*Variable interest rate 7(a) loans are pegged to the Prime rate (currently at 3.25%), the LIBOR rate or the SBA optional peg rate.
According to the SBA, fixed interest rate 7(a) loans are based on the Prime rate in effect on the first business day of the month of your loan.
In addition to the more general 7(a) loans, the SBA offers other business loans that are more specific. For example, the SBA’s 504 CDC loan is specifically for businesses looking for financing to purchase fixed assets like land, machinery or real estate. These loans require at least 10% down for borrowers. Up to 40% of the loan is offered by a certified development company (CDC) and the remaining percentage (at least 50%) is offered by a bank. The benefit is that these loans have fixed rates that are fairly low, but they are dependent on the loan amount.
Other more specific loans include the SBA microloan program for certain types of small businesses and startups. These loans are for smaller amounts, usually up to $50,000, and they’re provided by microloan lenders specific to certain states and regions of the country.
Besides the type of loan you select, your business history and profile as a borrower will also play into determining the interest rate you’ll pay.
Credit profile
Most small business lenders will evaluate both your personal and business credit score during the loan application process. Lenders want to see that you can repay your other personal or business debt obligations on time.
Most lenders require minimum credit scores to qualify for their loan products. These can vary greatly: Banks sometimes require FICO credit scores of 680 and above, while some alternative lenders may accept scores as low as 500. Your credit score will be a determinant in what interest rate you receive, with higher scores generally translating to lower interest rates.
Business financials
Lenders will also consider your current and projected business finances as part of the application process. Most lenders make requirements regarding your time in business and the minimum amount of annual revenue your business must generate. While specific requirements for cash flow or profitability are less common, you should be prepared to show relevant documentation if asked. You’ll also need to demonstrate how you plan to use the loan proceeds and how the funds would benefit the business in the long run – this should be carefully outlined in your business plan and strategy.
Lender relationship
Another factor that affects your interest rate is your relationship with the lender. Some lenders may offer lower interest rates or reduced fees to applicants who have a deposit account with the institution or have taken out loans in the past. This is true for both banks and alternative lenders, so it may be a smart idea to do all of your borrowing and banking in one place.
Types of fees
APRs include the interest that needs to be repaid as well as any applicable fees. Business financing usually comes with a number of fees that can inflate the overall APR. Be wary, as you don’t want to be misled in online installment loans IL underestimating the true cost of a loan if interest rates are low but all other fees are high.
The exact interest rate borrowers pay will depend on several factors, including the amount of the loan and whether you’ve opted for variable or fixed interest rates, as shown in the tables below. In addition, the partner bank working with the SBA will likely have fees that can vary slightly from lender to lender.