What Rates to Expect for SBA Loan Programs
Popular Ways to Fund a Business Without Hefty Interest Rates
As the world evolves in terms of technology so is the commercial or rather the business part of the globe. Entrepreneurs nowadays have a wide field from which they can borrow loans at low-interest rates compared to the 90s. It has given many individuals with great ideas but with little capital a platform to launch their business idea. In the United States, for example, the areas from where business people can get business loans are diversified. We have commercial loans given by traditional banks, alternative lending, payday loans as well as SBA loans.
SBA loans have recently become an entrepreneur’s popular source of financing. It is because of the fact that these loans are guaranteed by the Small Business Administration. If you take a loan from a commercial bank that is guaranteed by the SBA, the bank will be more willing to give it to you since there is surety that in case you default in repaying the loan, the SBA will repay a certain percentage of the loan to the bank.
There are different types of SBA based loan programs that are offered by the Small Business Administration. They Include:
The 7(a) Loan Program:
It is one of the most flexible types of SBA primary loans that they have. For this type of loan, the SBA guarantees up to five million dollars ($5,000,000), which is approximately 75 percent of the total amount borrowed. In March 2017, an SBA 7(a) loan of $25,000 or less to be repaid within 7 years or less is going at an interest rate of 8 percent. On the other hand, if the same loan is to be repaid for a period of more than seven years, the interest is 8.5 percent. An SBA 7a type of loan that falls between USD 25,001 and USD 50,000 and has to be repaid within a period of 7 years or less attracts an interest rate of 7 percent but if the loan has to be repaid in a period which is more than 7 years has an interest rate of 7.5 percent.
If an entrepreneur right now applies for an SBA 7a type of loan which is more than $50,000 US dollars, they will have to pay an interest rate of 6 percent if the repayment period is below 7 years but if the period is more than 7 years, then an interest rate of 6.5 percent will apply. It is good to remember that the SBA 7a loan programs do not have a minimum amount but have a limit of five million dollars ($5,000,000). If your loan is less than $150,000, then the SBA guarantees you 85 percent of the loan, but if the loan is more than $150,000, you are guaranteed only 75 percent of the loan.
What Are the Requirements?
Not every individual can qualify for SBA 7a loans. It is unfortunate though but we can’t run away from reality. The truth is, we all cannot qualify. Why? Here is a quick look at why some of us won’t be given these loans:
- You should have a business that has been running for the last 2 years: This is a hindrance to people who are not running any business on the day of application.
- Personal Credit Score: Perhaps the credit score plays a big role in determining whether you qualify for an SBA loan or not. For now, you should have a credit score of above 680 to access SBA loans.
- $50,000 Business Revenue for the last one year: Another hindrance? Most definitely, most of us do not have businesses that are this lucrative and that means that this requirement automatically locks us out.
The above requirements have locked some of us from accessing the 7a SBA guaranteed type of loans.
What Determines the Interest Rates?
It is a crucial area that each one of us should be very aware of before making a decision on whether to apply for this type of loan or not. There are a number of factors that come into play when it comes to determination of the interest rate for 7a loans. As at March 1st, 2017, the following are the parameters being used to determine the interest on this loan program.
- The Base Rate: This is a public interest loan measure and is subdivided into three categories; the prime rate, the SBA peg rate as well as the Libor (30 days) plus 3 percent.
- The Loan period: The SBA type of loans have only two repayment periods; either below 7 years or above 7 years. If one takes a loan with a repayment period of one year and another one takes the same loan with repayment period of six years, both will fall under a 7 year repayment period and thus will attract the same interest rate charged. Alternatively, if you take a loan of a 10 year repayment period while another individual takes the same loan with a repayment period of 8 years, a common interest rate will apply since both loans fall under a repayment period of more than 7 years.
- The Amount of the Loan: The SBA 7a type of loans are categorized into three: below $25,000, between $25,001 to $50,000 and over $50,000. It means that if you take a loan of $30,000 and I take a loan of $49,999; both fall under the same category of below $50,000. However, it’s good to note that the higher the amount of loan one takes, the lower the interest rate and vice versa.
Fixed and Variable SBA Interest Rates
Just like other traditional loans, the 7a type of loans also has a fixed interest type as well as the variable interest type. Those with fixed interest means that throughout the whole repayment period of the loan, no bank will change the interest rate that was assigned to the loan at the time of disbursement. However, with variable type, the interest varies according to the changes in the market.
For SBA 7a loans, banks do reset the variable interest rate depending on the 3 types of publicly available market interest numbers which include; the prime rate, the LIBOR rate as well as the SBA Peg rate. As at 1st March this year, the prevailing market rates are as follows; the prime rate is at 3.75 percent, the LIBOR rate is 3.79 percent while the SBA peg rate is 1.75 percent. These rates may vary from time to time, and as per now, they are said to be very low. Whenever these rates go high, the interest rates of repaying loans will also go high. If at a time they go low, so will the interest rates on SBA 7a loans.
Perhaps it is not the interest rates that affect the total amount payable when one takes an SBA 7a type of loan. There are other factors that come into play to determine the total cost any borrower will have to incur. They include:
- The Origination Fee: When applying for any loan to the bank or whichever financial institution, the institution charges the costs of processing the loan. All these costs are passed on to the borrower. Each financial institution currently has an origination fee that is about 4 percent. It means that if one applies for a loan of $100,000, they will only receive a 4 percent of the total amount.
- The Guarantee Fee: This fee is initially paid by the lender to the SBA when they get you to apply for the loan, but at the closing, the borrower will have to bear the burden of the guarantee fee. As of now, the guarantee fee for loans that are less than $150,000 has been waived out by the SBA. However, any loan higher than that is currently attached with a guarantee fee of between 3 percent and 3.75 percent. The guarantee fee is based on the total amount of the loan as well as the maturity period of the loan. For instance, a loan of more than $150,000 that matures after a year attracts a guarantee fee of 0.25 percent. In case your SBA 7a loan is more than $150,000 and matures in a period which is longer than a year, a 3-tier system of interest shall be used to charge the interest rate. For loans between $150,000 and $700,000; a 3 percent guarantee fee is charged. For loans between $700,000 and $1,000,000; a 3.5 percent guarantee fee is charged while if the loans are more than $1,000,000; a guarantee fee of 3.75 percent is charged. Between $150,000 and $700,000; a 3 percent guarantee fee is charged. For loans between $700,000 and $1,000,000; a 3.5 percent guarantee fee is charged while if the loans are more than $1,000,000; a guarantee fee of 3.75 percent is charged.
- The total cost of borrowing SBA 7a loan programs (interest rates plus fees) or even any other type of loan is referred to as the annual percentage yield (APY). This is the total amount that any borrower incurs after the whole loan is repaid.
The CDC/504 Loans
The SBA CDC/504 loans are long terms loans that are mainly meant for individuals who want to invest in real estate or any other type of development. The interest rates that banks charge on these type of loans is determined by the Small Business Administration. As at now, March 2017, the rate ranges between 3.93 percent and 4.57 percent. The rate, however, depends on the amount of the loan being borrowed.
The CDC Loan Is Mainly Made Up of Two Types:
A loan which is 50 percent of the total amount borrowed from a financial institution, in this case a bank, and a loan given by any certified development company which is 40 percent of the total amount needed. This means that the borrower needs to have 10 percent of the total amount which will act as a down payment from you as the borrower.
The interest rates charged on these type of loan tends to be very low. This is due to the fact that the bank loan supersedes the CDC loan and since the borrower is investing in real estate property there is little chance that the bank won’t be able to get back its money.
Just like the other normal loans, the CDC/504 loans also have certain requirements that every borrower should meet. These include;
- Having been in the real estate business for more than 4 years.
- Have a personal credit score of above 680
- Have at least 10 percent of the total amount being borrowed that will act as your deposit.
The Current Interest Rates on CDC/504 Loans
These loans are given out either within a repayment period of 10 years or a repayment term of 20 years. Each loan’s total interest rate is made up of the treasury rate, the fixed rate as well as the current ongoing fees.
If a loan is to be repaid within 10 years, the current prevailing rates are; a 5-year treasury rate of about 2.01 percent, a fixed rate of 0.38 percent and ongoing fees of about 1.7 percent. This means that the total interest rate one will have to pay is 4.09 percent which is the summation of the treasury rate, the fixed rate and the ongoing annual fees.
For a 20 year repayment loan period, the 10-year treasury rate is 2.49 percent, the fixed rate is 0.48 percent while the ongoing annual fees are 1.7 percent bringing the total interest rate to be 4.67 percent. It is vital to be aware that the rates charged by the Certified Development Company portion of the loan remains constant but the other bank portion could at times vary though not by a big margin.
The SBA loan programs are available now as in March 2017 at the rates explained above. For as long as one meets the requirements, you may either go for a SBA 7a type of loan or if you want to invest in real estate business, then the CDC/504 loan is available too.
If you can get a lender who will pay the guaranty fee to the SBA in advance which is usually the normal way, then the SBA 7a type of loan will boost your business. On the other hand, if you want to invest in real estate, the CDC loan can do you good as long as you have the 10 percent of the total cost of the amount being borrowed to act as your deposit.