Affordable funding is a great idea for small businesses interested in growing. A Small Business Administration (SBA) loan is one great option with long terms, low rates, and very low monthly payments. Here’s more about the associated rates and fees, to help you learn more about what to expect from these government-backed loans.
What is an SBA Loan?
The most prominent assistance program that the SBA offers is a guarantee on loans made through banks, credit unions, and other lenders they partner with. By securing a portion of the loan in the case of the borrower defaulting, the lenders are presented with less risk, so they are more likely to offer an affordable loan. Since 2009, the SBA has backed over $150 billion through its various programs.
How can you benefit from an SBA loan?
The SBA guarantee enables banks to extend more favorable loan terms and to lend to businesses that sometimes wouldn’t be able to borrow money conventionally. A big benefit to SBA loans is the wide use of funds allowed. Businesses can use these low-cost funds for many different purposes, including:
- Purchasing fixed assets such as equipment, machinery, and commercial real estate
- Refinancing existing debt
- Buying another business
- Bolstering working capital
SBA loans usually have lower down payment requirements than traditional bank loans. Many SBA loans require an equity contribution as low as 10%, enabling businesses to keep more cash in their coffers instead of tying it up in fixed assets. SBA loans usually feature longer repayment terms than traditional bank loans. There is no prepayment penalty, so SBA loans can be repaid sooner if cash flow allows. Both new and established businesses can apply for SBA loans.
SBA 7(a) Loan Interest Rates
SBA 7(a) loan rates are variable and tied to the Prime Rate. Banks in the SmartBiz network offer SBA loans at an interest rate of 8.25% - 9.25% depending on the loan size and financial profile of the business.
Additional fees for an SBA 7(a) Loan
There are additional fees charged to the borrower. Here is an estimate of the fees. These can vary based on the business financial profile and the size of the loan.
There are additional costs associated with an SBA 7(a) loans from banks in the SmartBiz Loans ® network: Banks in the SmartBiz ® network typically charge a one-time application fee of no more than $3,000.
Bank closing costs
Bank closing costs typically add about another $450 and include standard bank fees though additional third-party report charges may apply. Fees are an estimate, and the actual amounts may vary.
Good news for borrowers! The Small Business Administration (SBA) announced there will be no guarantee fee for SBA loans of $350,000 or less through January 1, 2022. Normally, this 2.25% fee is taken off the proceeds you receive when your loan funds. That can mean up to $7,875 more in loan proceeds for your business.
Other SBA financing
Other types of SBA loans not offered through the SmartBiz ® marketplace include CDC/504 loans and SBA microloans. These are typically used for more specific purposes, so they can have unique requirements and components. For interest rates on these loans, visit the SBA’s official website.
How to apply for an SBA 7(a) loan
Applying for an SBA 7(a) loan takes some work on a business owner’s part to submit all of the financial documents and other required paperwork. Because of the COVID-19 pandemic’s effect on small businesses, SBA 7(a) lenders now have additional questions regarding how your business is operating.
The best practice when applying for a business loan is to be as organized and prepared as possible. You should also have good communication with your lender to get a realistic expectation about effort and timing. A good strategy is to work with your bookkeeper, accountant, or another small business financial professional to gather paperwork. Here are some tips to help the process move smoothly.
Before beginning your application, make sure that you meet basic eligibility requirements. You don’t want to invest your valuable time if you don’t qualify. Eligibility requirements, in addition to SBA requirements, can vary from lender to lender.
Prepare a Business Plan ( Note: SmartBiz Loans ® does not require a business plan)
Submitting a business plan is a unique opportunity for you to present a roadmap with concrete details on how you plan to achieve your goals. A business plan will help you set milestones to measure success and position yourself within your industry. This can also help you provide lenders with a forecast of where you’re headed in the future.
Gather the paperwork
No matter which lender you’re working with, having all the necessary documentation is crucial to obtaining your funds as quickly and efficiently as possible. As you’re progressing through the application, you’ll need to demonstrate that you’re able to make regular payments. Some of the most common documents that our bank partners request include:
Personal & Business Tax Returns
- Personal Financial Statements, required from each individual owning 20% or more of the company
- Profit and Loss Statement
- Balance Sheet
Since the pandemic, lenders will also want to know:
- The industry you operate in and how it was impacted overall
- How the coronavirus has impacted your business
- Changes you’ve put in place to mitigate the financial impact
- How you will use the funds to rebuild
Connect with an SBA Loan Lender
Avoid going from bank-to-bank to find a lender who will approve your application. When you work with SmartBiz Loans ® , we’ll help you increase your likelihood of getting a “Yes” by matching you with the bank partner most likely to fund your business.
For additional information about SBA 7(a) loan applications, review this article from the SmartBiz ® Small Business Blog: 4 Ways to Prep for a Stellar Small Business Loan Application.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.