The Federal Reserve, in an effort to stave off runaway inflation, bumped the Prime Rate up four times in 2023 and a whopping seven times in 2022. As of this writing, the Prime Rate is 8.5%. If you’ve been in the market for a business loan, you might be a bit worried. Is now really the time to apply or should you wait until rates go down again? Are you going to end up paying elevated rates for the life of your loan if you can’t afford to wait? Economists predict more rate hikes in 2024, which means you can either jump on a loan now to take advantage of current rates before they go up again or hold out for the Fed to drop those rates. There is, however, a third option, which we’ll talk about below. The good news is, even with the recent rate increases, loans from the Small Business Administration (SBA) loans are still a bargain, and here’s why.
SBA Basics
First, let’s get into the basics of SBA loans and the options they provide. Loans are not available directly through the SBA. The SBA works with banks and private lenders to offer 7a loans backed by the agency. It essentially acts as a cosigner on the loan to make accessing these loans easier. The SBA also works through regional nonprofits that offer 504 loans. Both types of loans have maximum interest rates set by the SBA. Borrowers have to meet the SBA’s requirements to be eligible for either program, such as not having a federal conviction on their record or a default on federal debt (including student loans). Some business types aren’t eligible, which is one good reason to have a broker on your side. A broker can help you navigate the eligibility rules to meet qualifications before you decide to apply. Interest rates for 7a and 504 loans vary based on the Prime Rate, how much you borrow, what your loan term is, why you want the loan, and whether your loan has a fixed or variable interest rate. Variable rates are subject to change with the Prime Rate, the LIBOR, and other comparable loans. Fixed rates will stay the same throughout the term of your loan, regardless of what the Prime Rate does. The third option, mentioned earlier, is refinancing. SBA loans can be refinanced based on certain conditions. So, even if you choose a fixed-rate loan, you may be able to change for a lower rate. When interest rates are high, but expected to come down, picking an SBA loan with a variable rate may be the best option, with a future fixed refi in the plan. Refinancing replaces your old loan with a new one with a lower rate or a shorter term.
How Do SBA Loans Compare?
Most borrowers seek the lowest interest rate on a business loan that they can get. So, how do the SBA’s rates stack up against other small business loans? As of the date of writing, the current SBA loan rates are:
- SBA 7a fixed: 13.5% to 16.5%
- SBA 7a variable: 10.75% to 13.25%
- SBA 504 fixed: 6.6% to 7.1%
It should be noted that SBA 504 loans have three parts: 50% from a bank, 40% from a CDC, and a 10% down payment from the borrower. The rate above is only for the CDC portion of the loan and remains fixed. The bank portion, however, might have a variable rate. Compare the rates above with the average rates for traditional bank loans:
- Bank loan: 5.89% to 12.23%
Banks offer fixed and variable loan rates based on your credit score and your time in business. Unlike the SBA, most are reluctant to lend to borrowers who have been declined by other lenders or that they see as a risk due to sudden growth, inconsistent revenue, or a less than premium credit score. Private loans are another source of funding for small businesses. These loans are commonly short-term loans secured by the business’s assets. The average rates for private loans are: Private loan: 10% to 18% These rates are from collateralized, short-term loans from private companies. On top of the rates above, most private lenders also charge points and origination fees that can range up to 6%. While these are far more accessible for most businesses, the rates can put businesses at a disadvantage as compared with larger, more established competitors.
Finding the Best Rates
There are a lot of factors that play into whether you’ll be at the high end or the low end of these averages. Some have more rigorous qualification requirements and take longer to be approved than others. The best rate for your business loan won’t be the same “best rate” as the business down the street received. The easiest and fastest way to find out what you qualify for and which lender can give your business the funding it needs is to use a reliable broker. When it comes to SBA loans, there’s still a bit of shopping around that can net you the best rate. Our team does the work for you, so you don’t need to waste time searching lender by lender. We help you match with the most likely SBA-approved lender to give you a loan and the best packages. SBA loans can cover equipment, property, working capital, and more. SBA 7a loans can cover combinations of working capital with property or equipment. Brokers help structure these packages around your business’s scenario and objectives to provide the most beneficial mix. We do more than save you money on a loan. Because we work with many types of loans daily, we know the ins and outs most people don’t have time to learn. We also have existing lender relationships, which ultimately work to your advantage with special offers and exclusive deals. Our knowledge and skills help you position your business for the best financing terms and conditions. So, if you’re hunting for a small business loan and don’t know where to start, start by contacting us today.