➥ SBA loans are government-backed loans designed to help SMEs get easy access to funding that they can use to grow and expand their business. It’s one of the most affordable financing options available for small businesses.
➥The SBA loan calculator can help business owners get a rough estimate of how much the loan would cost them. But before they can use it, they must gather the needed data like loan amount, interest rate, and repayment term.
➥ It’s important to note that the calculator doesn’t include the additional fees in calculating the loan costs. With that, the total cost of the loan could be higher than the result you get from the calculator.
SBA loans are the most coveted business loans out there. It comes with a high funding amount and a minimal interest rate. The financing also offers longer repayment terms than conventional business loans, which translates to smaller, more affordable monthly repayments.
But that begs the question, how much will the financing cost your business?
Before we answer that question, it’s important to know what SBA loans are first and how their rates are determined, so we can get a rough idea of how much it costs.
What are SBA Loans?
Simply put, SBA loans are government-backed business financing designed to help SMEs access cash that they otherwise wouldn’t qualify for (or have a hard time qualifying for) without the federal government’s help. The government backing incentivizes the lenders to offer small businesses financing with excellent terms.
With the SBA loans, eligible businesses can get up to $5 Million depending on the SBA loan they apply for. These loans can have a repayment period of five to 25 years.
Types of SBA Loans
SBA loans come in different forms. The most common SBA loans that businesses typically apply for are SBA 7(a) loans, CDC/504 loans, Express Loans, and Microloans. Here’s a quick overview of each:
- SBA 7(a) loans. The SBA 7(a) loan is the most sought-after SBA loan. Once approved, businesses can get up to $5 million in funding with a maximum repayment term of 25 years. The proceeds can be used towards any business need, including acquiring commercial real estate, purchasing equipment, addressing day-to-day expenses, business expansion, reordering large inventory, refinancing debt, and taking on a big business opportunity such as a business acquisition.
- SBA CDC/504 loan. The SBA CDC/504 loan is a less flexible SBA loan option designed to help businesses fund specific business growth opportunities such as acquiring commercial real estate, constructing/renovating commercial spaces, or buying expensive equipment. It cannot be used to cover working capital needs or refinancing debts (unless they used the debt for commercial real estate acquisitions, constructions, or buying equipment). The CDC/504 loan can have a funding amount of up to $5 million (or $5.5 million for some businesses) with a repayment period of five to 25 years.
- SBA Express loans. SBA Express loans offer expedited government-backed loan application processing for small business owners. The usual turnover time for SBA Express loans is 36 hours, which is much faster than SBA 7(a) or CDC/504 loans that take up to three months. The SBA Express loans can be used for the same purpose as SBA 7(a) loans.
- SBA Microloan. The SBA designed their Microloan program to help startups, underserved businesses (i.e., companies owned by women, veterans, and minorities), and non-profit childcare centers access funding for additional working capital. Unlike the loans mentioned above, SBA Microloans come with a lesser funding amount, which maxes out at $50,000, and a shorter repayment period (not exceeding six years). The proceeds can be used towards startup costs, operating expenses, buying business supplies, and ordering inventory to name a few.
SBA Loans Standard Interest Rates
Estimating the interest rate for your loan can be challenging, especially if you have no idea how much banks and other lenders usually charge for the loan. The good thing is, with SBA loans, the government regulates the interest rate the lenders can charge for the loan. Knowing the standard rates will make it easier for you to arrive at an estimate when calculating your costs.
That said, here are the standard rates for the most common SBA loan products.
The interest rates for SBA 7(a) loans will be dependent on the current prime rate, meaning it will be based on the interest rate that banks charge on their most creditworthy clients. The prime rate can change depending on how the economy is faring.
The lenders usually calculate the interest rate based on the prime rate plus a markup rate of 2.25% to 4.75%. The markup rate will depend on the loan term and amount.
Here’s a summary of the possible interest rates for SBA 7(a) loan:
|Loan Amount||Less than 7 Years Repayment Term||More than 7 Years Repayment Term|
|Up to $25,000||Prime rate + 4.25%||Prime rate + 4.75%|
|$25,000 to $50,000||Prime rate + 3.25%||Prime rate + 3.75%|
|$50,000 or more||Prime rate + 2.25%||Prime rate + 2.75%|
The repayment term for the SBA 7(a) loan will depend on how the proceeds were used. For instance, the repayment period can be up to ten years if the business funding is towards business acquisitions, equipment purchases, or working capital expenses. For purposes like commercial space construction or any other real estate investments, the repayment terms could go as long as 25 years.
Moreover, the rates for SBA 7(a) loans could also be fixed or variable. If the lender uses a fixed interest rate on your loan, you’ll pay the same interest rate for the rest of the loan term. With a variable interest rate, the interest you’ll pay on your loan will increase or decrease, depending on the market’s current situation. With that, it would be best to test out several scenarios using the SBA loan calculator.
The SBA CDC/504 loan is structured a little differently from other SBA loans. With the SBA CDC/504, the SBA works with another non-profit entity called the community development corporation (CDC), which provides a portion of the funds extended to the borrowers.
Essentially, the SBA CDC/504 loan is structured as follows:
- The CDC provides up to 40% of the funding;
- Lenders fund up to 50% of the financing
- The remaining 10% will serve as the down payment for the loan, which the borrower covers.
That said, the CDC/504 loan rates will be composed of two different interest rates – one from the CDC and the other from the lenders. In general, the CDC will charge around 3% to 6%. The interest rate on the lender’s portion will depend on the lender. However, you can expect the interest rate to be more or less the same as what they charge for their commercial real estate loans, which is typically less than 10%.
SBA Express Loans
Because of the more streamlined process of SBA Express loans, you can expect the interest rates to be higher than other types of SBA loans. Depending on the loan amount, the lenders can add 4.5% to 6.5% to the prime rate. Here’s how it works:
- Loans up to $50,000 will have a maximum interest rate of 9.75% (current prime rate + 6.5% markup)
- Loan amounts more than $50,000 can have a maximum rate of 7.75% (current prime rate + 4.5%)
Moreover, the lenders may also charge a guarantee fee of 3%, which they pass on to the borrower upon closing.
Because microloan lenders lend to high-risk businesses (i.e., startups and underserved businesses), the interest rates tend to be higher than the other SBA loan options. Although lenders will charge different rates, the average microloan interest rate can hover between 8% to 13% of the loan amount.
What Factors Affect Your SBA Loan Rates?
Like any other loan, the SBA looks at several factors when deciding on the loan rates.
Specifically, they will evaluate the following factors:
• Credit Score
• Business Revenue
• Time in Business
As you probably know by now, your credit score is essentially a summary of your credit and financial behavior. The higher it is, the lesser the risk you’ll be in the lender’s point of view, and the higher your chances are at qualifying for affordable rates.
On the contrary, businesses with low credit scores may be viewed as high-risk or ‘subprime borrowers’. With that, the lenders may be more inclined to offer higher interest rates to mitigate the risk.
When applying for an SBA loan, you should also demonstrate that you have healthy business financials and earn enough revenue each year. This shows the SBA and lenders that you’ll be able to afford the loan repayments, making you a low-risk borrower.
Time in Business
One of the primary qualifications for SBA loans (except for microloans) is that your business should be operating for at least two years. A longer history means that you ha That means if you’re a startup, you’re less likely to qualify for some of the loan products.
Basically, the longer you’ve been in business, the better your odds are at qualifying for lower interest rates.
The SBA also requires collateral for most SBA loans. While lack of it won’t be the main consideration for approval, the value of the asset you pledge for security will affect your rates. Real estate assets and high-value equipment typically afford businesses lower interest rates. Businesses can also use their inventory and accounts receivable as collateral, but it won’t be as valuable as buildings and equipment.
How to Calculate Your Costs Using the SBA Loan Calculator
When calculating the possible cost of SBA loans, you’ll have to determine three things first:
- Loan amount or the amount you need
- Estimated interest rate
- Loan repayment term or period
You don’t need to have the exact figures to calculate the costs – after all, the calculator is only designed to give you a rough estimation of the potential costs. Plus, it can be difficult to determine the final interest rate and loan amount until the lender actually approves your loan application.
Once you have all the data figured out, you simply have to put it into the calculator, and it will do the math for you. Within seconds, you’ll have the results. The loan calculator should show you the following:
• Total repayments (principal amount + total interest) or the total amount you’ll pay over the loan’s lifespan
• Minimum monthly repayments until you pay off the loan in full at the end of the term
• Total interest paid
Again, the amount that results from the calculation will only be the estimated costs – it is not the final amount.
Nevertheless, the results may be enough to give you a bigger picture of how much an SBA loan will costs. This, in turn, can help you decide whether you can afford repayments or not and how the loan will impact your business in the long run.
The Limitations of SBA Loan Calculators
As much as we’d like to arrive at the exact cost of the SBA loan, the total financing cost and monthly repayments will only be finalized after the lenders approve you of the loan. From there, they will draft an agreement or contract that outlines the financing terms. As a borrower, you should review and understand it thoroughly.
It’s worth noting that, as with other loans, the lenders may charge fees for the service they provide. These additional fees won’t be included in the SBA loan calculator’s computation. That said, while reviewing the loan offer or contract, be sure to go over the fees that the lenders may charge because this will impact the final cost of your loan.
Some of the fees you should be on the lookout for include:
• Guarantee fee
• Origination fee
• Application fee
• Prepayment fee
• Late payment penalties
The Bottom Line: How Much Do SBA Loans Cost?
There’s no exact answer to this question. The figures will depend on the lender and your qualifications. With that, every applicant could end up with a different final cost.
But as mentioned, your rates will rely on your business credentials – specifically your credit score, revenue, and time in business. If you want to estimate the possible interest rate, evaluating where your business currently stands financially would help. Moreover, the lenders may also give you an idea of the interest rate you’ll qualify for upon your initial conversation.
Once you have the figures, all you need to do then is to enter the number in the calculator along with the amount you need and repayment term. Within seconds, you’ll get the results.
While SBA loans are considered the most affordable financing for businesses, it’s still important to calculate the costs. After all, taking out additional debt is a big financial decision for your company, and it can have a big impact on your bottom line. You want to make sure that you’re applying for the program that best suits your business needs and situation.
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