There are countless resources that educate entrepreneurs about the various small business loans they can pursue. But once you choose the right financing option for your business, it can be more difficult to find information about how to negotiate with a lender. And if you’re lucky enough to secure an SBA loan, you might find it difficult to navigate your loan’s complicated terms, let alone renegotiate them—if it’s even possible to negotiate an SBA loan offer at all.
SBA loans are known for offering some of the lowest interest rates and generous repayment terms on the market. Still, you may be curious about whether you can haggle down an even lower rate or better terms. And unless you have previous experience with SBA loans, it might not be clear what a good SBA loan rate is in the first place, which additional costs or requirements you’ll be responsible for fulfilling, or the loan terms that your business is qualified for.
Here, we’ll walk you through every aspect of an SBA loan offer and how your lender determines those components. That way, you’ll better understand what to expect when your SBA loan offer comes through—and whether that offer is sound, or if you may be in a position to negotiate your terms.
First, let’s clear something up: If you’re applying for an SBA loan, or have already applied, you might have come across a reference to negotiating the rate and term for a loan. But, in reality, it’s rare for a lender to agree on a lower interest rate once they have made an offer. So, it might be helpful to think of this as a negotiation between your lender and your loan application, rather than a negotiation between you and your lender.
In particular, it’s difficult to negotiate your SBA loan interest rate. Technically, the interest rates for SBA loans are not set in stone, and lenders determine rates on a case-by-case basis. But the variance in rates depends on a few factors beyond your control—not the borrower’s powers of persuasion.
So, one instance when you would want to renegotiate your SBA loan interest rate is if you know a lender is charging above the SBA’s maximum rate (which is unlikely). There is a maximum interest rate that lenders can issue for SBA loans, so understanding your rate can help you make sure you’re getting a fair offer. We’ll explain how SBA interest rates work in more detail later on.
Even before you apply for an SBA loan, it’s a good idea to break down the loan offer. That way, you’ll know how much you’re paying for and why, and which aspects of your loan offer you have some control over.
And if you have an active loan application or have already received an offer, understanding the components of your offer—and which aspects of your loan offer you may want to discuss—will help you work efficiently with your loan officer or lender.
Before you see any funds in your account, you’ll pay closing and guarantee fees, so it’s important to be prepared for the initial costs of a SBA loan. SBA loans can also require down payment and/or collateral upfront, depending on the size of the loan and the specific program.
The term is simply the length of time you have to pay back a loan to the lender. The SBA sets certain maturation terms for different types of SBA loans. For a standard SBA 7(a) loan, working capital loan terms are generally between five and 10 years, and commercial real estate loan terms can reach up to 25 years.
Beyond your specific loan program, your lender determines your SBA loan’s maturation terms based on your intended use of funds, the assets your buying (if applicable), and your ability to repay.
Generally, the current interest rate for an SBA loan is between 3.6% and 13%, depending on the type of SBA loan, loan amount, length of repayment term, and the current market.
But this is where things can get a bit complicated—the interest rate for an SBA loan is actually comprised of two factors: the base rate and the spread. On top of that, your SBA loan interest rate is fixed or variable.
Lenders use the U.S. prime rate to set a baseline rate for a number of different loan types, including SBA loans. A borrower can’t negotiate that base rate, because it reflects current U.S. banking rates and moves with the country’s economy—in other words, it’s entirely out of both your and your lender’s control. As of March 16, 2020 the current prime rate is 3.25%.
The spread is the aspect of SBA loan interest rates determined by a business’s creditworthiness and financial projections, which your lender determines based on the information provided in your loan application—but, still, the spread can’t surpass the SBA maximum interest rate.
An SBA loan either has a fixed rate, so that payments will remain the same throughout the loan term, or a variable rate, which changes based on the market interest rates and U.S. economy.
Most SBA 7(a) loans have a variable rate, which means a lender can adjust the interest rate for the outstanding balance of the loan—but, again, the spread can’t surpass the SBA’s maximum allowable interest rate.
SBA CDC/504 loans for real estate and major fixed assets typically have a fixed interest rate, which means the interest rate remains at a fixed percentage above the prime rate for the full term of the loan.
SBA loans are repaid in monthly installments. In addition to repayment on the loan, plus interest, this payment might also include a monthly fee for “loan services” the lender provides, like billing and bookkeeping.
Similar to other bank loan applications, your SBA loan application will incur fees for processing and potentially for other services, like a credit check. The fees you pay depend on the type of loan you’re applying for and any third-party services used by you or the lender throughout the loan process, as well as your loan amount.
If you’re applying for an SBA 7(a) loan, the SBA will charge lenders a fee in exchange for their loan guarantee. But most lenders pass this onto the borrower (you)—so you should be aware of this fee.
But the good news for SBA 7(a) loans is that the guarantee fee scale is standard, so you can make a solid estimate for what this cost will look like before you encounter it.
The guarantee fee for SBA 7(a) loans is a small percentage of the loan amount—between 0% and 3.75%—which is based on the amount of the loan the SBA has pledged to cover in the event of a default. The SBA typically waives the guarantee fee for sub-$150,000 loans, but that fee jumps to 3% for loans between $150,000 and $700,000.
While it might seem like a guarantee fee would be paid upfront, SBA guarantee fees are actually included as part of your loan package and show up in your monthly payments.
Fees for SBA CDC/504 loans are slightly different than their SBA 7(a) counterparts. The biggest difference between the two is the breakdown of the fees, since 504 loans involve a traditional lender, like a bank, and a nonprofit community development corporation (CDC).
Instead of a guarantee fee, your SBA CDC/504 loan will requires a loan origination fee. Typically, this will come out to between 0.5% and 2%, in addition to a flat fee of $2,000 to $3,000, which is charged by the CDC. That fee is rolled into your loan and included in your monthly payments.
All SBA 504 have origination fees, but a lender might require an origination fee between 0.5% and 3.5%, separate from a guarantee fee. Origination fees are paid directly to the lender for the costs of loan processing. Technically the SBA does not allow additional origination fees on 7(a) loans, so they might be called something different, like “loan packaging fees.”
If you work with a lender or loan officer to assemble your SBA loan application, you might need to pay a packaging fee, which will vary depending on the lender you work with. And if you hire a broker to assist with the application process or another third-party service, you might need to pay them a fee directly.
Any services a lender provides to complete the application process—like valuations or appraisals, reporting, or additional services, like an attorney review—are usually paid at the loan closing. Closing fees are especially important to keep an eye on if you’re purchasing property or using it as collateral, because you’ll need an appraisal, which can cost thousands of dollars. The good news is that you can check the guidelines set by the SBA for lenders and CDCs online, including SBA rates, acceptable lending terms, and limitations.
The truth is, there’s rarely a negotiation between the lender and the borrower during the SBA loan process. So, your best course of action is to ensure that you’re applying for the right type of SBA loan, with terms that you know you’ll be able to meet.
Both the SBA and your lender will evaluate your SBA loan application. But ultimately, it’s up to your lender to set the terms of your SBA loan, since they’re the institution responsible for disbursing the funds. And different lenders have their own loan processes.
If you anticipate trying to negotiate your SBA loan offer (or if you merely want to know whether negotiation is an option), even before you apply for your loan, find out if your target bank has dedicated loan officers who can work with you throughout the process.
The processing fees and other loan costs you’re responsible for can vary depending on the lender you’re working with and the loan program you’re applying for.
Unfortunately, there’s no standard rate for processing fees—but you can compare collateral and down payment requirements among SBA loan programs before applying. That way, you can better ensure that you’re only applying for the SBA loan whose requirements you can truly meet.
Typically, SBA loans under $25,000 will not require collateral. And if you’re seeking a loan less than $50,000, it’s worth considering an SBA Microloan, which doesn’t require a down payment at all. Loans over $50,000 will usually require a down payment between 10% and 20% of the loan value. Depending on the size of the loan, and your creditworthiness, the guarantee fee or down payment may be lowered, too.
Lenders work with business owners to mutually agree on an SBA loan offer and interest rate, but, as you know, the SBA does establish maximum interest rates that a lender can’t exceed. The primary factors in determining an interest rate are the size and length of a loan and the current market rate.
When you receive an SBA loan offer, go ahead and check your quoted interest rate, the current market rate, and SBA-designated maximums. It’s unlikely that there will be discrepancies, but market rates can give you an idea of how your offer compares to industry averages.
And if you find that you’re able to pay your SBA loan early, you might be able to do so without incurring a prepayment penalty—or you might not. If your SBA 7(a) loan term is under 15 years, then there’s no prepayment penalty, but there is if your loan term is over 15 years. SBA 504 term loans carry prepayment penalties, too.
Presenting your SBA loan application with all the proper documentation is your best bet for reaching terms you and a lender agree on. But if you find that you simply can’t meet the terms of your SBA loan, and your lender isn’t willing to renegotiate, you may consider defaulting on your loan. (Of course, defaulting is a worst-case scenario. Communicate with your lender ASAP if you suspect that you can’t meet your loan’s repayment terms.)
Borrowers who can’t repay their SBA loan can submit the SBA’s Offer in Compromise form, which can get you started with the process of compromising a claim. (A compromised loan means that the SBA will no longer attempt to collect payments.)
To default on a SBA loan, you’ll need to be able to prove that the loan amount cannot be recovered within a reasonable amount of time. Depending on the current outstanding debt, value of your assets, and estimated worth of the business (assessed by the creditor), you might be able to settle for an equivalent value that the lender deems acceptable.
Well—maybe. That really depends on the interest rate your lender initially offers, the type of SBA loan you apply for, and your business’s credit history.
Ultimately, it’s unlikely that a lender will agree to a lower interest rate—but if you have outstanding credit or think the lender’s rate exceeds the SBA maximum rate, it’s worth asking your loan officer about the possibility of adjusting your rate.
You can increase your chances of getting a great rate and terms on your SBA loan by making sure that you’re eligible for an SBA loan in the first place, that you’re financially solvent enough to repay your loan, and that your application accurately reflects your business and meets SBA loan requirements. And if you’re approved for an SBA loan, you and your lender will work together to establish terms that work for you
That said, familiarizing yourself with SBA loan programs ahead of time will make it easier to make a decision once you do receive a loan offer, and be more prepared to seek adjustments if necessary. Both the interest rate and collateral requirements for an SBA loan will depend on your business’s financial standing, your loan amount, and the economy, so make sure to check industry average rates and SBA maximum rates before agreeing to your lender’s quote.
Finally, review the components of a SBA loan offer so that you can be sure that you understand the loan rates and terms of your specific SBA loan program. The more you educate yourself about the loan application process now, the better poised you’ll be to negotiate a loan rate that works for your business and the lender.