How to Get the Best Interest Rate on an SBA Loan?

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Small Business Administration (SBA) loans are made through approved, private lenders, with most of the terms being negotiated directly between the small business owner and the lender. This includes the interest rate, within certain limitations. The SBA has set maximum rates for lenders, but it is possible to work with lenders to get a better interest rate.

Maximum Loan Rates

The SBA has determined that lenders can charge borrowers a certain amount more than one of three established rates. The most common of these is the Prime rate, which is tied to the Federal Reserve s federal funds rate.  Maximum interest rates for 7(a) loans with terms of less than seven years can be as much as the Prime rate plus 2.25 percent. For loans with terms longer than seven years, lenders can add up to 2.75 percent. For example, if the Prime rate is 5.0 percent, a loan with a repayment term of fifteen years could have an interest rate of up to 7.75 percent.

Loans with balances of less than $50,000, and SBA Express loans, can have higher rate caps.

Get the Best Rate

Small businesses do not have to settle for the maximum interest rate. Because the loans are made through private lenders, there is plenty of competition and variation. Small firm owners can be proactive in securing a great SBA interest rate by taking the following vital steps.

Improve Your Credit Score

SBA loans are designed to help small businesses that do not necessarily have the best credit, but those with better credit histories will certainly score better rates. Credit scores can be improved by consistently making payments on time and by lowering the balances on existing business credit cards. Firms can also make sure that all their vendors are reporting their payments; this will add to the positive history. Businesses should review their credit reports before applying for SBA loans to learn what lenders will be seeing and to correct any errors. With a great credit report, borrowers have more leverage in asking for an attractive interest rate.

Borrowers should get rate estimates from several lenders to compare what range is available. SBA loans are available with both fixed and variable rates and the cost of these will vary from lender to lender.  Shopping around can also entice lenders to sweeten their offers when they know they are competing with others for the business. The SBA website allows small companies to search for all the approved lenders in their area and state.

Provide Collateral

Interest rates are a reflection of the lender s risk of loss by making a loan. If small business owners can provide valuable collateral, lenders risk is decreased and they can reduce the interest rate. Suitable collateral could include business equipment, buildings, accounts receivable, personal assets and in some cases, inventory.

With the help of some or all of these steps, small firms will be able to negotiate the very best possible rate for their SBA loan.

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