How Are SBA Loan Rates Determined? Our Complete Guide
The SBA guarantees up to 85 percent of loans valued at under $150,000, and 75 percent of loans valued at over $150,000. This covers three different loan types, which we’ll review in this post, as well as the SBA disaster loan.
If you’re ready to start a small business, expand an existing business, hire new employees, or refinance existing loans, SBA loans are a wonderful option. However, it’s important to weight them against other business financing options prior to submitting a loan application.
In this blog post, we’ll explain what the SBA loan rates are and how different loan options have varying rates.
Three Small Business Administration Loan Options
The three main types of SBA loans are the 7(a), 504, and Microloan program. Each of these loan types have their own benefits and drawbacks, uses and features, and SBA loan rates. To compare them, you may benefit from using a SBA loan rate calculator to determine which option best fits your needs. However, we’ll review their primary features below:
1. SBA 7(a) Loan
The Small Business Administration’s 7(a) loan program is their flagship option for small businesses. These loans have a federal guarantee of up to $5 million and funds can typically be used for working capital, equipment, and expansion opportunities.
Current SBA Loan Rates
The current SBA loan interest rates for the 7(a) loan, calculated with current prime rate of 5.25 percent, are as follows:
- For loans of $25,000 or less, if the loan is going to be paid off in under seven years, it is 9.5 percent. If the loan repayment term is for over seven years, it is 10 percent.
- For loans of $25,000 to $50,000, if the loan is going to be paid off in under seven years, the SBA loan rate is 8.5 percent. If the loan term is for over seven years, it is 9 percent.
- Finally, for loans over $50,000, if the loan is going to be paid off in under seven years, the loan rate is 7.5 percent. If the loan term is for over seven years, it is 8 percent.
- The SBA CAPLine product is part of the SBA (7)a program. The borrowing maximum is up to $5 million, and the SBA line of credit interest rate depends on the loan amount received.
As shown in the list above, there are three main determining factors that play into the SBA loan rates for the 7(a) loan:
Loan terms: For this loan category, it falls on either side of seven years as a midpoint, with no in between. A 7(a) loan with a three year term is treated the same as a loan with a six year term.
Loan size: There are three categories for this: Under $25,000, $25,000 to $50,000, and $50,000 and up. Therefore, a loan that’s $60,000 is going to be in the same bracket as a $4.5 million 7(a) loan.
Base rate: There are three main base rates used in the 7(a), that are usually dependent on the specific institution used and the geographic location.
- Prime rate
- LIBOR (London Interbank Offered Rate): One month + 3 percent
- SBA PEG Rate
7(a) loans that are over seven years have maximum interest rates half a percent higher than comparative loans with terms under seven years.
Uses for this SBA Loan
Most standard 7(a) Small Business Administration loans are for a variety of uses. These range from property expansion to structural renovations. It could be for the purchase of vacant land or buildings.
These loans can also be used for general start-up costs, seasonal business lines of credit, or the refinance of debt. Additionally, building materials, working capital, inventory management, and the purchase of equipment and fixtures are all common uses for a 7(a) SBA loan.
These loan types shouldn’t be used to pay off creditors who haven’t been adequately secured. Also, these loans should never be used to manage business expenses in the following sectors:
2. SBA CDC/504 Loan
The SBA guarantees up to $5 million for the Certified Development Companies (CDC)/504 loan program. These funds are typically utilized for machinery, operational facilities, and land.
In contrast to the 7(a), of which many are processed by banks and other financial institutions, 504 SBA loans are processed mostly through nonprofits and specialized online lenders.
Current SBA Loan Rates
The SBA’s CDC/504 loan program consists of two different loans; one loan comes from a bank, funding half of the requested financing, and the other comes from the CDC (Certified Development Corporation).
The CDC funds an additional 40 percent of the requested financing, and the final 10 percent will be in the form of a down payment from the business owner.
The rates on the CDC piece of the SBA 504 loan in its current status (as of November 2019) differ between the ten-year and 20- and 25-year SBA loans.
- For the 10-year SBA Loan, the term is the five-year Treasury rate plus 1.5% to 5.125% in fees
- For the 20-year and 25-year SBA Loan, the term is the ten-year Treasury rate plus the same percentage in fees as the above
Each month, the CDC will submit closed loans to the SBA. They, in turn, pool these loan amounts together and sell them off to investment firms and individual investors. These investors then provide the capital that funds their loans.
The SBA loan rates for the CDC piece of the CDC/504 loan are very much subject to the rules of the SBA. Under these rules, interest rates for their portion is based on current rates for both five-year and ten-year bonds offered by the US Treasury. From this, spreads must be included for investor returns in addition to the fees charged by both the SBA and CDC.
The small business loan rates mentioned above are fixed, of course. For this reason, your payment amount won’t change for the length of the SBA loan on the CDC piece. The interest rates on the bank portion of the loan, though, are up for negotiation between yourself and the bank. The SBA has no authority over the rates here, but they are almost always under 10 percent.
Uses for this SBA Loan
The CDC/504 loan can be used for real estate, equipment, and construction costs that are time-intensive and very expensive for businesses to fund upfront. This includes costs such as:
- The purchase of land or buildings
- Improvements to land, including street improvements, the addition of utilities, parking lot construction and landscaping
- Conversion, renovation, modernization, or construction of new structures for use by a small business
- The purchase or upgrade of large, long-term machinery or equipment
3. SBA Microloans
Microloans provided through the Small Business Administration typically cap out at $50,000. These loans are meant to be used for expenses such as:
- Startup expenses
- Inventory management
- Working capital
Unlike 7(a) loans and 504 loans, microloans typically are processed through local-area nonprofits and community-focused institutions.
Current SBA Loan Interest Rates
The Small Business Administration takes a more hands-off role when it comes to SBA loan rates on their microloans in comparison to their other lending programs. The SBA’s role is to limit the intermediary markup that lenders can charge on top of the standard SBA rate, which covers the lender’s cost to borrow the funds from the SBA.
Right now, the interest rates on SBA Microloans are:
- For loans less than or equal to $10,000, the cost of funds plus 8.5 percent
- For loans over $10,000, the cost of funds plus 7.75 percent
Subject to the limits above, additional interest rates are negotiated and discussed with intermediary lenders. The SBA has little involvement with this part of the process.
Overall, SBA loan rates for this type of loan will typically vary between 6.5 and 13 percent, with the 2018 average being 7.6 percent.
Uses for this SBA Loan
SBA Microloans range from as much as $50,000 to as little as $500 and can be used for a wide variety of expenses, including:
- Inventory payments
- Supply purchases
Please note, though, that SBA Microloans can not be used to pay off existing debts, or in the purchase of real estate.
It’s important to consider interest rate options for the SBA loans mentioned in this post, in addition to SBA express loans and other SBA loan products. In addition, remember that there are other business loan options available outside of the SBA, so consider those funding programs as well.
Editor’s Note: This post was updated for accuracy and comprehensiveness in February 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.