How is an SBA loan investor compensated when the loan is paid off early?

February 11, 2020

by an investor from New York University in St. Louis Metropolitan Area, USA

Let's say a business buyer borrows $1 million at 8% for 10 years. The bank sells the loan to an investor for let's say $1.1 million for a 5% yield (I'm just making up numbers). If the loan is paid off after one year, the investor will have lost money. Does the bank make him at least whole or guarantee the yield?

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Reply by a lender
from University of Missouri in St. Louis, MO, USA

The math is a little different. A $1 million loan would have a $750,000 guarantee and that is what is sold. Typically the yield on a floating rate is 8-12%. depending on how high the rate is. Fixed rate SBA loans have almost no yield so they aren't usually sold which is why a lot of banks won't do fixed rates (don't let anyone tell you that you can't fix an SBA loan. that is an individual bank call). So the bank would get a $75,000 fee when we sell the note. There is no claw back. The investor has a relatively risk free investment since the bank has to buy the note back if the deal goes bad. Their risk is that the loan is paid off or goes south before the interest income supplements the amount of the original $75,000. Depending on the rate/fee paid that is probably###-###-#### months or so.

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