If you’re searching for funding for your small business -- and who isnt -- then you’ve probably heard about SBA loans. Just to clarify, SBA is an acronym for the U.S. Small Business Administration which is a U.S. government agency that offers online tools, training programs, one-on-one counseling services and funding to help small business owners start and grow their businesses. While all of these resources are valuable, this blog posts is going to focus on the kinds of SBA loans and how to get one.
What is an SBA loan?
The Small Business Administration offers a variety of financial resources. However what is arguable one of the most helpful is are small loans for business owners who would not otherwise qualify for them.
There are all kinds of SBA loans.
In SBA’s microloan program, the organization loans money to nonprofit lenders. These lenders provide loans of up to $50,000 to owners of small companies. In addition to funding, this program also provides other helpful services including technical support, marketing and management guidance for borrowers.
SBA loan guarantees help businesses better terms.
For most other kinds of SBA loans, the organization works with a network of banks, to offer loans to small business owners at very favorable rates.
Business owners who participate in this program, usually get access to better loan terms than they would get if they went directly through their bank. This is because the SBA offers the banks a partial guarantee to secure the loan.
Small businesses get their loan. Banks get peace of mind.
Without this partial guarantee, traditional banks tend to consider lending to small businesses to be too great of a risk. Consequently small business who don’t get loans guaranteed by the SBA often qualify for less-than-ideal terms -- higher rates and shorter payback periods -- if they’re even able to qualify for a bank loan at all.
What the partial guarantee means is that the bank knows that even if the owner of the small company owner for some reason ends up not being to pay back the loan, they will get back the income that the SBA guaranteed. Although the SBA doesn’t guarantee an entire loan amount, it can cover up to 85% of the total amount. And we’re not talking about small loans. In 2010, the Small Business Jobs Act increased the maximum amount of these kinds of loans to $5 million.
What’s the catch on getting up to $5M in an SBA loan?
As you can imagine, because SBA loans involve a government organization, the application process is incredibly painstaking and often restrictive. If you’re planning to apply for an SBA loan, you’ll need to have all your ducks in a row, back everything up with a lot of documentation and be prepared to wait. SBA loans don’t qualify as quick cash. I’ll talk about qualification specifics a little later in this post.
What happens if you can’t repay your SBA loan?
After a 10-day grace period, banks will usually start sending notices that you are late on your loan payment and that your over-due payment will have to be upped to include a late fee. Beyond that, every lender has different policies and procedures for what they do when a borrower stops paying off their loan
Most banks have a team that works to figure out a new repayment plan with the company owner. That plan could include loan restructuring or only requiring that you pay interest for a limited period of time. In those cases, the loan wouldn’t be considered to be in default.
With that being said, you should know that you could be considered in “technical default” on the loan even if you’re current on payments. Although it’s uncommon, you can be considered in default if you violate the terms you agreed to on the loan. That can include not providing tax returns for every year of the loan, taking on additional debt, or failing to get the bank’s approval when you bring in new shareholders. SBA loans require small business owners to abide by some pretty strict rules in return for access to loan money at great rates.
Say you try to work with the bank but you just can’t keep up with the payments. When a government small-business loan goes into default, the lender will try to collect the full amount from the borrower. They’ll only call in the SBA’s 85% guarantee if its efforts to collect fail. These include:
Seizing business assets. Like when you default on any other type of loan, the lender has the right to seize the assets you used as collateral to back the loan. This can include business bank accounts, inventory, equipment, or real estate.
Seizing personal assets. If you own 20% or more of the business as well as other key managers who were required to sign a personal guarantee to get the SBA loan, you are all personally liable. A personal guarantee is a written promise that says you and the other signers agree to pay back the loan personally if your business cannot.
What this means is if the value of the seized collateral the business owned didn’t cover the outstanding amount of the loan amount, the bank has the right to try to go after personal assets.
Typically the lender will send “demand letters” which call on them to personally pay the shortfall. If that fails, they could file a lawsuit in state court. Green says. With a personal guarantee, lenders make moves to liquidate the borrower’s personal assets. That can include your home or other real estate, bank accounts, and all kinds of valuable property that you own depending on the laws of the state.
If the SBA takes the fall, you’re not off the hook.
If you default on the loan and the bank takes a loss because your business and personal assets didn’t cover the loan, they then go to the SBA. The bank submits the loss to the SBA to honor its guarantee of covering 85% on loans of $150,000 and less, and up to 75% on loans over $150,000.
If this happens and the federal government takes a loss on the loan, it can take additional steps to get the loss repaid. This could include which could include garnishing your wages or freezing your bank accounts.
What are typical SBA loan terms?
So let’s take a deeper dive into the 8 different kinds of SBA loans in terms of rates and how to secure one for your small business—so that you can take advantage of one of the very best options for small business lending on the market.
SBA loan interest rates and terms will vary depending on the type of SBA loan you take out and, in some cases, it will depend on the lender’s rates. That being said, it’s fair to say that these loans usually offer better than decent rates and terms— sometimes even better than what you can get from a bank loan.
As far as business financing options go, these loans are great but in order to qualify for one, you will have to meet pretty stringent borrower standards. Plus as I mentioned earlier, SBA loans aren’t fast money. It typically takes at least 1-3 months to get approved and funded.
How are rates set for SBA loans?
The SBA sets loan rates in a variety of ways, depending on the type of loan. The Administration publishes information about rate changes in the federal register and on their website. Unfortunately, sometimes it can be difficult to find specific up-to-date information. Check out each loan type in the list below for more information on how rates are set.
Every quarter, the Small Business Administration publishes an interest rate called the optional “peg” rate (13 CFR 120.214). This rate is a weighted average cost of money to the government for maturities similar to the average SBA direct loan. It may be used as a base rate for guaranteed fluctuating interest rate SBA loans.
Financial institutions that make SBA loans typically may charge up to a maximum allowable rate. That means you may get quoted different rates by different lenders based on your creditworthiness and other factors. If you get a loan made through the SBA like EIDL or Business Physical Disaster loans, they will charge an interest rate set by the SBA.
Are SBA loans interest-only loans?
SBA loans usually require you to make fixed monthly payments that will amortize the loan. Interest-only loans often require lump sum balloon payments later in the loan term which is risky for both the borrower and the lender (in this case the SBA, or ultimately taxpayers). For this reason, the SBA does not make loans that have balloon payments.
But while balloon payments aren’t an option, there are some loan programs and situations that may let you have interest-only payments. For example, Export Working Capital Program loans cited below, for example, may permit interest-only payments.
Fixed vs variable interest rates for SBA loans
Some SBA loans like disaster loans will only offer fixed rates while others like 7(a) loans may offer either fixed or variable interest rates. Some loans may carry a combination of fixed or variable interest rates. With Export Working Capital loans, for example, the tender may use a fixed rate on either the guaranteed or unguaranteed portion and a variable rate on the other portion of the loan. The guarantee refers to the SBA guarantees which help protect the lender in the case of default.
Current SBA Loan Interest Rates 2021
Based on what we’ve discussed so far, you can see why Small Business Administration (SBA) loans are one of the most popular and dependable ways for small business owners to get the funding they need. However, like any financial product, rates change. What are the current rates for business owners looking to get financing? It depends on the specific SBA loan.
Here’s a quick rundown.
What kinds of SBA loans are right for your business?
1. SBA PPP loans
Small business owners who were affected by the pandemic got to take advantage of Paycheck Protection Program loans. Most of these loans will be forgiven. However, any balances that aren’t forgivable carry a fixed rate of 1%. The repayment period is 2 years for loans approved by the SBA before June 5, 2020, and 5 years for loans approved after that date. If mutually agreed to by both the lender and borrower, a loan was approved before June 5, 2020. can have a term of 5 years
2. SBA EIDL loans
Economic Injury Disaster Loans that were issued in response to the COVID-19 disaster have a fixed rate of 3.75% (2.75% for nonprofits) for 30 years.
3. SBA Disaster loans
A fixture at the SBA for many years, SBA Disaster loans are for businesses in a federally declared disaster area that have been destroyed, damaged, or otherwise negatively affected by hurricanes, earthquakes, fires, or other natural catastrophes.
If your business qualifies, you can apply for loans of up to $2 million for physical damages caused by the disaster. If your business suffered economic rather than physical damage from the disaster, you can also apply for an Economic Injury Disaster loan of up to $2 million. You can use the money as working capital to help your company pay regular bills like rent, utilities, and other operating costs that it would have paid if the disaster hadn’t happened.
How the interest rate is set
The lender will set the interest rate at the time the disaster is declared. The rate will apply to all loans that are processed under that declaration of disaster. Recently in 2019 and 2020, the interest rate has been up to 4% (2.75% for private nonprofits) for businesses without credit available elsewhere. The maximum rate for businesses with credit available elsewhere is currently 8%.
According to federal law, the interest rate is based on whether the business has “Credit Available Elsewhere.” The SBA decides whether your business does or doesn’t have enough funds or other resources, or isn’t able to borrow from non-government sources, in order for it to take care of its own disaster recovery. If they decide that you do have other resources or can reasonably get credit elsewhere you won’t qualify for an EIDL disaster loan.
How long do you have to pay it back?
30 years is the maximum repayment term for an SBA Disaster loan. If you have some credit available elsewhere but not enough, your loan will have a maximum repayment term of 7 years. The SBA will set the payment amount and length of repayment based upon your company’s ability to repay.
4. MREIDL loans
The Military Reservist Economic Injury Disaster Loan program (MREIDL) provides funds to eligible small businesses to meet operating expenses that it could have met, but can’t meet because one of its essential employees was "called-up" to active duty in their role as a military reservist.
These loans are intended only to provide the amount of working capital needed by a small business to pay its necessary obligations until the essential employee is released from active military duty and comes back to work. It’s not intended to cover lost income or lost profits. You can’t use an MREIDL loan to take the place of regular commercial debt, refinance long-term debt, or finance business expansion.
Published interest rates for loans granted under the Military Reservist Economic Injury Disaster Loan program change quarterly. However once the interest rate is assigned to an MREIDL loan at the time of approval, it remains fixed.
5. SBA 7(a) loans
Among the best-known SBA loans, SBA 7(a) loans offer up to $5 million in funding for qualified businesses. These loans may have either fixed or variable interest rates. There are generally three acceptable base rates for variable rate loans:
Each of these base rates is very similar. They typically differ by less than a portion of a percentage point. Be aware, LIBOR will be phased out, and lenders do have the option of using another base rate if they use it on similarly priced commercial loans.
SBA 7(a) Variable Loan Rates
These variable rate loans are based on the current prime rate of 3.25%. They would have the following maximum rates:
Loan Amount | Loan Term of <7 years | Loan Term of >7 years |
Under $25,001 | 7.5% (Prime + 4.25%) | 8% (Prime + 4.75%) |
$25,001 – $50,000 | 6.5% (Prime + 3.25%) | 7% (Prime + 3.75%) |
More than $50,000 | 5.5% (Prime + 2.25%) | 6% (Prime + 2.75%) |
If you want more stability in your payment, you can also get a fixed-rate 7(a) loan. The current maximum rates based on the prime rate are:
Loan Amount | Rate | Prime rate in effect on the first business day, plus: |
Under $25,001 | 11.25% | 6.0% (600 basis points) plus the 2.0% (200 basis points) |
$25,001 – $50,000 | 10.25% | 6.0% (600 basis points) plus the 1.0% (100 basis points) |
$50,001 – $250,000 | 9.25% | 6.0% (600 basis points) |
$250,001 or more | 8.25% | 5.0% (500 basis points) |
Make sure to carefully read the terms of your loan so you know exactly what your monthly payments will be. And remember, SBA loan rates are just a part of the total cost.
Most 7(a) loans have a 10-year term, however, your company may have up to 25 years (or useful life) to pay it off when these loans are used to buy equipment or real estate. These loans are often used for working capital, inventory, and in some cases to refinance debt.
6. SBA Express loans
SBA Express loans are another kind of SBA 7(a) loan but are a lot faster and easier to apply for.
Just like other 7(a) loans, rates may be fixed or variable. Fixed-rate loans have the same maximum rate as other 7(a) loans. For variable rate loans, lenders can use the optional base rates mentioned above and may charge up to:
Lenders can select from other pricing options but they can’t exceed the SBA maximum allowable interest rate.
7. SBA Microloans
If you don’t need a ton of money, you might consider applying for a smaller and possibly more easily accessible SBA microloan. Although these loans have rates that vary from lender to lender, the SBA puts limits on interest rates. The current maximum interest rate is:
The base rate is then discounted based on average loan size but can never be less than 0%. In the current low-rate environment, the microloan rate generally won’t be more than 7.75% for smaller loans or 8.5% for larger ones.
Payment plans
You have to make payments on your microloan payments on at least a monthly basis and balloon payments aren’t allowed. In certain cases, you can get deferred payments.
Terms
The longest term on these business loans will never be more than six-years. Because not all microloans will require collateral, they’re a great option for small businesses that need smaller amounts of funding.
Caps
Microloans are capped at smaller loans of up to $50,000. You can use them to buy “furniture, fixtures, supplies, materials, equipment, and/or for working capital.” However you can’t use the funds to buy real estate or for your home as a business owner unless your home is used specifically for business. Lenders may let you use a microloan to refinance debt when they think it will improve cash flow for the business.
8. SBA 504 Loans (CDC Loans)
SBA 504 Loans (also known as 504 CDC loans) offer financing through two different lenders but are administered by a single lender. Half of the loan comes from the bank, while a portion of the rest (up to 40%) comes from a Certified Development Company (CDC). The bank then sells the CDC portion of the debt to a private investor. As a borrower, you’ll pay the last 10-20% in the form of a down payment.
The program currently offers 10, 20, and 25-year interest rates at 2.231 percent, 2.364 percent, and 2.399 percent. Click here to find out more about monthly 504 effective interest rates.
There is no cap on the project size for these loans, but the maximum loan amount is typically $5 million dollars. Borrowers often use the money to pay for major projects such as commercial real estate purchases (where at least 51% must be owner-occupied, and more in some cases). Other uses include facilities expansions or large equipment purchases. The options for repayment terms are 10, 20, or 25 years.
How do know if your small business qualifies for any of the kinds of SBA loans?
Except in the case of SBA Disaster loans, you will apply for these small business loans through a financial institution approved to make SBA loans. Some banks are “preferred lenders.” That means they, not the SBA, have the final say on whether or not you are approved or not. Howeve, all lenders are required to make sure loans meet the minimum SBA loan requirements. These include:
Because credit can be a major factor in getting approved for an SBA loan, it’s important to know your personal and business credit scores before you go to the trouble of applying. Lenders will use the information about your credit scores to determine your ability to repay, and they can turn you down without it.
Check out this link for more information on SBA loan qualifications.
How to apply for an SBA loan
As mentioned at the beginning of this post, because the SBA is a government entity, application and approvals for a loan can be a bit complicated and take a long time. For some SBA loans, you have to apply directly to the SBA. These include Disaster Loans and Economic Injury Disaster Loans (EIDL. If you want to apply for these loans you have to complete the loan application at SBA.gov.
Who has the final say on other kinds of SBA loans?
All other SBA loans go through lenders approved by the SBA. While these lenders have to follow SBA guidelines when approving SBA guaranteed loans, they may add their own eligibility requirements which they are allowed to do as long as they aren’t discriminatory. Consequently, it pays to shop around to find a lender that will work with you and your specific circumstances. You’ll find that some SBA lenders will work with startups, for example, while others might not.
If you need money fast or you don’t meet the requirements like having a good credit score an SBA loan may not be for you, You might want to look into other options including lines of credit, term loans, business credit cards, equipment financing, or even crowdfunding.
SBA loans are designed specifically to help small businesses like yours. So if you have the time, patience, and good credit scores to qualify, they are definitely something to look into.
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