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SBA Loans: Eligibility, Rates, Fees, and Terms

Dane Panes | January 21, 2022

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    Businesses often find themselves in need of additional funds to cover growth initiatives or address unforeseen expenses. That said, they often turn to banks and other alternative lenders for help. If you’re one of the many entrepreneurs searching for the best funding option for your business, then there’s a high chance that you’ve come across the term “SBA loans”.

    As a business owner, getting approved for an SBA loan can be worthwhile. Not only will you get to qualify for larger amounts of funding, but you’d also be able to take advantage of the affordable rates.

    If you’re looking to learn more about it, you’ve come to the right place. This article will take about the different types of loans out there as well the SBA loan rates, fees, and terms.

    What are SBA Loans?

    The Small Business Administration (SBA) loans are among the most affordable business loans in the United States, which is why it fares well with small business owners. Put simply, an SBA loan is a business financing that the federal government, specifically the SBA, partially guarantees. It means that if the business defaults for some reason, the SBA will cover the repayments of the guaranteed portion (usually 80%) of the loan.

    However, it should be noted that the SBA doesn’t grant the loan directly to the business owners. Instead, it’s the intermediary lenders that underwrite the loan to the business owners. The SBA only guarantees a portion of the loan to make it easier for companies to qualify.

    Since the government backs up the majority of the loan, there is less risk involved on the lender’s side. As a result, they’re more likely to grant loans with excellent terms to small business owners.

    Types of SBA Loans

    SBA loans are further divided into four loan types: SBA 7(a) loan, SBA CDC/504 loans, SBA Microloans, and SBA Disaster Loans. Here’s how the SBA structures each type:

    1. SBA 7(a) Loans

    The SBA 7(a) loan is one of the most popular loan options of the Small Business Administration (SBA). The SBA works with selected financing institutions, which provide the funding to small business owners. Because the SBA backs up a considerable percentage of the financing, the repayment terms and interest rates are much flexible than other financing options.

    Through the SBA 7(a) loan, businesses can get up to $5 million in financing with a repayment term of up to 25 years, depending on where the funding is used. In general, the SBA permits the use of the SBA 7(a) funding for the following business expenses:

    • Refinance existing debts
    • Short- or long-term capital
    • Acquiring real estate properties
    • Buying equipment, machinery, furniture, fixtures, and office supplies
    • Business space construction
    • Renovating existing office/store space
    • Purchasing inventory in bulk

    The key factors that will determine how much you’ll be eligible to include your credit history, financial statements, where your business operates, what industry you’re in, and more.

    SBA 7(a) Loan Qualifications

    To be eligible for an SBA loan, you need to meet the following requirements:

    • Your business must be for-profit, meaning your company should be operating intending to earn money.
    • Two years of business history
    • You must have a credit score of at least 680 or better.
    • Net income must be under $5 million
    • Have no prior loan defaults or criminal record
    • Be able to present collateral for loans over $25,000
    • Have reasonable invested equity

    It’s also worth noting that the lenders might also require collateral and/or a personal guarantee to secure the loan.

    SBA 7(a) Loan Rates

    As mentioned, the SBA doesn’t underwrite the loan to business owners. That is the intermediary lender’s job. However, the SBA usually sets the maximum interest rate for the loan, and lenders cannot charge more than that.

    SBA 7(a) loan rates will depend primarily on the current prime rate – a market rate banks use as the lowest rate for their commercial loans. The prime rate can change depending on how the economy is currently faring. At present, the current prime rate stands at 3.25%.

    As of April 2021, the SBA has updated the rates for their SBA 7(a) loan. Currently, the loan’s interest rate ranges from 5.50% to 8%. Typically, the better your financial and credit standing is, the lower the loan interest rates will be.

    Here are the current SBA 7(a) loan rates:

    • Loans with term length of less than 7 years:
      • $25,000 and below: Prime rate + 4.25%
      • $25,000 to $50,000: Prime rate + 3.25%
      • $50,000 and above: Prime rate + 2.25%
    • Loans with term length of more than 7 years:
      • $25,000 and below: Prime rate + 4.75%
      • $25,000 to $50,000: Prime rate + 3.75%
      • $50,000 and above: Prime rate + 2.75%

    SBA 7(a) Loan fees

    The SBA 7(a) loan also comes with additional fees on top of the interest rate. For one, borrowers might have to shoulder the guarantee fee. A guarantee fee is a government-imposed fee for the guaranteed portion of the loan. The SBA charges this to the lender, but the lending company could pass this on to you (the borrower) upon closing.

    Here’s a summary of the guarantee fees business owners can expect when approved of the SBA 7(a) loan:

    • For loans less than $150,000: No guarantee fee
    • Loan amounts ranging from $150,000 to $700,000: 3% guarantee fee
    • Loans ranging from $700,000 to $1 million: 3.5% guarantee fee
    • Loan amounts greater than $1 million:5% guarantee fee on the first $1 million and an additional 0.25% guarantee fee for the remaining portion of the loan amount

    The lenders may also charge a prepayment penalty of up to 5% to borrowers if they decide to pay off the loan earlier than the agreed time. However, the prepayment penalty will only apply to loans with a repayment term of 15 years, and borrowers will only have to pay for a prepayment penalty if they decide to prepay during the first three years of the loan.

    Other fees that you can expect to pay for the loan include:

    • Application fees
    • Appraisal fees
    • Packaging fees
    • Closing fees

    Repayment Term

    The repayment term for SBA 7(a) loans will depend on the borrower’s financial and credit records, the purpose of the loan, and the average lifespan of the asset financed by the loan. Here are the repayment terms for each SBA 7(a) loan purpose:

    • Seven years for loans used as working capital
    • Ten years for machinery and equipment
    • 25 years for real estate

    The lenders may also charge a prepayment penalty for loans paid before the end of the agreed term. However, you’ll only be required to pay the fee if you’ve applied for an SBA 7(a) loan with a repayment term of more than 15 years, and you decide to prepay on the first three years after the granting of the loan.

    SBA Express Loan

    The SBA Express Loan is a sub-program of the SBA 7(a) loan program. As the name implies, it offers an expedited loan application process for small business owners. However, lenders can only offer a loan amount up to $350,000, and the repayment period may be shorter.

    Considering the nature of the SBA Express loans, lenders will typically charge higher interest rates. Some can charge a prime rate + 4.5% to 6.5% of the loan amount. However, the terms would depend on your financial and credit history. Essentially, better credentials will afford you excellent loan terms (i.e., lower interest rate, longer repayment period).

    1. SBA CDC/504 Loans

    The CDC is a non-profit corporation whose primary role is to promote economic development through business growth and job creation in communities. Together with the financing institutions and the SBA, they provide financing to small business which they can use to acquire fixed assets.  

    The SBA CDC/504 loan program has three components: 50% of the financing will come from the financial partners (usually a bank); 40% will be supplied by the Certified Development Company (CDC) and; the remaining 10% will come from the borrowers and will serve as the down payment for the loan. However, young businesses (under two years of operation) might have to provide a larger percentage as a down payment. 

    With the financing, businesses can get up to $5.5 million, which they can put towards the following business initiatives:

    • Improving existing buildings
    • Developing lands
    • Renovating or remodeling of new buildings
    • Obtaining new equipment or machinery

    It’s worth noting that the SBA CDC/504 loan doesn’t provide the same spending flexibility as the SBA 7(a) loan. In other words, business owners cannot use it to boost their working capital, consolidate debt(s), or invest in rental properties.

    Eligibility

    To qualify for the financing, your business must:

    • Have a yearly net income of $5 million or less after taxes for two consecutive years
    • Be a for-profit company
    • Have a tangible asset worth less than $15 million invested in the company

    Unlike other SBA loans, the SBA CDC/504 loan doesn’t require additional collateral. However, they may tie up the loan to the equipment, commercial building, or real estate you’ve acquired using the loan’s proceeds. In that case, the lenders can seize the asset in the event of a default and use it as payment for the loan.

    They also don’t have a set minimum credit score for qualification. However, even if that’s the case, presenting a good credit score (680 or better) during the pre-qualification process may increase your odds of approval.

    SBA CDC/504 Rates

    As mentioned, SBA CDC/504 loan has three components: 50% of the funds will come from the bank, 40% will be provided by the CDC, and the remaining 10% will come from the business owner. In the loan application process, the CDC will pool all of the closed loans then submit them to the SBA. The SBA, in turn, sells these applications to potential investors who will provide the funding for the businesses.

    That said, the interest rate of the CDC portion of the loan will still depend on rules set by the SBA. Under those conditions, the interest on the CSC portion will be based on the 5-year and 10-year U.S. Treasury bonds plus a spread of investor returns. The CDC and SBA would also add their rates on top of the U.S. Treasury rates.

    Here are the rates for the CDC portion of the loan:

    • 10-year SBA Loan Term: 5-year Treasury rate + 2.23%
    • 20-year SBA Loan Term: 10-year Treasury rate + 2.36%
    • 25-year SBA Loan Term: 10-year Treasury rate + 2.39%

    The good thing about the CDC’s interest rates is that it’s fixed. In other words, the rate will not change over the entire loan term.

    The SBA doesn’t have much control over the bank’s rate on their portion of the loan. This leaves the bank and business owners to do the negotiations. The interest rates usually fall below 10% of the loan amount.

    SBA CDC/504 Loan Fees

    Like other types of loans, the SBA CDC/504 Loan also comes with fees that both SBA and CDC charges. Here are the fees that you’ll have to pay if you get approved for the loan:

    • Guarantee fee:5%
    • CDC servicing fee:625%
    • Annual fixed service fee: 0.3205%
    • Central servicing agent fee: 0.1% or less

    These fees are ongoing. It means that business owners will have to pay these throughout the entire duration of their loan. The lender may also charge a participation fee of 0.5%, paid one time at closing.

    Repayment Term

    Like SBA 7(a) loans, loan terms for SBA CDC/504 loans can range from 10 to 25 years, and the borrowers should make monthly repayments.

    2. SBA Microloan

    SBA microloans are best for small businesses and non-profit childcare centers looking to apply for loans in lower amounts. The loan was primarily tailored to accommodate the needs of veterans, low-income, and women entrepreneurs. As such, the beneficiaries would get up to $50,000 in funding which they can use to boost their start-up capital or expand their businesses.

    Business owners can put the loan proceeds towards business expenses like topping up inventory or supplies, furniture, fixtures, or buying smaller machinery or equipment. Because of the lower loan amount eligible to the business, the SBA microloan cannot be used to pay for real estate or refinance existing debts.  

    The microloan program is made possible through the SBA’s effort in working with an intermediary or non-profit community-based lender. The SBA provides the fund to these lenders, and the lenders, in turn, loan the money to the small business owners.

    Eligibility

    To qualify for an SBA microloan, you’ll have to meet the following eligibility criteria:

    • The small business must be operating for-profit; however, non-profit child care centers may be eligible for an SBA microloan
    • Business owners must have a credit score of 575 or better
    • Loan applicants must demonstrate “good character”, meaning they shouldn’t have a prior criminal history like theft or fraud.

    They may also require the borrowers to present collateral and/or sign a personal guarantee. Although they’re offering lower loan amounts, they’re facing a considerable risk by lending to start-ups. Collateral and personal guarantee assure the lenders that they can get the money back if the business defaults.

    SBA Microloan Rates

    Unlike the SBA 7(a) and CDC/504 loans, the SBA doesn’t set the interest rates for Microloans. Instead, the interest rates would depend on the intermediary lenders that the SBA works with. However, the SBA does put a limit to how much interest rate the intermediary lenders can charge. That said, the lenders cannot charge more than 13% interest rate for microloans.

    The following is the updated list of interest rate limits for Microloans:

    • Loans amounting to $10,000 and below: Cost of funds + 8.5%
    • Over $10,000: Cost of funds + 7.75%

    When applying for a microloan, you and the lender will negotiate the interest rate. Usually, they may base it on your cash flow and credit background. However, they may also have to take the economic situation into account when deciding on the rate.

    SBA Microloan Fees

    Applying for an SBA Microloan does come with additional charges. The fees will vary from lender to lender, but in general, here are the fees you can expect:

    • Application fee
    • Loan processing fee
    • Closing costs

    Repayment Term

    When it comes to the Microloan repayment term, the SBA only specifies one thing: the repayment period must not exceed 72 months or six years.

    3. Know Your Loan Options

    One thing to know about being a startup is that your loan options will most likely be limited. Since you haven’t established a solid financial and credit track record, lenders would be less willing to extend credit to you.

    But that doesn’t mean that you won’t be able to find a great financing solution for your business. Here’s a breakdown of each of the financing options you might be able to qualify for:

    a. Business Lines of Credit

    If you’re looking for a financing solution that will help you cover almost any business expense, a business line of credit would be an excellent choice. With one, you can draw cash whenever the need arises and only pay back the amount you owe, plus interest. The best part about lines of credit is, you can repeatedly draw money from your credit line as long as you don’t exceed the preestablished credit limit.

    The proceeds from your credit line can be used for a variety of purposes, including:

    • Additional working capital
    • Buying additional inventory
    • Equipment acquisition
    • Purchasing office supplies and fixtures
    • Cover payroll
    • Creating a safety net in case of emergencies

    Lines of credit can be secured and unsecured. Secured business lines of credit or those that require collateral may afford you a higher credit limit. The terms for an unsecured line of credit, however, may not be as flexible.

    b. Business Credit Cards

    Business credit cards work similar to that of a business line of credit, and it can be utilized for the same purposes (additional working capital, equipment, inventory, or office supplies). They’re also a revolving credit, which means that you can tap into the funds, pay what you owe, then reuse the funds again if the need arises.

    Business credit cards are usually the go-to financial resource of many startups. It’s the easiest to qualify for because most of the time, lenders only look at the business owner’s personal credit score to determine their qualification. Even if they don’t have a good credit score, it won’t be hard to find a provider that would still be willing to work with them. Business owners may just have to commit to paying high fees to offset the risk the lenders are facing.

    Furthermore, many credit card companies offer 0% introductory APR. This basically means that you won’t have to pay any interest on the funds you use within a specified time. However, you have to make sure that you pay off your credit before the date the APR is set to increase.

    With a business credit card, most lenders won’t require collateral but may require a down payment. They may also ask the business owners to sign a personal guarantee agreement.

    c. SBA Microloans

    SBA microloans are one of the best startup loans available to small business owners. It offers low-interest short-term loans to help businesses establish and expand. With one, eligible borrowers can get as much as $50,000 to jumpstart their business.

    Although SBA Microloans are designed specifically to help underserved businesses (i.e., women-, veteran-, or minority-owned companies), startups can qualify for it, too. SBA microlenders (usually non-profits) don’t require excellent credit. In fact, it’s common to find a lender that would be willing to work with borrowers with a credit score as low as 575.

    However, they would have to demonstrate strength in other areas of the loan application to make up for the low credit score. For instance, they would need to pledge valuable collateral or present a solid business plan. You’ll also have to demonstrate your ability to repay the loan through your financial projections to improve your chances of approval.

    Moreover, you’d also need to demonstrate that you can’t qualify for the same credit amount and terms from other lenders. SBA microloans are usually the last-resort financing options for small business owners.

    SBA microloans can have a 6-year repayment period with an interest rate hovering between 8% to 13%, depending on the lender and your qualifications.

    3. SBA Disaster Loans

    The threat of catastrophe can be devastating to small businesses as their margins are too narrow, leaving little room for emergencies. If not addressed, companies could face bankruptcy and, possibly, closure. To mitigate the risk of closure and help them rebuild after a disaster (flood, typhoons, tornadoes, etc.), the SBA assists small business owners through the SBA Disaster Loans.

    With the Disaster Loan Program, businesses can get as much as $2 million in funding, depending on the business needs and repayment capabilities. They can then use the money to cover the cost of damages like repairs on their buildings or equipment (through the SBA Business Physical Disaster Loan Program).

    Other than physical damages, borrowers can also use the proceeds to cover the lost income in the months following the disaster. The SBA also launched an Economic Injury Disaster Loans (EIDL) for COVID-19 to support businesses affected by the pandemic. However, the conditions for the loan are slightly different as the virus doesn’t inflict physical damages on the property.

    With the COVID-19 EIDL, the SBA capped off the loan amount to $150,000 because of the high demand. The business owners can then use the proceeds towards paying down debts, accounts receivables, payroll, and other payables that the business hasn’t paid due to the effects of the pandemic.

    SBA Disaster Loan Qualification

    To become eligible for the SBA’s Disaster Loan Program, your business must meet the following requirements:

    • Your business must be located within a disaster-declared zone.
    • A minimum credit score of 640
    • Collateral for loans greater than $25,000
    • Must demonstrate sufficient cash flow to prove that they can repay the loan back

    SBA Disaster Loan Rates

    The SBA Disaster Loan rates for other disasters such as typhoons, floods, etc., may vary depending on whether you have access to other credit resources or not. It’s what the SBA refers to as “credit available elsewhere”. Here’s a breakdown of the rates:

    • For businesses with credit elsewhere, the interest rate can go as high as 8%.
    • For companies without credit available elsewhere, the maximum interest rate can go as low as 4%.

    For COVID-19 EIDLs, the SBA may have to require the borrowers to prove that they can’t qualify for credit elsewhere before they become eligible for the loan. Otherwise, they would have lesser chances of qualifying.

    However, once approved, the rates for COVID-19 EIDL are as follows:

    • For-profit businesses: up to 3.75%
    • Non-profit businesses: up to 2.75%

    Both EIDLs have fixed interest rates. The SBA also defers the loan repayment for the first 12 months after the date of the underwriting. This gives the business owners ample time to recover, so they will have enough to cover the loan repayments.

    It’s also worth noting that the numbers reflected above are the maximum interest rates. The SBA often offers lower interest rates for their Disaster Loans, especially if you’re a non-profit organization. The interest rate could also depend on the disaster area, so be sure to check the fact sheet the SBA provides for clarifications.

    SBA Disaster Loan Fees

    As of date, there are currently no reported upfront fees for EIDL loan

    Repayment Term

    The SBA has set the maximum repayment period for EIDL programs up to 30 years for loan amounts up to $2 million. The lenders may defer the payments in the first year. In other words, the business owners will only start the repayments one year after granting the financing. 

    Final Thoughts on SBA Loans

    Whether you’re a small business owner needing an additional capital boost to grow your business or recover from a recent disaster, SBA loans can provide you with the funds you need. SBA loan rates are typically the lowest as the federal government backs them up. Once approved, you can take advantage of higher loan amounts at very affordable rates.

    However, it’s important to remember that each type of SBA loan is tailored for a specific business need. So, it might be worth assessing what your business needs as of the moment and what your credit standing currently looks like. Again, the better your credentials are, the more attractive your loan terms and conditions will be.

    About the Author

    Dane Panes started freelance writing in 2017. Since then, she has written about a lot of topics for different businesses. She started writing for SMB Compass in March 2020 and has been a full-time content writer ever since. Now, she focuses mostly on topics related to entrepreneurship and business financing.