makes an SBA loan, the SBA agrees to pay back a percentage of the outstanding balance if the borrower defaults. This guarantee encourages lenders to approve loans they might otherwise decline and offer better terms than conventional financing.
SBA Guarantee Percentages
The guarantee percentage varies by loan program and amount:
| Loan Type | Guarantee Percentage |
|---|---|
| 7(a) loans up to $150,000 | Up to 85% |
| 7(a) loans over $150,000 | Up to 75% |
| SBA Express loans | 50% |
| 504 loans (CDC portion) | 100% of CDC portion |
| Microloans | No SBA guarantee (different structure) |
Example
You receive a $400,000 SBA 7(a) loan with a 75% guarantee. If your business fails and you default with $300,000 still owed, the SBA would reimburse the lender up to $225,000 (75% of $300,000). The lender bears the remaining $75,000 risk.
You Are Still Responsible
The SBA guarantee protects the lender, not you. If you default, you still owe the full amount. The lender will pursue collection from you first, and the SBA guarantee only kicks in after recovery efforts.
Why the Guarantee Matters to You
The SBA guarantee benefits borrowers in several ways:
- Easier approval: Lenders accept more risk because of the guarantee
- Better rates: Reduced risk allows lower interest rates
- Longer terms: Lenders offer extended repayment periods
- Lower down payments: Some SBA programs require only 10% down
- Access to capital: Businesses that cannot get conventional financing may qualify
The Guarantee Fee
For this benefit, the SBA charges a guarantee fee that varies based on loan size, term, and current SBA fee schedules. This fee is typically financed into the loan, so you do not pay it upfront.
Guarantee fees generally range from 0% to 3.5% of the guaranteed portion, with higher fees on larger loans and longer terms. Check the current SBA fee schedule for exact amounts.
Fee Reductions
The SBA sometimes reduces or eliminates guarantee fees for veterans, in rural areas, or during economic stimulus periods. Ask your lender about current fee reduction programs.
What the Guarantee Does Not Cover
The SBA guarantee has limitations:
- Does not eliminate your personal guarantee obligation
- Does not protect you from collection or legal action
- Does not cover interest or fees that accrue after default
- Does not automatically mean approval (lenders still underwrite)
Think of the SBA guarantee as a tool that opens doors to financing, not as a safety net for borrowers. It makes lenders willing to take chances on small businesses, but the responsibility to repay remains entirely yours.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.