Financing is one of the most crucial factors determining any business’s success, whether starting a new business or expanding an existing one. On that note, you might have already heard about the SBA (Small Business Administration) loans. These are the most advantageous small business funding solutions because their interest rates are lower than those of other business loans.
SBA loan rates are the interest rate charges on loans backed by the SBA. Although the SBA doesn’t offer loans to small business owners, it works with approved SBA lenders (banks, credit unions, and other financial institutions). This guarantee helps minimize the risk for the lenders and enables small businesses to access credit under favorable terms.
In this article, you will learn about SBA loan rates since the U.S. Small Business Administration provides several loan programs for small businesses. Let’s get into it.
Why Are SBA Loan Rates Lower Compared To Others?
It’s important to note that SBA loans have relatively low interest rates because they employ a two-part strategy. First, the SBA ensures that SBA loans are made proportionally. That means the guarantee can’t exceed 85% of the loan.
A guarantee below 85% offers the lender more protection and lowers risk, allowing lenders to offer lower interest rates to borrowers. Again, to ensure lower SBA loan rates, the SBA has a provision of the maximum allowable interest that any lender can ask from borrowers. This keeps rates affordable.
Types of SBA Loans and Their Rates
1. SBA 7(a) Loan Program
The SBA 7(a) loan is the most widely used loan in the SBA program. It has various loan options, such as export loans and CAPLines of credit. Additionally, these loans may have a variable or fixed interest rate and are available for up to $5 million.
SBA 7(a) loan current interest rates are based on the prime rate or the SBA Optional Peg Rate, and the difference between the two is often less than a percentage point. For variable rate loans with a maturity under 7 years, loaning between $0 and $25,000, the rate is the prime rate plus 4.25%, and for loans which are between $25,001 and $50,000, they charge the prime rate plus 3.25%. Going higher for loans over $50,001, the SBA loan rate is the prime plus 2.25%.
The rates are slightly higher for loans with a maturity of over 7 years. If the loan is less than $25,000, the prime rate is plus 4.75%. The second is the prime rate plus 3.75% if the loan is between $25,000 and $50,000, and the prime rate plus 2.75% applies to the loan over $50,001.
Fixed-rate 7(a) loans also have their interest rates determined in layers or tiers. For SBA 7(A) loans between $0 and $25,000, the loan interest is the prime rate plus 8%. For loans between $25000 and $50000, the prime rate plus 7% applies. Still, lending between $50,001 and $250,000 attracts a rate of the prime rate plus 6%, and for any loan that exceeds $250,000, the rate applied is the prime rate plus 5%.
2. SBA Express Rates
There is also a variation of the 7(a) loan known as an express loan. It was created to fund the loan faster than the usual 7(a) loan. The disadvantage of this faster funding time is that the SBA guaranteed percentage is lower. Thus, the maximum loan amount is lower at $500,000 and has a higher interest rate.
The interest rate of the SBA Express loan is pegged to the prime rate, but the maximums are prime +6.5% for loans of $50,000 or less and prime + 4.5% for loans over $50,000.
3. SBA Economic Injury and Disaster Loan Rates (EIDL)
EIDL loans offer financing for businesses affected by natural disasters. To qualify for this grant, the business must be in the declared disaster area. The maximum loan amount available for EIDLs is $2 million.
Since SBA Economic Injury and Disaster Loans are unconventional loans in the SBA program, you can access them by directly applying to the SBA. So, don’t apply for them through an intermediary.
Interest rates for EIDL loans are also kept relatively low to facilitate recovery. The maximum interest rate is 4%, which varies between 2% and 3. 75%. Remember that the SBA Economic Injury and Disaster Loan rates are usually fixed when the SBA declares an area a disaster zone.
4. SBA 504/CDC Rates
The SBA 504 loan program is for long-term, fixed-asset financing. It’s used primarily for purchasing assets like land or machinery.
During application, SBA 504 loans will be processed with the Certified Development Company (CDC), the SBA’s nonprofit organization. The CDC usually provides 40% of the funding, while the lender provides 50%. On the other hand, the borrower is expected to contribute 10% of the amount needed for the purchase as an initial deposit.
For the SBA 504/CDC Loan, you can borrow up to $5.5 million per project or even $16.5 million when working on three projects. The interest rate is usually 3% of the loan or 5%- 7% of the APR.
5. SBA Microloans
A SBA microloan is designed for new and emerging small businesses. The maximum amount is $50,000, with an average loan size of $13,000. Borrowers of an SBA microloan usually have to complete a loan application through an intermediary lender. Most prefer a community partner of the SBA. The interest rates for SBA microloans vary between 8% and 13%, depending on the lender’s decision.
How Does The SBA Loan Work?
It’s important to note that the SBA doesn’t approve loan applications or provide funds. Instead, potential borrowers apply through an SBA-approved lender. It can be one of three types of financial institutions: credit unions or other online lending marketplaces such as United Capital Source or similar online lending platforms.
If you apply to an SBA-approved lender, the SBA endorses the loan. SBA-preferred lenders can close the loan request without getting approval from the SBA.
It should be noted that the time it takes to close and fund the loan varies based on the type of SBA loan. Usually, the timeline can range between 2 weeks and 120 days. Problems with documentation can also create further complications.
Conclusion
SBA loan rates are crucial for any small business owner who wants to borrow money. Interest rates will undoubtedly vary because numerous loan programs fit the needs of an SME. Whether you choose 7(a) loans, express loans, EIDL, 504/CDC loans, or microloans, remember that the SBA loan rates are relatively low, as indicated above.
To qualify for an SBA loan, business owners must meet both the SBA and the specific requirements of the lending institution. They must be for-profit, located in the US or its territories, small businesses, have adequate cash flow, and cannot receive other funding.
