The Small Business Administration (SBA) provides some of the lowest loan rates among lenders for small-business financing — and we’ve spelled out those rates below.
SBA loans, provided through lenders approved by the federal agency, are guaranteed by the SBA. Specifically, these loans are supported by an SBA loan guarantee of up to 85% of the amount a business owner borrows.
There are several SBA loans available, with amounts ranging from $500 to $5.5 million.
- SBA 7(a) Loans – The most popular type of loan.
- SBA CDC/504 Loans – For anyone buying an owner-occupied commercial property.
- SBA Export Loans – To finance exports.
- SBA Microloans – For loans for working capital of $50,000 or less.
- SBA Disaster Loans – For a business impacted by a declared natural disaster.
- SBA CAPLines – For a line of credit.
There’s a full breakdown of these loans on the SBA website, where you’ll find details on:
- Business rates
- Who qualifies for these loans
- SBA loan interest rates and terms
- The maximum loan amount offered
We’re going to focus specifically on SBA 7(a) and SBA CDC/504 Loans.
SBA 7(a) Loan Program
This is the standard loan program the SBA provides to financial lenders. It comes with a loan guarantee (85% for loans up to $150,000 and 75% for loans greater than $150,000), allowing lenders to provide financing to small businesses lacking good credit or credit histories.
To secure a loan through the SBA 7(a) loan program, check to see if your business is considered small by the SBA. The SBA has a section on its website that can help small business owners check whether they’ve classified their enterprise correctly. The agency features an online size standard tool to help potential loan applicants check whether they can classify themselves as a small business.
There are other requirements you also have to satisfy. For instance:
- Your business must be operating for profit in the US
- It must be physically located in the US or its territories
- You must want the loan for a legitimate business reason
- You can’t be in debt to the US government
- You must have invested your own time and/or money into the business.
As with any other business loan, if you’re applying for a 7(a) SBA Loan, you’ll have to show documents like your: financial statement, a business plan and a personal financial statement. However, the SBA does say that:
“Even those with bad credit may qualify for startup funding. The lender will provide you with a full list of eligibility requirements for your loan.”
SBA 7(a) Loan Interest Rates
Lenders who participate in SBA loan schemes are the ones who set the interest rates on the SBA loan. Interest rates are set, but they are, in part, determined by the prime rate (4.75% as of November 2019). Bear in mind that fixed-rate loans often incur higher prices.
The current SBA 7(a) loan rates are as follows:
For loans less than 7 years:
- $0-$25,000: prime rate + 4.25% (4.75% + 4.25% = 9%)
- $25,001 – $50,000: prime rate + 3.25% (4.75% + 3.25% = 8%)
- Exceeding $50,000: prime rate + 2.25% (4.75% + 2.25% = 7%)
For loans of 7 years or longer:
- $0-$25,000: prime rate + 4.75% (4.75% 4.75% = 9.5%)
- $25,001-$50,000: prime rate + 3.75% (4.75% + 3.75% = 8.5%)
- More than $50,000: prime rate + 2.75% (4.75% + 2.75% = 7.5%)
What Determines SBA 7(a) Loan Rates?
The following 3 things determine the SBA 7(a) Loan Rate:
The loan length: There are 2 repayment times: less than 7 years or more than 7 years. It doesn’t matter whether you take out a loan for 1 year or 3, the loan interest rate remains the same.
The loan amount: You’ll have seen that the SBA 7(a) loan falls into 3 categories:
- Less than $25,000
- More than $50,000
The higher the loan, the lower the SBA interest rates and vice versa.
The base rate: this is divided into 3 areas:
- The prime rate
- The SBA peg rate
- The Libor (30 days) + 3%: This stands for London Interbank Offered Rate.
Fixed and Variable SBA Interest Rates
An SBA 7(a) loan can have either a fixed or variable interest rate. The fixed-rate remains the same throughout the loan’s duration. Whereas, the variable rate will go up or down, either monthly or quarterly, depending upon the three factors listed above: the prime rate, SBA peg rate and the Libor + 3%.
What Are the Requirements?
Not everyone can qualify for an SBA 7(a) loan. Those who do must have a business that’s been up and running for the past 2 years. Also, you need to have a credit score of 680 or above and generate revenue of $50,000 in the last year. The SBA Express Loan and the ABS Advantage Loan are part of the 7(a) Loan program.
SBA CDC/504 Loans
An SBA CDC/504 loan is used to finance fixed assets, such as real estate, machinery or land. If such a loan is offered, the SBA works with Community Development Companies (CDC) and other financial partners.
Typically, the loan provided is then split between the CDC (40%), the lender (50%), and 10% by your business. The maximum amount loaned ranges between $5 million and $5.5 million, with a 10- or 20-year fixed rate. The SBA offers business resources that further explain SBA CDC/504 loans and financing rates.
SBA CDC/504 Loan Rates
The SBA determines how much a bank can charge on this type of loan, although there’s no definitive estimate available. One thing to note: These loans are fixed, so the interest rate doesn’t change over the lifetime of the loan. These interest rates are based on market interest rates. As these change, so will the prices on these loans.
The SBA CDC/504 loan interest rates are broken down here:
If you take out a 10-year loan, the interest rate will be made up of the current 5-year treasury rate, a CDC annual fee and a fixed rate. These vary year on year.
If you take out a 20-year loan, then the above also applies except that the fixed rate is higher and the treasury rate is the current 10-year one.
It’s also worth noting there are markup fees for the SBA and its partners. There’s a borrower fee, a CDC servicing fee and a CSA fee.
The Bottom Line
SBA approved loan rates can be a favorable option for small businesses, not least because of the competitive repayment lengths and terms. Also, the SBA guarantees a large portion of these loans. As such, if a business defaults on an SBA loan, the agency pays out the insured amount.
The downside is that applying for such a loan can take weeks or even months. As the SBA says:
“The SBA reduces the risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.”
Type of financing you go for, it’s worth doing your homework first and factoring in the time it takes for your application to be processed. You’ll need to ask the right questions concerning loan rates and how long those rates will stay in place before signing the dotted line.