SBA Loan Rates Explained

Loans backed by the Small Business Administration come with some of the lowest interest rates you’ll find on the market. These small-business loans are also more difficult to qualify for because “We’re from the government, and we’re here to make things easier” is a sentence you’re as likely to hear as “Full disclosure on UFOs, Bigfoot, and the current whereabouts of Elvis coming right up.”

SBA business loans require your business to be operational for at least two years and profitable enough to show $100,000 in revenue within the last 12 months. Also, business owners will need a personal FICO credit score no lower than 680 to take advantage of those sought-after SBA loan interest rates. Though factors like the general state of the US economy and the confidence of lenders figure in, there’s a solid correlation between higher credit scores and lower interest rates.

Does not represent the typical rate for every borrower; other fees may apply.

What is an interest rate?

Interest is what a lender charges you for the service of borrowing money from them, whether it be for short-term loans or long-term financing. Interest rates are usually set as annual percentages for as long as it takes to repay the loan. If the repayment term of your loan indicates a fixed rate (a rate that won’t change over the course of your payment schedule), your monthly payments should remain consistent.

How interest rates are determined

The SBA sets the lenders’ interest rate maximums and bases them on three criteria:

• The base rate, which is the US Prime Rate (5.25% as of October 2018) or international LIBOR (London Interbank Offered Rate, measured monthly; 2.28319% as of October 2018) multiplied by the 3% SBA Peg Rate.
• The term length of the loan, the span of which can be under seven years, or over seven years (SBA 7[a] loans).
• The loan amount, which breaks at under $25,000, $25,000 to $49,000, and over $50,000 (SBA 7([a] loans).

SBA 7(a) loans have the widest range of uses of all SBA loans (from working capital to debt refinancing to equipment and business purchases), as well as a high maximum loan amount (up to $5 million) and extended repayment terms (as long as 25 years).

The CDC/SBA 504 is a hybrid loan specific to real estate wherein an SBA-approved lender contributes 50% and a local certified development corporation (CDC) puts up 40%, with the remaining 10% covered by the borrower’s down payment. Terms are either 10 years or 20 years in length, and the CDC’s portion of the rates are set for the loan’s duration.

An SBA Express loan is a variation of the SBA 7(a) loan with an accelerated timeline. An initial response is guaranteed within 36 hours, but the overall processing time of the loan is not guaranteed to be expedited. SBA Express loans come with higher interest rates and a lower borrowing cap of $350,000.

The SBA CAPLine Program is designed for businesses with seasonal or short-term capital needs, and it’s usually given in conjunction with SBA 7(a) or CDC/SBA 504 loans. CAPLines come as fixed rate or revolving lines of credit of up to $5 million.

Origination and guarantee fees

Lurking in all these numbers are extra costs that aren’t always made readily apparent. Banks and lenders will usually tack an origination fee onto a loan to cover their end of the deal, and it’s entirely up to the institution to determine the amount of that fee. If the lender arrives at a 3% origination fee, they’ll take $1,800 off your $60,000 loan, leaving you with an actual total of $58,200. Of course, you’ll still pay interest based on $60,000.

SBA loans have another processing cost lying in wait called a guarantee fee, which the bank or lender pays to the SBA in return for their assurance on the loan—and it’s usually 3% to 3.5% of the total. The guarantee fee is determined by the amount and term of the SBA-backed loan.

Let’s look at an example of how much you can expect for a guarantee fee. On a $500,000, 10-year loan, 75% (or $375,000) is guaranteed by the SBA; 3% of that 75% comes out to an $11, 250 SBA guarantee fee. And if the origination fee wasn’t enough, you’re on the hook for the guarantee fee too.

These fees plus interest rates add up to the real cost of borrowing capital, elegantly titled as APR (annual percentage rate) or sometimes APY (annual percentage yield). Typically, the shorter the repayment term of a loan, the higher the APR; with a longer term, you get a lower APR. The bank is always going to recoup its costs no matter the length of your agreement.

The takeaway

There’s far more to SBA program loans and interest rates than what we could cover here; working with a trusted lending source and doing your own deeper research are routes we can’t recommend enough for business owners. SBA small-business loans are in high demand due to their low interest rates and wide spectrum of uses, and the qualifications are, in most cases, more exacting than those of standard bank loan applications. They may not be quite as hard to nail down as the location of Elvis’s secret retirement home, but be prepared to put in the work.