How SBA Variable Interest Rates Work
June 6, 2022 | Last Updated on: February 3, 2023
June 6, 2022 | Last Updated on: February 3, 2023
In this article, you’ll learn:
So, you’re thinking about applying for a U.S. Small Business Administration (SBA) loan. That’s great news! The SBA, which was created in 1953, is a federal agency that has helped countless small business owners secure funding – the Paycheck Protection Program (PPP), for example, gave more than $780 billion in forgivable loans to more than 10.7 million borrowers.
The SBA offers variable interest rate loans and fixed interest rate loans – we’re going to start by comparing the two types of loans. After understanding the differences, you will learn whether or not an SBA variable interest rate loan is right for your small business.
A variable interest rate loan is a loan in which, as the name suggests, the interest rate varies over time. The rate is linked to a benchmark, such as the prime rate – more on this in a bit. Your loan payments decrease if the benchmark decreases and increase if the benchmark increases.
The interest rate on a fixed interest rate loan stays the same for the life of the loan, regardless of any benchmarks. With this type of loan, you know your monthly payments ahead of time.
So, which type of loan is better for you? As with so many things in business, the answer is “it depends.”
Do you expect market interest rates to soar over the next year? In this case, you may want to take out a fixed interest rate loan. If you expect a drop in rates, on the other hand, a variable interest rate loan may be right for you.
Here’s another consideration: your ability to deal with uncertainty. A fixed interest rate loan might make sense with its predictable payments for a small business owner who values certainty.
The SBA 7(a) loan program is the most popular type of financing provided by the federal agency. With this program, a small business owner can access up to $5 million in financing. The SBA guarantees up to 85% of the loan, depending on how much the small business owner borrows.
A small business owner can use an SBA 7(a) loan for commercial real estate, short- and long-term working capital, refinancing current business debt, and purchasing furniture, fixtures, and supplies. The maximum maturities for SBA loans are 25 years for real estate, 10 years for equipment, and 10 years for a working capital or inventory loan. Here is some more info on maturity terms.
If you decide to get an SBA loan, you negotiate the interest rate with the SBA lender. With that being said, there are SBA maximum interest rates, which are pegged to the prime rate, the LIBOR rate, or an optional peg rate.
The prime rate is the interest rate large corporations pay to commercial banks – it is determined by the federal funds rate.
The London Interbank Offered Rate (LIBOR) rate is the interest rate at which big global banks make short-term loans with one another. The Waterfall Methodology, a standardized, transaction-based, data-driven, layered method, is used to calculate the LIBOR rate.
The SBA optional peg rate is based on what the federal government pays for loans with similar maturities – it is calculated each quarter, and you can find it in the Federal Register.
Your SBA loan interest rate is pegged to one of the three rates mentioned in the previous sections – the lender adds a percentage to the base rate. A higher loan amount is currently correlated with a lower spread (the amount added to the base rate). With maturity, it’s the other way around; a longer maturity is currently correlated with a higher spread.
To qualify for an SBA loan, you need to meet several eligibility requirements. Here are a few of them:
With other types of financing, such as a term loan from an online lender, the loan application process is simple, and you get a decision in less than a week. But with an SBA loan, you have to provide several documents and fill out several forms – and you may have to wait over a month to find out if you qualify for financing. Reviewing the eligibility requirements before you get started lowers your chances of wasting time.
With all that being said, many small businesses meet the eligibility requirements. If you are one of them, you can move on to your loan application. Here’s a checklist of what you need to submit to the SBA. Some documents can be easily gathered, such as personal and business federal income tax returns, business financial statements, and personal resumes for each principal. With other pieces of the puzzle, you may want to get help from a qualified professional. For example, you must explain why you need the SBA loan and how you expect the financing to help your business. A Certified Public Accountant (CPA) may be able to provide valuable input that increases your chances of securing funding.
You can get an SBA loan through a traditional bank or online lender. With any potential lender, it’s essential to ask how much experience they have processing SBA loans; the process isn’t easy in the best-case scenario – so you don’t want to make things harder than necessary. Biz2Credit has experience connecting small business owners with SBA funders, making the process as easy and convenient as possible.
meta description: With interest rates rising, it is more important than ever before to understand how variable interest rates work. Learn about how variable interest rates work for SBA loans in particular with our guide!
Here are some of the pros and cons of getting an SBA variable interest rate loan – some of these apply to SBA loans in general.
Here are a few pros of getting an SBA variable rate loan:
Here are a few cons of getting an SBA variable rate loan:
For small business owners who meet the eligibility requirements, an SBA variable interest rate loan is an excellent small business financing option – particularly if they satisfy the following conditions:
Before applying for an SBA variable interest rate loan, make sure you are fully aware of how the interest rate will be calculated. The stakes are high, particularly for a longer-term small business loan for a substantial amount of money. If you take out a five-year loan, for example, the repayment terms may look a lot different towards the end of the life of the loan.
Biz2Credit has experience helping small business owners get SBA funding, including Ajita Mohan, who has a counseling service. Mohan said, “I submitted paperwork, and was helped by their team in accessing lenders. It was pretty painless.”
Learn more about how Biz2Credit can help you fund what’s next for your small business.