After hundreds of government guaranteed loans, there are questions we’ve heard many times from banks and borrowers. Let’s review them, in case they’ve crossed your mind, too.
Do all loans require a personal guarantee?
Any loan the SBA guarantees requires at least one personal guarantor and a personal guarantee from all owners of 20% or more of the borrowing entity. The USDA follows this guideline with a couple of notable exceptions, such as loans to co-ops or publicly-traded companies, but the exceptions are limited. Contact VITAL for more information about exempt situations.
Can a business obtain a guarantee for their loan without sufficient collateral?
Yes for the SBA, and no for the USDA. For the SBA, the loan amount is determined by borrower need and the ability to repay the loan. The SBA will take all available collateral. If all available collateral is insufficient to secure the loan on a liquidated basis, the borrower can still obtain the loan. For loans guaranteed through the USDA, the loan amount Is determined by the collateral as well as the borrower’s ability to repay the loan. The USDA will not guarantee a loan without sufficient collateral.
Does a borrower need to put a second mortgage on his or her home?
Regarding the SBA, if there isn’t enough collateral to secure the loan on a liquidated basis, the borrower will need to provide a secured personal guarantee. This means they will need to pledge personal real estate, but only to the extent that they are short on collateral. USDA loans must have sufficient collateral to cover the requested loan on a liquidated basis to be eligible for a guarantee. The banks’ normal lending guidelines regarding collecting secured guarantees from borrowers will be the deciding factor.
Can the guaranteed portion of the loan be sold in secondary market?
Yes, for both SBA and USDA loans! Many banks use this strategy to produce noninterest income, and collect it in the same year the loan is sold. Banks with a high loan-to-deposit ratio can sell the guaranteed portion of loans as a method to manage their outstanding loan balances.
Will the government give guaranteed loans to companies that are highly leveraged or have a negative worth?
Yes, the SBA will still guarantee a loan to a borrower who is highly leveraged or has a negative net worth. The SBA has no leverage guidelines for borrowers. The USDA has a requirement for the borrower to have a 10% tangible net worth if the business has been in operation for 24 months or more. If the borrower has had operations of less than 24 months, the tangible net worth requirement is 20%. Contact VITAL for a further explanation of the USDA requirements.
What are the maximum terms on guaranteed loans?
Up to 25 years for an SBA loan secured by real estate, 10 years on everything else. Up to 30 years for a USDA loan secured by real estate, up to 15 years for a loan secured with equipment, and up to 7 years for a loan secured by working capital assets.
What are the maximum interest rates?
The SBA caps the interest rate a bank can charge at the WSJ Prime Rate + 2.75% if the loan is a variable rate loan. The maximum fixed rate loan (fixed for the life of the loan, no adjustments) is currently 8.66% for loans greater than $50,000. The USDA has no set benchmarks. Their criteria is the rate must be “reasonable." At VITAL, we follow the SBA guidelines when pricing our USDA loans. The rates have always been acceptable to the USDA.
What is the interest rate adjustment period?
For the SBA, the pricing can adjust monthly, quarterly, annually, every 3 years or every 5 years. All of the prior mentioned adjustment periods constitute a variable rate loan. A fixed rate loan is exactly that, fixed for the life of the loan with no adjustment in rates possible. The USDA will allow the adjustment period to be set by negotiation between the lender and the borrower. The secondary market prefers a monthly or quarterly adjustment period, which will help the lender sell for the maximum premium. Adjustment periods other than monthly or quarterly can be sold, but the resulting premium is deeply discounted (as much as 35%).
What questions of yours didn’t we cover? Contact VITAL any time.
For more information, download our free e-book: Your Guide to SBA and USDA Lending.
Subscribe to VITAL Insights for educational articles, case studies, and other resources.