What to know about SBA loans
What is an SBA loan?
SBA loans are small-business loans guaranteed by the SBA and issued by participating lenders, mostly banks.
The SBA can guarantee up to 85% of loans of $150,000 or less and 75% of loans of more than $150,000. The average 7(a) loan amount was about $425,500 in 2018, according to the agency’s lending statistics. The program’s maximum loan amount is $5 million.
If you’re looking to open a new location, hire employees or refinance an existing loan, SBA loans are a great option. SBA loan rates and terms typically are more manageable for borrowers than other types of financing.
Summary of SBA loan types
| Loan type | What you need to know |
| 7(a) loan program (SBA’s flagship loan program) |
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| 504 loan program |
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| Microloans |
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| SBA disaster loans |
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What interest rate and terms can I get on an SBA loan?
In keeping with SBA rules, participating lenders set their interest rates based on the prime rate plus a markup rate known as the spread.
SBA 7(a) loan interest rates in 2020
| SBA loan size | 7(a) loan paid off in under 7 years * | 7(a) loan paid off in over 7 years * |
| $25,000 or less | 7.50% | 8.0% |
| $25,001 to $50,000 | 6.50% | 7.0% |
| More than $50,000 | 5.50% | 6.0% |
| *Rates calculated with the current prime rate of 3.25%. Updated March 2020. | ||
Note that the APR on a loan differs from the interest rate. The APR is a percentage that includes all loan fees in addition to the interest rate.
In addition to the low APRs, another perk of SBA loans is that you get more time to repay them than you would get on non-SBA forms of lending from banks or online lenders.
The loan term depends on how you plan to use the money, according to the SBA:
- Working capital or daily operations: seven years.
- New equipment purchases: 10 years.
- Real estate purchases: up to 25 years.
For SBA loans, a longer term means a lower interest rate and lower regular payments. That means you’ll have more money available for other business needs.
What is an SBA loan guarantee?
Lenders provide the funds that make up an SBA loan, but the agency guarantees a portion of the amount, up to a $3.75 million guarantee. That means if you default on the loan, the SBA pays out the guaranteed amount. This guarantee lets lenders offer longer terms for repayment than they otherwise could, which means your monthly payments will be lower.
The SBA also requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.
How do I get an SBA loan?
Applying for an SBA loan can take weeks, even months. Your chances of being approved are greater if your personal and business finances are in good shape.
Eligibility requirements
While the vast majority of businesses are eligible for financial assistance from the SBA, some are not.
Eligible businesses must:
- Operate for profit
- Be engaged in, or propose to do business in, the U.S. or its territories
- Have reasonable owner equity to invest
- Use alternative financial resources, including personal assets, before seeking financial assistance
If your business is struggling, an SBA loan is probably out of the question. And if it falls into any of the ineligible categories the SBA spells out on its site, don’t bother applying.
If you think you qualify, the best place to start is the SBA website, which includes a loan application checklist. Use this to gather your documents, including your tax returns and business records.
Here are some of the documents you’ll need before applying:
- SBA’s borrower information form
- Statement of personal history
- Personal financial statement
- Personal income tax returns (previous three years)
- Business tax returns (previous three years)
- Business certificate or license
- Business lease
- Loan application history
Then ask your SBA district office for the names of a few approved lenders. The agency also offers a SBA Lender Match tool to match potential borrowers with lenders. Banks follow SBA guidelines but use their own underwriting criteria to evaluate loan applications.
The SBA has another financing program called SBA Express, which aims to respond to loan applications within 36 hours. If your credit and small-business finances are in excellent shape, the wait may be shorter. The maximum amount for this type of financing is $350,000, and the maximum amount the SBA could guarantee is 50%.
How do I pick the right bank?
If you’re applying through a traditional bank, it helps to work with one that has a track record of processing SBA loans. Ask your potential lender these questions:
- How many SBA loans do you make?
- How often do you fund SBA loans?
- How experienced is your staff in the process?
- What is the dollar range of the loans you make?
In general, a bank with multiple years of experience in processing SBA loans will be able to give you guidance, including letting you know your chances of being approved.
Current SBA 7(a) loan interest rates
| SBA loan size | 7(a) loan paid off in under 7 years * | 7(a) loan paid off in over 7 years * |
| $25,000 or less | 7.50% | 8.0% |
| $25,001 to $50,000 | 6.50% | 7.0% |
| More than $50,000 | 5.50% | 6.0% |
| *Rates calculated with the current prime rate of 3.25%. Updated March 2020. | ||
Keeping up on the Small Business Administration’s terms and rates is part of a smart approach to finding a small-business loan. The 7(a) loan is the SBA’s most popular product and offers a flexible sum of cash for a variety of uses, including managing daily operations, purchasing new products and refinancing high-interest loans. Business borrowers also find low-cost financing for land and other major purchases with SBA 504 loans.
How SBA loan rates are set
The SBA sets interest rate guidelines for lenders, which helps keep small-business owners’ borrowing costs low. Interest rates for SBA 7(a) loans are the daily prime rate, which changes based on actions taken by the Federal Reserve, plus a lender spread. The spread is negotiated between the borrower and the lender, and can result in either fixed or variable interest rates. However, the SBA caps the maximum spread lenders can charge based on the size and maturity of the loan.
A lender providing an SBA loan may also calculate interest rates using the one-month London Interbank Offered Rate plus 3% or the SBA’s optional peg rate instead of the daily prime rate.
Here’s a breakdown of SBA business loan terms and rates, including interest and fees.
SBA 7(A) interest rates
7(A) LOANS REPAID IN LESS THAN 7 YEARS
| Loan size | $25,000 or less | $25,001 – $50,000 | More than $50,000 |
| Maximum interest rate | *Prime + 4.25% | *Prime + 3.25% | *Prime + 2.25% |
7(A) LOANS REPAID IN MORE THAN 7 YEARS
| Loan size | $25,000 or less | $25,001 – $50,000 | More than $50,000 |
| Maximum interest rate | *Prime + 4.75% | *Prime + 3.75% | *Prime + 2.75% |
*The current prime rate, as of March 2020, is 3.25%.
Remember that interest rates make up only part of your expenses. Your APR reflects your true cost of borrowing, including your interest rate and all fees associated with the loan.
SBA 7(A) loan terms
- 7(a) loans do not have a minimum loan amount and max out at $5 million.
- The SBA guarantees 85% of your loan if it’s less than $150,000 and 75% if it’s more than $150,000. However, it limits guarantees to $3.75 million.
- SBA loans aren’t easy to qualify for. Learn the qualifications for SBA loans to make sure they’re right for you.
Guaranty fees
7(a) loan guaranty fees are based on the loan amount and maturity date and apply only to the guaranteed portion of the loan. Lenders are required to pay the SBA the guaranty fee, but some pass the expense on to you. However, the SBA limits the maximum amount you will be charged.
You’ll pay no guaranty fee if your loan is less than $150,000. If it’s more than $150,000 and matures in less than a year, you’ll see a 0.25% guaranty fee.
If your loan is for more than $150,000 and takes more than a year to mature, you’ll be charged based on a three-tier system:
- 3% on loans of between $150,000 and $700,000.
- 3.5% on loans of between $701,000 and $1 million.
- 3.75% on loans of more than $1 million.
CDC/504 loans
Business borrowers looking to buy land, buildings or major equipment with long-term, fixed-rate financing can apply for SBA 504 loans. These loans are partially funded by certified development companies, nonprofit organizations focused on community economic development. The loans require collateral, typically the assets that are being financed, as well as personal guarantees from the principal borrowers.
CDC/504 SBA loan terms
- 504 loans are available in 10- or 20-year terms.
- Fee percentages are fixed but reset every five years based on principal, often resulting in a lower payment for the borrower.
- The minimum loan amount is $50,000; the maximum is $5.5 million.
How 504 loan rates are set
Small-business owners seeking a 504 loan are on the hook for a down payment of at least 10% of the cost of the project. A traditional lender, such as a bank, puts up 50% of the loan, and a certified development company puts up as much as 40%. The SBA guarantees 100% of the CDC portion of the loan.
SBA 504 loan terms are primarily made up of the following:
- The Treasury bond rate: Loans with 10-year terms are priced based on the five-year Treasury bond, while loans with 20-year terms are based on the 10-year Treasury bond.
- A guaranty fee that is paid to the SBA.
- A servicing fee that is paid to the CDC.
- A fee paid to the central servicing agent.
When applying, you’ll be quoted an effective interest rate, which is the sum of those three fees and the Treasury bond rate. However, you’ll also pay a one-time fee of 2.15% to the SBA, as well as some additional fees, meaning your total cost of borrowing (or annual percentage rate) will be slightly higher than your effective rate.
The bottom line on SBA loan rates
SBA loans give you the best interest rates, though the application process can be complicated and time-consuming. If you find yourself in need of money fast, numerous online lenders can help you get the capital you need. However, they have less favorable APRs.
Ineligible businesses
Ineligible businesses include those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole.
Specific types of businesses not eligible include:
Real estate investment firms, when the real property will be held for investment purposes as opposed to loans to otherwise eligible small business concerns for the purpose of occupying the real estate being acquired.
Firms involved in speculative activities that develop profits from fluctuations in price rather than through the normal course of trade, such as wildcatting for oil and dealing in commodities futures, when not part of the regular activities of the business.
Dealers of rare coins and stamps are not eligible.
Firms involved in lending activities, such as banks, finance companies, factors, leasing companies, insurance companies (not agents), and any other firm whose stock in trade is money.
Pyramid sales plans, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants. Such products as cosmetics, household goods, and other soft goods lend themselves to this type of business.
Firms involved in illegal activities that are against the law in the jurisdiction where the business is located. Included in these activities are the production, servicing, or distribution of otherwise legal products that are to be used in connection with an illegal activity, such as selling drug paraphernalia or operating a motel that permits illegal prostitution.
Gambling activities, including any business whose principal activity is gambling. While this precludes loans to racetracks, casinos, and similar enterprises, the rule does not restrict loans to otherwise eligible businesses, which obtain less than one-third of their annual gross income from either the sale of official state lottery tickets under a state license, or legal gambling activities licensed and supervised by a state authority.
Charitable, religious, or other non-profit or eleemosynary institutions, government-owned corporations, consumer and marketing cooperatives, and churches and organizations promoting religious objectives are not eligible.
Fees
| Gross loan size | Fees (See note 1) | Notes |
| Loans of $150,000 or less (See note 2) | 2% of guaranteed portion Lenders is authorized to retain 25% of the fee. |
Maturities that exceed 12 months |
| SBA Express Loans to qualified Veterans & Spouses up to $350,000 | Zero (When program is zero subsidy) | Maturities that exceed 12 months |
| $150,001 to $700,000 | 3% of guaranteed portion | Maturities that exceed 12 months |
| $701,001 to $5,000,000 (See note 3) | 3.5% of guaranteed portion up to $1,000,000 PLUS 3.75% of the guaranteed portion over $1,000,000 |
Maturities that exceed 12 months |
| Short term loans | 0.25% of the guaranteed portion. | Maturities of 12 months or less |
| SBA On-Going Guaranty Fee | A percentage of the outstanding balance of the guaranteed portion. The fee is set at time of approval. | Paid by lender and cannot be passed on to the borrower |
Note 1: The SBA specifies the amount of certain fees each fiscal year for all loans approved during that year.
Note 2: For example, the guaranty fee on a $100,000 loan with an 85% guaranty would be 2% of $85,000 or $1,700, of which the lender may retain $425.
Note 3: For example, the guaranty fee on a $5,000,000 loan with a 75% guaranty (3.75 million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) plus 3.75% of $2,750,000 ($103,125) with totals $138,125.
In case of a default how the lender (Bank) may try to collect
When a loan does go into default, the lender will try to collect the full amount from the borrower, calling in the SBA’s guarantee only if its efforts to collect fail.
The lender has the right to seize the assets the borrower used as collateral to back the loan. This can include business bank accounts, inventory, equipment or real estate.
“Banks are going to follow their normal policies and procedures to ensure that the collateral can repay the loan.”
Borrowers owning 20% or more of the business and individuals that hold key management positions are also required to sign a personal guarantee to obtain SBA loans. A personal guarantee is a written promise that says you agree to pay back the loan personally if your business cannot.
This means if the collateral the business owned doesn’t satisfy the loan amount outstanding, the lender has the right to try to collect on personal guarantees made by the owners of the business.
“They can send demand letters to the guarantors, which seeks payment for the shortfall, and they could file a lawsuit in state court.”
With a personal guarantee, lenders can look to liquidate the borrower’s personal assets, such as real estate and bank accounts, but the laws vary by state.
If you default and the lender takes a loss on the loan, it submits the loss to the SBA to honor its guarantee. The SBA guarantees up to 85% on loans of $150,000 and less, and up to 75% on loans over $150,000.
If this comes to pass and the federal government takes a loss on the loan, it can take additional means to get the loss repaid, which could include garnishing wages or freezing bank accounts of the borrower.
Link: https://www.sba.gov/funding-programs/disaster-assistance