Before starting the application process for an SBA loan, it’s important to understand the overall cost of Small Business Administration loans. The borrower and lender will ultimately determine the exact terms. However, it’s helpful to have an idea of what items contribute to the overall loan amount. Remember that it’s possible to negotiate these terms with a lender.
The Small Business Administration guarantees a portion of SBA loans. However, there is a guarantee fee that comes with this benefit that funding partners are responsible for paying. Unfortunately, they have the option to pass this fee onto the borrower. They’re able to add the fee into the overall loan amount.
If you plan on taking out an SBA loan that is under $150,000, funding partners can waive the guarantee amount. Any loan amount over $150,000 could be subject to a fee ranging from 3% to 3.5% of the guaranteed amount. The exact fee amount is dependent on the loan amount plus the length of the business loan. For instance, if a borrower wishes to take out a $500,000 20-year loan, the SBA will guarantee 75%. The lender or borrower would end up having to pay 3% of the guaranteed amount ($375,000). This would bring the guarantee fee amount to $11,250.
In addition to guarantee fees, the Small Business Administration typically adds an origination fee to SBA loans. This fee takes care of the lending company’s cost of making the loan available to borrowers. They usually take origination fees straight from the loan amount instead of having the borrower pay them directly. So, if the lender sets the origination fee to 4% and the borrower is requesting to take out $500,000, the borrower will only be receiving $480,000. Origination fees are not dependent on any of the loan’s factors, but are decided upon by the lending company themselves.
SBA loan rates
Two factors comprise the interest rates on SBA loans: a base rate and an allowable spread. One of the three market interest rates can determine the base rate: the current prime rate, the London Interbank One Month Prime (LIBOR) plus 3%, or the SBA Peg Rate. Since these interest rates change with the market, the base rate is also subject to change.
In addition to the base rate, the SBA allows lending companies an allowable spread. This means that lenders can add in their own rate in order to determine the final loan rate. Fortunately, the SBA sets a maximum spread so that lending companies don’t set rates on SBA loans too high. The length of the loan determines the maximum spread.
SBA loans that are set to be paid back in less than seven years will have a maximum spread of 2.25%. For loans that are scheduled to be paid back over the span of seven years or more, the maximum spread will be 2.75%. Using the same example as above, the $500,000 20-year SBA loan will have a base rate plus an allowable rate of 2.75% or less. The borrower and lending company will negotiate the actual interest rate.