Interest rates for SBA 7(a) loans are comprised of the daily prime rate, which changes based on actions taken at the Federal Reserve, plus a lender spread, which is capped by the SBA based on the size and maturity of the loan. This spread is negotiated between the borrower and the lender. The result is either a fixed or variable interest rate.
A lender might also calculate interest rates using the one-month London Interbank Offered Rate plus 3% or with the SBA’s optional peg rate instead of the daily prime rate.
For SBA 7(A) loans scheduled to be repaid over 7 years or less, the maximum interest rate allowed will vary based on the size of the loan. For loans of $25,000 or less, the maximum interest rate is Prime + 4.25%. For loans between $25,001 - $50,000, the maximum interest rate must be Prime + 3.25%. Last, the maximum interest rate for loans over $50,000 must be Prime + 2.25%.
The current Prime rate in December 2022 is 7.5%. Therefore, if a small business takes out a 7(A) loan with a loan duration of fewer than 7 years, they can expect to pay no more than 11.75% for a loan that is $25,000 or less, no more than 10.75% for a loan between $25,001 and $50,000, and no more than 9.75% for a loan over $50,000.
For SBA 7(A) loans with payback periods longer than 7 years, the interest rates are slightly less favorable. For loans of $25,000 or less, the maximum interest rate is Prime + 4.75%. For loans between $25,001 and $50,000, the maximum interest rate is Prime + 3.75%. Last, the maximum interest rate for loans over $50,000 is Prime + 2.75%.
The current Prime rate in December 2022 is 7.5%. So, if a small business takes out a 7(A) loan with a loan duration longer than 7 years, they can expect to pay no more than 12.25% for a loan that is $25,000 or less, no more than 11.25% for a loan that is between $25,001 and $50,000, and no more than 10.25% for a loan that is more than $50,000.
A few terms that you should know about when it comes to SBA 7(A) loans include:
SBA loans are not easy to qualify for. Learn more by reading below.
If you’re pursuing an SBA loan, you need to be aware of two types of fees:
Here’s how fees can apply:
Another type of SBA loan used by small businesses is a CDC/504 loan. To be eligible for this loan, you must: a) operate as a for-profit company in the United States, b) have a tangible net worth of less than $15 million, c) have an average net income of less than $5 million after federal income taxes for the two years preceding the application. These loans are popular for small businesses looking to buy land, buildings, or major equipment with long-term, fixed-rate financing. These loans require collateral. The collateral is usually the financed asset (s) and personal guarantees from the principal borrowers.
Here are some basic CDC/504 loan terms:
504 loan interest rates are based on the U.S. Treasury bond rate. When applying, you’ll be quoted an effective interest rate, which is the sum of three fees:
Borrowers can expect to pay a one-time fee of 2.15% to the SBA and some additional fees. As a result, the total APR will be slightly higher than your effective rate. Last, it’s important to consider that the down payment required for a 504 loan is at least 10% of the project's cost. Then, a traditional lender, such as a bank, will contribute 50% of the loan, and a certified development company will contribute as much as 40%. The SBA will then guarantee 100% of the CDC portion of the loan.
The main difference between a fixed and variable SBA loan rate is that a fixed interest rate will stay the same over time. Whereas a variable SBA loan interest rate changes over the course of the loan. The changes in the interest rate are based on the market, usually, a financial benchmark set by the bank. Variable SBA loan rates are risky because there is a potential that the interest rate will increase drastically. A fixed SBA loan rate may cost slightly more on paper, but you will have the peace of mind of knowing exactly how much the loan will cost you (assuming you make your payments on time).
SBA 7(A) loans and CDC/504 loans are not interest-free for 12 months.
However, suppose your business needs to repair or replace disaster-damaged or destroyed real estate, machinery, equipment, inventory, or other business assets. In that case, you may qualify for the SBA’s Economic Injury Disaster Loan (EIDL) to meet working capital needs. These loans can also help business owners who were negatively impacted by COVID-19. For these SBA loans, interest rates are zero percent for the first year and are as low as 3.04 percent for businesses, not to exceed 4 percent. For loans over $25,000, collateral is required, with real estate as the preferred collateral. The SBA can provide up to $2 million to help meet financial obligations and operating expenses that could have been met had the disaster not occurred.
Compared to conventional business loans, SBA loans tend to have longer repayment terms and lower interest rates. Of course, the most competitive interest rate that your business can achieve varies greatly based on several factors. Still, SBA loans are generally geared toward new businesses that haven’t operated long enough to build strong credit histories.
SBA loans come in both fixed-rate and variable-rate options. The individual SBA-approved lenders determine rates, but they must comply with maximums set by the SBA.
There are 9 types of SBA loans available:
1. SBA 7(A) loans: This is the most popular type of SBA loan. It can be used for working capital, expansion, equipment, and property. The maximum loan amount possible is $5 million and the maximum loan duration is 25 years.
2. SBA Express Loans: These loans are smaller and quicker than traditional SBA 7(A) loans and are available for a loan amount up to $350,000. They are best for businesses needing fast funding and owners with strong credit histories.
3. SBA 504 Loans: These loans are available to purchase fixed assets like real estate or equipment. Loan amounts range from $125,000 to $20 million.
4. SBA Microloans: These loans are small and short-term, typically used for working capital or inventory. They are best for businesses with a strong credit history needing smaller funding.
5. SBA Disaster Loans: These are available to businesses that have been negatively impacted by a declared disaster. Businesses can claim two types: Business Physical Disaster Loans and Economic Injury Disaster Loans (EIDL). Both loans are available for up to $2 million and have competitive interest rates and terms.
6. SBA Community Advantage Loans: To take advantage of this program, your business should be located in an underserved market, as defined here. These loans can be used for working capital, equipment, expansion, and property.
7. SBA Export Working Capital Loans: This program is designed to help small businesses finance their international sales. These loans can finance receivables, inventory, and other short-term working capital needs.
8. SBA Export Express Loans: These loans offer quick financing and are best for businesses that want to expand their operations by exporting goods or services. Loans are available for up to $500,000, with terms of up to 12 months.
9. SBA International Trade Loans: These loans are available to businesses engaged in international trade with a maximum loan amount of $5 million.
Although SBA loans are a valuable resource, they can be tough to qualify for. Some things that may disqualify businesses from qualifying for an SBA loan include the following.
There are also specific types of businesses that are not eligible for SBA loans. These include
SBA loan programs are generally intended to encourage longer-term small business financing. The maximum duration of an SBA loan is 25 years for real estate, 10 years for equipment, and 10 years for working capital or an inventory loan.
There are several types of SBA loans with variable requirements and opportunities, as mentioned above. The most common SBA loan is the 7(A) loan. In 2018, the average SBA 7(A) loan amount was $417,316; in 2022, the average small business loan amount, according to the Federal Reserve, was $633,000. The duration of the loan will depend on how the loan will be used. Generally, the SBA requires the lender to set terms based on the use of proceeds, the useful life of assets acquired, and, most importantly, the borrower’s ability to repay. The SBA will always try to achieve the shortest term possible to minimize risk. That being said, loans for working capital can last up to 10 years, loans for equipment, fixtures, or furniture can last up to 10 years, real estate up to 25 years, leasehold improvements up to 10 years, and mixed-purpose loans will often have a blended maturity date.
Interest rates for the SBA 7(A) loans are calculated based on the daily prime rate (which changes based on actions taken by the Federal Reserve) plus a lender spread. As of December, interest rates for the SBA 7(A) loan vary from 9.75% to 12.25%, depending on the loan size and loan duration (7 years being the cutoff). LIBOR or the SBA PEG rate may also be used depending on the specific institution and geographic location.
The maximum interest rate of an SBA loan will vary depending on the daily prime rate, which changes based on actions taken by the Federal Reserve. As of December 2022, the maximum interest rate on an SBA 7(A) loan is 12.25%.
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