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On the hunt for business loans?
If you’ve shopped your financing options around a bit, then you’ve probably heard this before:
“SBA loans are the best financing products available to small business owners.”
And nine times out of ten, that’s true. SBA loans are fantastic small business loans because they’re so affordable. Issued by the bank—and partially guaranteed by the SBA—an SBA loan carries an interest rate similar to the low rates you’d find with a traditional bank loan.
But just how affordable can your SBA loan be? Our SBA loan calculator can help you find out.
An SBA loan is a unique financing product. It has a pricing structure unlike most small business loans.
Its unique loan rates and fees stem from the fact that an SBA loan is guaranteed by the government.
Let’s take a step back. How does an SBA loan really work?
Despite what its title suggests, an SBA loan isn’t issued by the Small Business Administration.
Instead, think of it this way: The SBA is a government organization that helps encourage traditional banking institutions to lend to more small businesses by guaranteeing a portion of the loans they fund.
By guaranteeing a large portion of these small business loans, banks can lend to more “less qualified” small business owners. In the worst-case scenario a business owner can’t pay the SBA loan back, an SBA guarantee ensures that the lender will be reimbursed for the loss.
It’s like the SBA is acting as an insurance agency on the loan.
Now, back to that SBA loan calculator question. While the SBA guarantees these loans to generally help small businesses grow, you do still get charged interest rates and fees on the loan.
The exact rates and fees you pay depend on the SBA lender you’re working with and which SBA loan program you’re applying to.
So let’s give you an SBA loan calculator of sorts for each SBA loan program.
A 7(a) loan is a small business owner’s best option when you need capital for general business purposes.
It’s the SBA’s most common and popular financing program. The loan amount of 7(a) loans goes all the way up to $5 million—but the average 7(a) loan was $371,628 in 2015. (Plug that loan amount in the SBA loan calculator above to see the true cost of an average 7(a) loan!)
Here’s what you need to know about the rates and fees on a 7(a) loan.
When you’re plugging in the numbers on your SBA loan calculator, there are a few different fees you need to be aware of.
First off, 7(a) loans carry a guarantee fee.
Remember how the SBA guarantees the loan will be paid back? They charge a fee for this service.
Guarantee fees are based on the loan’s maturity and the dollar amount guaranteed (instead of the total loan amount, since the SBA doesn’t guarantee 100% of your SBA loan).
The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans of more than $150,000. But the SBA sets its maximum guarantee exposure amount at $3.75 million. If you do this math on your SBA loan calculator, you’ll find that this means that if you qualify for the maximum 7(a) amount ($5 million), the maximum guarantee on the loan will be 75%.
The guarantee fee charged on SBA loans is actually fronted by the bank lender—unless the bank chooses to pass on that expense to you, the borrower, upon loan closing.
You won’t have to worry about paying a guarantee fee on 7(a) loans under $150,000. But loans greater than $150,000 with a maturity of one year or shorter do carry a guarantee fee of 0.25% of the guaranteed portion of the SBA loan.
And if your SBA loan has a maturity of more than one year, the normal guarantee fee is 3% of the guaranteed portion (for loans of $150,000 to $700,000). If your loan is more than $700,000 (and has a maturity of more than one year), the guarantee fee is equal to 3.5% of the guaranteed portion of the loan. And finally, if your loan is more than $1 million, there’s another 0.25% of the guaranteed portion tacked onto the guarantee fee.
Phew—all in, a guarantee fee on a SBA 7(a) loan can range from 0% to 3.75%.
Now for the interest rate part of your SBA loan calculator.
What interest rates can you expect to find on a 7(a) loan from the SBA?
Well, the first thing you need to know is that the actual interest rate for a 7(a) loan is negotiated by you and the lender. However, the lender can’t just force you into a sky-high interest rate—they’re subject to the SBA’s predetermined maximums.
This maximum rate has two parts: a base rate and an allowable spread. The SBA allows three different base rates: a prime rate published in a daily national newspaper, London Interbank One Month Prime plus 3%, and an SBA Peg Rate.
The prime rate, which increased in December 2016, is now set at 3.75%.
And from this base rate, SBA lenders can add a spread to the rate to set the final interest rate.
For loans with maturities of less than seven years, the most a lender can take onto the loan is 2.25%. So the average 7(a) loan of terms less than seven years has an interest rate of no higher than 6%.
However, for 7(a) loans repaid in more than seven years, the allowable spread is no more than 2.75%.
(Note that if you apply for an SBA Express Loan, the allowable spread set on your interest rate will have a higher maximum.)
Unlike 7(a) loans, CDC/504 loans from the SBA are made for a more specific purpose—providing capital to buy land, buildings, or major pieces of equipment. Essentially, they’re for major fixed-assets purchases.
These loans are in part funded by certified development companies (CDCs), nonprofit organizations looking to aid community development.
What would your SBA loan calculator look like for a 504 loan? Here’s what you need to know.
Let’s start with rates, the more complicated of the two costs associated with a 504 loan.
Small business owners taking out a 504 loan are required to make a down payment on the loan—usually about 10% of the cost of the specified project for the loan.
In most cases, the lender (usually a bank) puts up about 50% of the loan, and the CDC puts up 40%. That means you come in with the 10%. However, the SBA is still guaranteeing this type of SBA loan. Specifically, the SBA guarantees 100% of the amount the CDC fronts for the loan.
The interest rate on a CDC/504 loan is set at an increment above the current market rate for five-year and 10-year U.S. Treasury issues (the Treasury bond rate).
Let’s clear that up a little bit.
Put simply, 504 loans come with loan rates of 5% to 6% attached. If you’re curious how the SBA gets those numbers, it comes down to this: Because CDC/504 loans are made up of two loans (one from a financial institution and one from a CDC), the interest rate you end up seeing—and paying—is actually a blended rate between the CDC’s rates (around 4% to 5%) and the rate you’d get at a bank.
Long story short, you’ll end up getting an interest rate of somewhere between 5% to 6% with a 504 loan. It’s complicated, but plug that range into your SBA loan calculator and you should have a good idea of what you’ll be paying in interest.
You also have 504 loan fees to factor into your SBA loan calculator.
The SBA doesn’t really outline which fees come attached to a 504 loan. But in general, you need to pay some sort of guarantee fee, a servicing fee (paid to CDC for providing the 40% debenture), and a fee paid to a central servicing agent.
According to the SBA, however, the sum of those three possible fees won’t total more than 3% of the debenture. And in a lot of cases, you can actually finance the fees with the 504 loan.
All in, the interest rate quoted on your 504 loan won’t show the full picture of the total cost of the loan. With those fees added in, you’ll be paying a little bit more. Make sure to factor this into your SBA loan calculator to know your true cost of capital.
The last loan program we’ll cover in this SBA loan calculator cheat sheet is the Microloan Program.
The Microloan Program is another popular loan program from the SBA. These microloans are smaller amount loans (up to $50,000), issued to help small businesses start and grow.
Again, the SBA doesn’t provide the funding themselves but instead issues funds to specifically designated intermediary lenders. These lenders are usually nonprofit organizations that have experience lending in their communities.
The interest rates and fees that come with a microloan aren’t too complicated, so this specific SBA loan calculator will be simple. They’re actually all up to the intermediary microlender, but interest rates typically range from 8% to 13%.
After reviewing all the different rates and fees structures on SBA loan programs and using your SBA loan calculator, are you convinced?
SBA loans are really the most affordable small business financing product on the market.
If you qualify for one, you deserve a pat on the back!