A Small Business Administration (SBA) loan provides funding partially-guaranteed by the government – meaning the government essentially acts as an insurance agency on the loan. Businesses borrow from lenders with an SBA guaranty, and in the event the business defaults on the loan, the government reimburses the lender for its loss. That being said, the borrower remains obligated for the full amount due.
Because of the involvement of the SBA, these loans offer a relatively low interest SBA loan rate that help encourage long-term financing for small businesses. Additionally, they require some of the lowest down payments and longest payment terms of various loan options. Still, also because of the involvement of the SBA, the paperwork and approval wait times can be lengthy.
Within the SBA, there are multiple loan programs. By understanding the differences and rates among some of the most common programs, you can make a more informed decision regarding your future funding.
The 7(a) loan program is the SBA’s primary program for assisting small businesses. The specific terms of these types of loans are negotiated with the lender, but they must meet SBA requirements – a maximum loan amount of $5 million (SBA does not set a minimum loan amount). The average 7(a) loan amount in fiscal year 2012 was $337,730.
Fees: Loans guaranteed by the SBA are assessed a guaranty fee, based on the loan’s maturity and the dollar amount guaranteed (rather than the total loan amount). The lender initially pays the guaranty fee and they have the option to pass that expense on to the borrower at closing. The fees range from zero percent (for loans under $150,000) to 3.5% on loans of more than $700,000. There is also an additional fee of 0.25% on any guaranteed portion of more than $1 million.
Interest Rate: The actual interest rate for a 7(a) loan guaranteed by the SBA is negotiated between the applicant and lender and subject to the SBA maximums. Both fixed and variable interest rate structures are available. The maximum rate is composed of two parts, a base rate and an allowable spread.
Lenders are allowed to add an additional spread to the base rate to calculate the final rate. For loans with maturities of shorter than seven years, the maximum spread will be no more than 2.25%. For greater maturities, the maximum spread increases just a bit to 2.75%.
Repayment Terms: While maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed, there are maximum maturity timelines – 25 years for real estate, up to 10 years for equipment, and generally up to seven years for working capital.
SBA loans are usually repaid with monthly payments (principal, plus interest). Balloon payments or call provisions are not allowed on any 7(a) loan except SBA Express loans. Good news – lenders are not allowed to charge a prepayment penalty if the loan is paid off before maturity.
Worth noting for real estate loans, however, is the SBA will charge the borrower a prepayment fee if the loan has a maturity of 15 or more years and is prepaid during the first three years.
A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation. CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 loan program.
504 projects usually work by dividing the loan among three parties: a private sector lender with a senior lien covering up to 50 percent of the project cost; the CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost; and a contribution from the borrower of at least 10 percent equity. To encourage loans, if the borrower defaults, the private sector lender is paid off first, reducing their risk.
The maximum amount of a 504 loan is determined by how the funds will be used according to one of three goals. For job creation, the maximum SBA debenture is $5 million. For public policy, the maximum is $5-5.5 million, and for small manufacturing it’s $4 million.
Fees: Fees total approximately 3% of the debenture and may be financed with the loan.
Interest Rates: Interest rates on 504 loans are pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues.
Repayment Terms: Maturity terms of 10 and 20 years are available.
The Microloan program usually provides smaller amounts than other programs (hence the name). The program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000. They can be used for working capital, inventory or supplies, furniture, equipment, and more. They cannot be used to pay existing debts or to purchase real estate.
These loans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. If you apply for microloan financing, you may be required to fulfill training or planning requirements before your loan application is considered. This business training is designed to help you launch or expand your business.
Interest Rates: Interest rates vary, averaging roughly between 8 and 13 percent.
Repayment Terms: Loan repayment terms vary according to loan amount, planned use of funding, any requirements determined by the lender, and the needs of the borrower. The maximum repayment term allowed for an SBA microloan is six years.
For more information on these or other SBA loan requirements or programs (disaster, export assistance, va small business loans, and other special purpose loans), visit sba.gov. If you would like to see if you’re eligible for an SBA loan, you can start an application on Fundera.com.