What are SBA Loans?
SBA loans are made available through the US Small Business Administration (SBA). The SBA partially guarantees SBA loans, enabling lenders to offer borrowers high loan amounts at lower interest rates and longer repayment terms. If the borrower defaults, the federal government pays for the guaranteed portion.
There are multiple financing packages available within the SBA loan program. Small business owners apply to the specific loan program that meets their business needs.
SBA loan options include:
-
SBA 7(a) loans (the most common).
-
SBA CDC/504 loans.
-
SBA Economic Injury & Disaster loans (EIDL).
-
SBA Microloans.
The various SBA loan options offer funding for a wide range of business purposes. Small businesses can use SBA loan proceeds for:
-
Buying commercial real estate.
-
Purchasing equipment, machinery, and other fixed assets.
-
Refinancing business debt.
-
Growing an export business.
-
Recover from a natural disaster (EIDL loans).
-
Startup funding (SBA microloans only).
How do SBA Loans work?
The SBA does not approve loan applications or provide funding. Instead, potential borrowers apply to an SBA-approved lender, which will be one of three types of financial institutions: commercial banks, credit unions, or alternative online lending facilitators, such as United Capital Source. Small business loan marketplaces can typically offer free personalized loan quotes.
Once you apply to an SBA-approved lender, the SBA signs off on the loan. SBA-preferred lenders can approve loan requests without obtaining SBA approval first. The application process for SBA loans can be more lenient compared to traditional bank loans.
SBA loans offer a wide range of loan amounts, with both high and low maximums, as well as competitive rates and extended loan terms. The loan amount, interest rate, and term you receive depend on your loan type, credit history, and lender.
SBA loans are available to businesses with fewer than 500 employees. Depending on the type of loan, closing and funding the loan can take anywhere from a few weeks to 120 days. Documentation issues can cause additional delays. Most SBA loans typically have monthly payments. The daily prime rate influences maximum interest rates for SBA loans. The SBA publishes the maximum fixed interest rates for loans monthly.
The SBA guarantees 85% of loans that are less than $150,000. The SBA guarantees 75% of loans that exceed $150,000. Express loans have a maximum guaranteed portion of 50%. Export Express, Working Capital, and International Trade Loans can have up to 90% guaranteed.
There are several loan types available:
-
SBA 7(a) Loans: The SBA 7(a) loan is the most popular option in the SBA loan program. SBA 7(a) loans can have repayment terms ranging from 10 to 25 years.
-
SBA 504/CDC Loans: SBA 504 loans are intended for purchasing land, buildings, or major equipment.
-
SBA Microloans: SBA microloans can provide borrowers with a maximum of $50,000.
-
The SBA Community Advantage Loan Program: SBA Community Advantage loans are designed to help underserved populations obtain financing. These loans focus on community economic development.
-
SBA Express Loan Options: SBA Express loans feature a streamlined application review process, with decisions typically made within 36 hours.
What are SBA Loan Interest Rates?
One of the main advantages of SBA loans is low interest rates. The SBA employs a two-pronged approach to maintaining lower interest rates.
One: The SBA partially guarantees SBA loans, up to 85%, which provides more security for the lender. Since the lender takes less risk, it can afford to offer a lower rate.
Two: The SBA also sets a maximum interest rate that lenders can charge.
Understanding SBA loan interest rates can help profitable businesses accurately calculate their estimated payments. Actual payments may vary.
Let’s examine the maximum interest rates by SBA loan type.
SBA 7(a) Maximum Rates
The SBA 7(a) loan is the most common type of loan in the program. 7(a) loans include export loans, CAPLines of credit, and other subsets. The interest rate can be variable or fixed. The maximum amount is $5 million.
Current SBA loan rates are pegged to either the prime rate or the SBA Optional Peg Rate. The difference between the two usually works out to less than a portion of a percentage point. The following data is based on the prime rate, which is 7.5% as of December 15, 2022.
Variable Rate Loans
For loans with a maturity under 7 years:
-
$0-$25,000: Prime rate + 4.25%
-
$25,001-$50,000: Prime rate + 3.25%
-
$50,001 or above: Prime rate + 2.25%
For loans with a maturity of over 7 years:
-
$0-$25,000: Prime rate + 4.75%.
-
$25,0001-$50,000: Prime rate + 3.75%.
-
$50,0001 or above: Prime rate + 2.75%.
Fixed Rate Loans
-
$0-$25,000: Prime rate + 8%.
-
$25,001-$50,000: Prime rate + 7%.
-
$50,001-$250,000: Prime rate + 6%.
-
Over $250,000: Prime rate + 5%.
SBA 504/CDC Loan Rates
SBA 504 loans require working with a Certified Development Company (CDC), which is a nonprofit community partner of the SBA. The CDC provides a portion of the funding, usually 40%, while the lender usually provides 50%. The borrower provides the remaining 10% as a down payment. The maximum loan amount is $5.5 million per project or up to $16.5 million for three projects.
The interest rates for 504 loans are “pegged to an increment above the 5- and 10-year Treasury rates.” In most cases, the total interest on the loan amounts to 3% of the loan amount, or an APR of 5% to 7%.
SBA Express Loans Rates
Express loans are also a subset of the 7(a) loan, which allows for faster funding, hence the name “Express.” The tradeoff for faster funding time is that the SBA guaranteed percentage is lower, resulting in a lower borrowing amount ($500,000 maximum) and a higher interest rate.
The interest rate is still pegged to the prime rate, but the maximums are:
-
Loans of $50,000 or less: Prime + 6.5%.
-
Loans over $50,000: Prime + 4.5%.
SBA Economic Injury and Disaster Loan Rates (EIDL)
EIDL loans provide funding for businesses impacted by a natural disaster, like a hurricane or tornado. The company must be located in a declared disaster area (the SBA makes the declaration). Borrowing amounts for EIDL loans go up to $2 million.
Since the loans are intended as recovery loans, the SBA keeps the interest rates low. It’s the only loan in the program where you apply directly to the SBA. EIDL interest rates cannot exceed 4%, and most fall between 2.75% and 3.75%. The SBA sets the interest rate when it declares an area a disaster.
SBA Microloans
The SBA microloan is the only financing package in the program that provides funding for startups and new businesses. Loan amounts go up to $50,000, but the average is $13,000.
SBA microloan borrowers apply through intermediary lenders, usually community partners with the SBA. Depending on the lender, interest rates range from 8% to 13%.
How are SBA Interest Rates determined?
As you can see from the previous section, the type of SBA loan plays a significant role in determining your rate. For the most common SBA loan, the 7(a) loan, the interest rate is also affected by whether it’s variable or fixed, the loan amount, and the loan maturity.
The interest rate ranges also leave some room for lenders to determine their own rates. Lenders will typically base the rate on your business’s financial health (especially cash flow), your credit score and credit history, and your industry. Businesses in stable industries are seen as less risky than those in more volatile or unpredictable industries.
How do you qualify for an SBA Loan?
Small business owners must meet both the SBA’s basic eligibility requirements and the lender’s specific requirements. Since the SBA doesn’t set credit score, time in business, or annual revenue requirements, each lender defines its own cutoffs. The SBA loan application process was simplified by new rule changes that took effect in May 2023. The simplified application process now includes eliminating the requirement for collateral on loans of up to $50,000.
Businesses applying for an SBA loan must meet the following requirements:
-
Be a for-profit business.
-
Operate and be physically located in the U.S. or its territories.
-
Meet the small business size standards as defined by the SBA.
-
Have the cash flow to handle loan repayments.
-
Not be eligible for or receive loan funds elsewhere (SBA loans are “last resort financing”).
Small business owners must also meet certain conditions, such as:
-
Have invested time and money (equity) into the business.
-
Possess a commitment to success and relevant management experience.
-
Provide a personal statement attesting to having good character.
-
Cannot be incarcerated, on parole, or probation.
-
Cannot be currently under indictment or other forms of criminal charges.
-
Cannot have previously defaulted on federal loans, such as student loans.
-
Must own at least 20% of the company.
Additional qualifications depend on the SBA lenders. At UCS, approved businesses we work with generally meet the following minimums:
-
Credit score of 650+.
-
At least two years in business.
-
$350k in annual revenue.
How to Apply for an SBA Loan:
United Capital Source can help you apply to an SBA-approved lender following these steps.
Step 1: Ensure You Qualify
You’ll need a credit score between 650 and 700 and a healthy, consistent cash flow. How you intend to use the money also plays a significant role. You’ll need a detailed plan of how the funds will help you invest in and grow the business.
Step 2: Gather Your Documents
Be prepared to provide:
-
Driver’s License.
-
Business license or certificate.
-
Voided Business Check (for business bank account information).
-
Bank Statements.
-
Credit Report/Statement of Personal Credit History.
-
Business Tax Returns.
-
Credit Card Processing Statements.
-
Personal Tax Returns – 3 Years.
-
Business Tax Returns – 3 Years.
-
Business Plan (Not in all cases).
-
Personal Financial Statement.
-
List of Real Estate Owned or Business lease, if applicable.
-
Debt Schedule/Loan/Rent/Lease Documentation
-
Deeds/Title/Ownership documentation for any collateral/Security
-
Current Profit & Loss Statements and Balance Sheet Year-to-Date
-
A/R and A/P Reports
-
United Capital Source 1 Page Application
Step 3: Fill Out the Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive Approval
SBA Loans through our network generally take 3-5 weeks to process. Once approved and your file is closed (45-60 days), funds should appear in your bank account in a few business days.
What are the advantages of SBA Loans?
The backing of the SBA allows lenders to offer high borrowing amounts at the lowest interest rates and longest repayment terms of any small business loan on the market. The SBA caps interest rates and sets rules for lenders to help ensure that loan packages are advantageous for small business owners.
Additionally, the various loan packages allow you to secure funding for most business purposes. Essentially, you could find an SBA loan to meet almost any business need.
What are the disadvantages of SBA Loans?
The biggest drawback to the SBA loan program is that it’s challenging to qualify. This is exacerbated by the lack of definitive qualifications from the SBA, leaving lenders to set very different criteria.
SBA loans typically require collateral, except for those under $25,000. Most SBA loans require a 10% down payment.
In addition, you need to sign a personal guarantee. The SBA or lender might file a UCC lien against your business assets for larger borrowing amounts.
The SBA also excludes businesses in specific industries. Those include:
-
Real estate investment firms.
-
Companies engaged in speculation.
-
Gambling businesses such as casinos.
-
Rare coin and stamp dealers.
-
Multilevel marketing (pyramid scheme) businesses.
-
Religious businesses, charities, and other nonprofits.
-
Lending institutions.
SBA Loan Pros & Cons
Pros:
-
High borrowing amounts – up to $5 million.
-
Low interest rates and long repayment terms.
-
The funds can be used for various business purposes.
Cons:
-
Long application and approval process.
-
Large amounts of paperwork.
-
Might require collateral.
-
Almost always requires a personal guarantee & down payment.
-
Requires good to excellent credit.
Frequently Asked Questions
Here are some of the most common questions about SBA loan interest rates.
Are SBA Loan Rates fixed?
SBA 7(a) loans can carry either fixed or variable interest rates. SBA 504 and EIDL loan rates are fixed. Most express and microloan rates are variable.
What are the terms for SBA Loans?
The longest terms available are for SBA disaster loans, which can go up to 30 years. Real estate loans, whether funded with a 7(a) or 504 loan, have terms of up to 25 years.
Most other SBA loans carry terms of up to 10 years. CAPLines of credit terms are between 5 and 10 years. SBA microloan terms typically range from 6 to 7 years.
What are the fees for SBA Loans?
Most SBA loans include a guarantee fee, which ranges from 0.25% to 3.75%, depending on the loan type, amount, and lender. The fee only applies to the percentage of the loan the SBA guarantees, not the total loan amount.
Lenders have the discretion to charge some additional loan fees, such as:
-
Credit check fee.
-
Packaging fee.
-
Closing costs.
-
Appraisal fees.
-
Late payment fees.
However, the SBA does not allow businesses to charge extraneous loan fees such as application fees and origination fees. Lenders can only charge prepayment fees on SBA Loans with terms of 15 years or more.
SBA 7(a) loans come with two types of fees: guarantee fees and annual service fees. Guarantee fees cover the SBA’s costs in case of default. Annual service fees compensate lenders for making and administering SBA loans. 7(a) Loan guarantee fees are based on the loan amount and maturity date and apply only to the guaranteed portion of the loan.
The SBA sets and announces guarantee fees every fiscal year. Lenders are required to pay the SBA the guarantee fee, but some pass the expense on to the borrower. The SBA’s guarantee fees for loans with terms of 12 months or less are 0.25% of the guaranteed portion for loans of $150,000 or less. For loans exceeding 12 months, the SBA’s guarantee fees can be as high as 3.75% for loans over $1,000,000.
SBA 504 loan fees include a guaranty fee paid to the SBA and a servicing fee paid to the CDC. The total cost of borrowing for SBA 504 loans is slightly higher than the effective interest rate due to additional fees.
What is the average SBA Loan Interest Rate?
It’s difficult to determine an average rate due to the different loan programs, interest rate ranges, and lender rates. In general, though, you can expect a lower interest rate on SBA loans.
SBA loan rates depend on the prime rate, which fluctuates based on U.S. economic conditions. The Federal Reserve’s actions influence the daily prime rate, which in turn affects SBA loan rates.
How do SBA Loan Rates compare to other small business loans?
There are plenty of small business loan options available. Both conventional business loans, such as those from a bank, and alternative online business loans offer a wide range of financing options and funding amounts.
Some of these loans offer advantages over SBA loans. For example, some alternative lenders can provide funding as soon as the same day or even the next day. Most other business loans don’t have the rigid eligibility, qualification, or documentation requirements that SBA loans carry.
However, SBA loans do offer the lowest interest rates available, along with the longest repayment terms. If you can qualify for an SBA loan, it will be the lowest-cost financing available to your small business.
If you are interested in non-SBA loans with looser requirements and faster funding times, consider one of the following:
Some small business owners consider personal loans when they are unable to qualify for other small business loan options.
SBA Loan Interest Rates – Final Thoughts
SBA loans offer the lowest interest rates on small business loans. While the exact interest rate you’ll receive depends on the type of loan, the lender, and your business and credit history, you can still expect a lower rate than you’d get with a conventional or alternative loan.
Contact us if you need further information on SBA loan rates or if you’re ready to apply. Our loan experts can help guide you through the SBA loan process.
