Designed to support entrepreneurs and small businesses, SBA loans offer numerous advantages, including competitive interest rates and flexible terms. However, understanding these terms and the rate structures can often be challenging. This guide will help you navigate and understand small business loans and the best ways to repay them.
The Small Business Administration (SBA) offers various loan programs to help small businesses obtain financing. SBA loans are designed to provide accessible and affordable capital to entrepreneurs, startups, and small business owners who may not qualify for traditional bank loans.
SBA loan programs help drive the economy by assisting businesses with funding to operate, expand, recover from disasters, and more. Rather than lending money directly, the SBA sets guidelines for loans and guarantees a portion of the amount borrowed in case of default. If the borrower defaults, they will reimburse the lender for a percentage of the outstanding loan balance. This guarantee gives lenders more confidence to approve financing for riskier small business ventures.
Several types of SBA loan programs are available, each with different benefits, eligibility requirements, and terms.
Two of the most popular SBA loan options we’ll be focusing on include:
- 7(a) Loans –The SBA’s primary and most flexible loan program. These 15–25 year loans are commonly used for purposes such as debt refinancing, real estate, new construction, and renovation.
- 504 Loans – 504 loans last 15–20 years and are for major fixed assets like heavy equipment. These long-term investments promote job creation and growth and often include the purchase or construction of land, existing buildings, and new facilities.
SBA does not set a minimum or maximum loan amount. Instead, maximums are determined by each specific loan program. For example, the maximum 7(a) loan amount is $5 million. SBA 504 loans, however, max out at $5.5 million. Loan size may also be limited by the size of the applicant’s business.
Interest rates vary by lender and loan type. At a baseline level, rates are typically tied to the prime rate (currently at 7.75%) or an optional peg rate.
For 7(a) plans, the interest rates are either variable or fixed and are negotiated between the borrower and lender. Fixed-rate loans maintain the same interest rate for the entire loan term, providing predictable payments and leaving room for misses if rates fall. Alternatively, variable-rate loans fluctuate based on market indicators like the prime rate. Rates start lower, but payments rise if rates increase. For variable 7(a) loans, the maximum interest rates vary.
On the other hand, 504 loans are formulated through SBA-licensed Certified Development Companies (CDCs) and tied to the bonds sold to international investors. These interest rates tend to reflect the 10-year U.S. Treasury bond rates, which are, by default, long-term, fixed-rate assets. Currently, interest rates are approximately around 6.18%– 6.31%.
Have you taken the time to read our case studies? Learn more about how Madison One has helped businesses receive USDA and SBA loans.
SBA loan terms depend on the loan program, amount, and use of funds. Standard repayment terms range from 7–25 years.
For example, SBA 7(a) loans under $50,000 can have terms of up to 10 years. Loan amounts of over $50,000 can go up to 25 years, allowing small businesses to secure funding for a wide range of needs. Meanwhile, 504 loans typically offer a long-term repayment structure with a fixed interest rate, allowing small businesses to finance commercial real estate and significant fixed assets with a repayment term of 10, 20, or even 25 years.
Committing to a repayment schedule can be daunting. Consider keeping your financing in check with the following tips:
Familiarize yourself with the terms, interest rates, repayment schedule, and any applicable fees associated with your SBA loan.
Develop a comprehensive repayment plan that aligns with your business’s cash flow and financial projections, ensuring you can comfortably make regular payments.
Make your loan payments on time to avoid late fees, penalties, and potential damage to your credit score, which can impact your business’s financial health.
If you encounter financial difficulties, communicate proactively with your lender. They could offer temporary solutions like deferment, restructuring, or interest-only payments.
Enroll in automatic payment options to ensure consistent, on-time payments without the risk of forgetting or missing a payment deadline.
If your business receives unexpected income or windfalls, consider allocating a portion towards loan prepayments, which can help reduce the overall interest cost and shorten the repayment period.
If you’re uncertain about repayment strategies, consider consulting with financial advisors or accountants specializing in small business finances and SBA loans.
Those interested in an SBA loan should research and evaluate the following crucial factors:
- The loan amount needed and the intended use of proceeds
- Whether you can repay, considering debt service coverage ratios
- How to match loan product and term length to use of funds
- The timing of capital needs and when funds will be required
- Total costs, including guarantee fees, closing costs, and servicing fees
- Current financing rates, caps, loan limits, and terms being offered
- Your eligibility, based on time in business, credit, collateral, and other criteria
- The required paperwork and timeframes for processing and funding
With proper planning and execution, an SBA loan can provide critical financing to grow and sustain a small business. Weighing the advantages against limitations along with professional guidance enables getting the most value from SBA programs.
Are you a small business owner in need of funding? Traditional banks may not be willing to take a chance on your next project, but Madison One CUSO has the perfect solution for you. With an SBA loan, you can secure the funding you need without settling for high-interest rates or massive monthly payments.
In just a 15-minute consultation, our team can determine if you’re a good candidate for an SBA loan. We guide you through the application process and explain your options so that you can make the most informed decision for your business.
With loan amounts of up to $5 million or $15 million and repayment terms ranging from 7 to 25 years, we offer favorable lending terms to help your business grow.
We’ve helped countless rural and small businesses nationwide. Learn more about our services and contact us today.