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 90% of the amount a business owner borrows.
The agency offers a free online referral tool that matches lenders and small businesses.
There are several SBA loan options 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 expanding or modernizing a fixed property asset.
- SBA Export Loans – To finance exports.
- SBA Microloans – For working capital loans 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 financing 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 business owners who cannot obtain bank financing.
To secure a loan through the SBA 7(a) loan program, check if your business is considered small by the SBA. The SBA has a section on its website where small business owners can see whether they’ve correctly classified their enterprise. The agency features an online size standards tool to help potential loan applicants check whether they can classify themselves as small businesses.
There are other requirements you also have to satisfy. For instance:
- Your business must be operating for profit in the U.S.
- It must be physically located in the U.S. or its territories
- You must want the loan for a legitimate business reason
- You can’t be in debt to the U.S. 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 such as financial statements, a business plan and personal financial statements.
An established business looking for SBA-guaranteed financing must have a healthy credit score—sometimes around 680. However, the SBA notes that some businesses could qualify for startup funding, even with bad credit. The lender will ultimately decide whether you’re eligible.
What Determines SBA 7(a) Loan Rates?
The following 3 things determine the SBA 7(a) Loan rate:
1. The loan length: There are 2 repayment terms: less than 7 years or more than 7 years. It doesn’t matter whether you take out a loan for 5 years or 10, the loan interest rate remains the same.
2. The loan amount: The SBA 7(a) loan program falls into 3 amount brackets:
- Less than $25,000
- More than $50,000
The higher the loan, the lower the SBA interest rates and vice versa.
3. 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, which can set the interest rate for adjustable rate financial products.
SBA 7(a) Loan Interest Rates
Institutions that participate in SBA-backed lending set the interest rates on the loan. Interest rates are, in part, determined by the prime rate (3.25% as of December 2020). Bear in mind that fixed-rate loans often incur higher prices.
- The current SBA 7(a) loan rates are as follows:
For loan terms less than 7 years:
- $0-$25,000: Prime rate + 4.25% (3.25% + 4.25% = 7.5%)
- $25,001 – $50,000: Prime rate + 3.25% (3.25% + 3.25% = 6.5%)
- $50,000 and up: Prime rate + 2.25% (3.25% + 2.25% = 5.5%)
- For loans of 7 years or longer:
- $0-$25,000: Prime rate + 4.75% (3.25% 4.75% = 8%)
- $25,001-$50,000: Prime rate + 3.75% (3.25% + 3.75% = 7%)
- $50,000 and up: Prime rate + 2.75% (3.25% + 2.75% = 6%)
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 3 factors listed above: the prime rate, SBA peg rate and the Libor + 3%.
What Are the Requirements?
To qualify for an SBA 7(a) loan, a business must generally meet the following criteria:
- Your business has been up and running for the past 2 years
- You have a credit score of 680 or above
- Your business generates a minimum of $50,000 in annual revenue
The SBA Express Loan, Export Loans and CAPLines 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 funding provided is then split among the CDC (up to 40%), the lender (up to 50%) and your business ( a minimum of 10%-15%). The maximum amount funded through the CDC ranges between $5 million and $5.5 million, with a 10-, 20- or 35-year fixed rate. The SBA offers business resources that further explain SBA CDC/504 loans and financing rates.
SBA CDC/504 Loan Rates
Though the SBA sets limits on how much a bank can charge in interest on this type of loan, it does not set the rates. Therefore, interest can be fixed or variable, and rates can be negotiated between the third-party lender and borrower. As of October 2020, the maximum interest rate a third-party lender can charge for a 504/CDC loan is 6% over prime.
Interest rates on the CDC-funded portion of the loan consist of several components: the debenture interest rate, the note rate and the effective rate. The calculation is complicated, but today’s borrowers can expect to pay around 2.2% to just over 3%, depending on the length of the loan term. One thing to note: the CDC portion of the loan is fixed, so the interest rate doesn’t change over the term. Loan rates will change with market fluctuations.
It’s also worth noting CDCs are allowed to charge borrowers a processing (or packaging) fee, closing fee, servicing fee, late fee, assumption fee, Central Servicing Agent fee and underwriters’ fee. The SBA sets limits on what the CDC can charge, but expect to pay around 3.5% of your CDC loan amount, plus annual servicing and guaranty fees of about 1% of your unpaid balance. Fees can be financed with the loan.
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.
However, the downside is that applying for such a loan can take weeks or even months. As the SBA states:
“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.”
Regardless of the 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 on the dotted line.