SBA Loans: How Do Their Rates Work?

If you’ve done your homework on the various small business loan options, you’ve probably figured out by now that obtaining financing through one of the U.S. Small Business Administration’s various loan programs—typically called SBA loans—is very often the best deal you can get.

With a little more research, however, you may also have seen that the makeup of the interest rate on SBA loans is slightly more complex than for loans obtained through a traditional lender. So, how exactly do the interest rates work for SBA loans, and how can you predict what your interest rate will be? Let’s learn a little bit more about exactly how SBA loans work.

The SBA’s Role in Your Loan

Before we dig into exactly how the interest rates work for SBA loans, we should first clarify exactly what the U.S. Small Business Administration’s role is in your business loan relationship. Because despite what the term “SBA Loan” may suggest, the SBA itself does not directly lend money to small businesses. Rather, their role is to guarantee a portion of the loan with the intermediary lender—but the SBA’s approved lender will actually be the one loaning the funds and negotiating the loan’s exact terms.

As you’ll see below, the SBA gives guidance and parameters to interest rates for SBA loans by assigning an official prime rate and maximum spread. Within those parameters, it’s up to the intermediary lender to negotiate and set the loan’s final interest rate based on your credit history and qualifications as the borrower.

Understanding the Prime Rate

Set by the U.S. Federal Reserve, the prime interest rate is the lowest rate of interest at which money can be borrowed commercially. As of the most recent increase effective December 2016, the current prime rate set by the Federal Reserve is 3.75%.

Regardless of the type of loan you’re seeking, the terms, or your credit score, this prime rate forms the basis for what your SBA loan will cost. From there, all these factors will help your intermediary lender determine the “spread,” which is the amount added to the prime rate that forms the full interest rate for your loan.

Intermediary Lenders and Maximum Spread

Along with the daily prime rate, SBA loans are also subject to a lender spread negotiated between the borrower and the lender. This spread can result in either fixed or variable interest rates, but is capped by a maximum allowable spread set by the SBA. The maximum spread for 7(a) program loans—the SBA’s most popular loan program—depends on the size and terms of the loan:

Maximum Interest Rate for 7(a) loans with terms LESS than seven years:

• Less than $25,000: Prime + 4.25%
• $25,001 – $50,000: Prime + 3.25%
• More than $50,000: Prime + 2.25%

Maximum Interest Rate for 7(a) loans maturing in MORE than seven years:

• Less than $25,000: Prime + 4.75%
• $25,001 – $50,000: Prime + 3.75%
• More than $50,000: Prime + 2.75%

Though it’s rare, intermediary lenders also have the option of applying what’s called the “one-month London Interbank Offered Rate” plus 3%—or the SBA’s optional peg rate—instead of the daily prime rate. If you see these terms listed, consult your loan broker or your local Small Business Development Center for more information.

Guaranty Fees on SBA Loans

If you’re seeking an SBA loan for less than $150,000, you won’t be charged a guaranty fee. That means short of any fees assessed by your specific intermediary lender, the total of prime + spread calculated above will request your true cost of borrowing the funds.

For 7(a) and CDC/504 loans greater than $150,000 that mature in less than a year, a guaranty fee of 0.25% is assessed. Loans for greater than $150,000 with terms greater than a year hold a guaranty fee on a graduated scale:

• 3% for loans between $150,000 and $700,000
• 3.5% for loans between $701,000 and $1 million
• 3.75% for loans of more than $1 million

While the terms and interest rates on SBA loans can be a bit complex to understand, they are widely accepted as the lowest cost business loans around—and therefore highly sought after. To maximize your chances of obtaining an SBA business loan, do your research and complete the loan application very carefully before submitting. And remember—the better your personal credit score, the better your chances will be of obtaining the SBA loan you need to launch or grow your small business.