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Summary of all loan types

What is an SBA Loan?

SBA loans are small-business loans guaranteed by the SBA and issued by participating lenders, mostly banks. The SBA…

The SBA’s Flagship called the 7(a)

When you are considering a small business loan, there are several loan options available. If purchasing a business or getting working capital is the goal, the SBA 7(a) loan is probably a better loan option for you…

The SBA 504 CDC

The SBA 504 loan is commercial real estate financing for owner-occupied properties. These loans…

7(a) vs 504 CDC

Trying to decide what type of loan is best for your business can be confusing. With all the rules, and guidelines, but with the right information, you can

 

Find the best loan for your small business by contacting; (888) 339-1331

                                             What is an SBA Loan?                                         

SBA loans are small-business loans guaranteed by the SBA (Small Business Administration) and issued by participating lenders, mainly Banks, Credit Unions and Community Banks. Through the SBA 7(a) program, it may guarantee up to 85% of loans of $150,000 or less and 75% of loans of more than $150,000. Maximum loan amount is $5 million. However, 504 CDC’s maximum loan amount is $20 Million which SBA through a non-profit organization known as the CDC pays the borrower.

If you’re looking to open a new location, hire employees, refinance an existing high interest loan, purchase a business including a franchise, develop a new owner occupied construction, acquire equipment, and/or purchase a real estate then  SBA loans are a great option. Typically, are more manageable for borrowers than other types of financing.

Participating lenders set their interest rates based on the prime rate plus a markup rate known as the margin. In addition to the low APRs, another perk of SBA loan is that you get more time to repay them than you would get on non-SBA forms of lending from banks or online lenders. The SBA 504 CDC are priced differently. Since there are bonds involved in the sale and pricing of these loans, terms are longer, and pricing is fixed.

The loan term depends on how you plan to use the money, according to the SBA:

  • Working capital or daily operations: 7 Years
  • New equipment purchases: 10 years
  • Real estate purchases, renovation, and rehab: up to 25 years

For SBA loans, a longer term means a lower interest rate and lower regular payments. That means you’ll have more money available for other business needs.

What is an SBA loan guarantee?

Whether you’re starting a new business or expanding an existing one, building and developing your business, few activities will have as much long-term impact on your business as obtaining adequate financing. The SBA can be a valuable ally to any business seeking capital. SBA’s finance programs provide guarantees for short- and long-term loans to eligible, credit-worthy start-ups

and existing small businesses as well as opportunities in real estate transactions.

It is important to keep in mind that the SBA does not make the loans, but rather guarantees loans that you apply for and receive from a bank or credit union. In 504 CDCs an SBA would fund the loan to a CDC non-profit which in turn would fund the loan to the client.

Lenders are required to pay the SBA the guarantee fee

You’ll pay no guaranty fee if your loan is less than $150,000. If it’s more than $150,000 and matures in less than a year, you’ll see a guaranty fee.

If your loan is for more than $150,000 and takes more than a year to mature, you’ll be charged based on a three-tier system:

  • Loans of between $150,000 and $700,000
  • Loans of between $701,000 and $1 million
  • Loans of more than $1 million

 How SBA loan rates are set

Interest rates for SBA 7(a) loans are the daily prime rate, which changes based on actions taken by the Federal Reserve, plus a lender margin. The margin is negotiated between the borrower and the lender and can result in either fixed or variable interest rates. However, the SBA caps the maximum margin lenders can charge based on the size and maturity of the loan.

Interest rates on 504 CDC are calculated differently.

Find the best loan for your small business (888) 339-1331

To understand how SBA 504 interest rates are determined and why they can provide borrowers with tremendous savings, it’s helpful to understand the three-part structure of 504 loans which is discussed in the following contents.

504 Loans typically offer 90% financing, with some variances for start-ups or

special-use properties.

  • 50% of the total project costs come from a financial institution, usually a bank, and the bank gets first lien position on the assets.
  • 40% of the total project costs come from the SBA 504 Loan Program via a Certified Development Company (i.e. Growth Corp). The 504 loan is backed b
  • a 100 percent SBA-guaranteed debenture and the CDC gets second lien position behind the bank.
  • 10% of the total project costs come from the borrower’s down payment.
  • 7(a) accepts cross collateralization

The bank’s portion of the financing is offered with either a fixed or variable rate and is typically amortized over a minimum of seven years.  Bank rate, term, and fees are negotiable between the borrower and the bank.  The interest rates on the bank’s portion of the loan are not set by SBA.  However, because the bank gets first lien position and receives an SBA guarantee on approximately 40% of the loan, the bank’s rates tend to be lower than with conventional commercial loans.  It’s important to note…SBA does not provide a loan guarantee for the bank-funded portion of the financing.

The CDC’s portion of the financing comes with a fixed rate and a term of either 20 or 25 years for real estate and 10 years for equipment. The interest rate for this portion is determined when SBA sells the debenture to Wall Street investors to fund the loan.

SBA’s Flagship known as the 7(a)

When you are considering a small business loan, there are several loan options available. If purchasing a business or getting working capital is the goal, the SBA 7(a) loan is probably a better loan option for you. If you’re looking for a small business loan to purchase commercial real estate or heavy machinery/equipment, and or a construction development, then, the SBA 504 loan is the best choice. 7(a) loan proceeds can be used for short-term or long-term working capital and to purchase an existing business, refinance current business debt, or purchase furniture, fixtures and supplies.

For many small-business borrowers, government-backed loans are the holy grail. SBA loan interest rates are some of the most competitive among lenders.

The 7(a) loan is the SBA’s most popular product and offers a flexible sum of cash for a variety of uses, including managing daily operations, purchasing new products and refinancing high-interest loans.

The SBA sets interest rate guidelines for lenders, which helps keep small-business owners’ borrowing costs low.

Of all types of small business funding, Small Business Administration 7(a) loans are one of the best ways to finance your enterprise. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low interest rates. Getting one can help you grow your business without taking on possibly crippling debt.

Current SBA 7(a) loan interest rates

SBA loan size 7(a) loan paid off in under 7 years * 7(a) loan paid off in over 7 years *
$25,000 or less US Prime + Margin US Prime + Margin
$25,001 to $50,000 US Prime + Margin US Prime + Margin
More than $50,000 US Prime +Margin US Prime + Margin
*Rates calculated with the current prime rate of 4.75%. Updated March 2020.

SBA loans, as the 7(a) loans are also known, are the agency’s most popular type of financing.

Of all types of small business funding, Small Business Administration 7(a) loans are one of the best ways to finance your enterprise. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low interest rates. Getting one can help you grow your business without taking on possibly crippling debt.

SBA loans, as the 7(a) loans are also known, are the agency’s most popular type of financing.

Still, low annual percentage rates make the SBA program one of the smartest ways to fund your company. With some know-how and preparation, you may be able to secure some of the lowest business financing available. And if you don’t qualify for an SBA loan, there are faster, more accessible ways to borrow money, including online small-business loans.

Current SBA 7(a) loan interest rates

SBA loan size 7(a) loan paid off in under 7 years 7(a) loan paid off in over 7 years
$25,000 or less US Prime + Margin US Prime + Margin
$25,001 to $50,000 US Prime + Margin US Prime + Margin
More than $50,000 US Prime +Margin US Prime + Margin
*Rates calculated with the current prime rate of 4.75%. Updated March 2020.

 7(A) LOANS REPAID IN LESS THAN 7 YEARS

Loan size $25,000 or less $25,001 – $50,000 More than $50,000
Maximum interest rate *Prime + 2.25% *Prime + 2.0% *Prime + 1.75%

7(A) LOANS REPAID IN MORE THAN 7 YEARS

Loan size $25,000 or less $25,001 – $50,000 More than $50,000
Maximum interest rate *Prime + 2.125% *Prime + 1.875% *Prime + 1.50%

*The current prime rate, as of March 2020, is 4.75%.

Remember that interest rates make up only part of your expenses. Your APR reflects your true cost of borrowing, including your interest rate and all fees associated with the loan. Fees, rates and margins vary from each lender and are subject to change.

 SBA 7(a) loan interest rates in 2020

SBA loan size 7(a) loan paid off in under 7 years * 7(a) loan paid off in over 7 years *
$25,000 or less 8.5% 9.0%
$25,001 to $50,000 8.0% 8.50%
More than $50,000 7.0% 6.5%
*Rates calculated with the current prime rate of 4.75%. Updated March 2020.

Note that the APR on a loan differs from the interest rate. The APR is a percentage that includes all loan fees in addition to the interest rate.

CDC/504 loans

Business borrowers looking to buy land, buildings or major equipment with long-term, fixed-rate financing can apply for SBA 504 loans. These loans are partially funded by certified development companies (CDC), nonprofit organizations focused on community economic development. The loans require collateral, typically the assets that are being financed, as well as personal guarantees from the principal borrowers.

  • 504 loans are available in 10-20-25 year terms: As of current market these loans are priced around 5% or lower. Negotiable between the bank and the borrower
  • Fee percentages are fixed but reset every five years based on principal, often resulting in a lower payment for the borrower.
  • The minimum loan amount is $50,000; the maximum may be up to $20 Million.

How 504 loan rates are set

Small-business owners seeking a 504 loan are on the hook for a down payment of at least 10% of the cost of the project. A traditional lender, such as a bank, puts up 50% of the loan, and a certified development company puts up as much as 40%. The SBA guarantees 100% of the CDC portion of the loan.

SBA 504 loan terms are primarily made up of the following:

  • The Treasury bond rate: Loans with 10-year terms are priced based on the five-year Treasury bond, while loans with 20-25 year terms are based on the 10-year Treasury bond.
  • A guaranty fee that is paid to the SBA.
  • A servicing fee that is paid to the CDC.
  • A fee paid to the central servicing agent.

When applying, you’ll be quoted an effective interest rate, which is the sum of those three fees and the Treasury bond rate. However, you’ll also pay a one-time fee to the SBA which varies from lender to lender, as well as some additional fees, meaning your total cost of borrowing (or annual percentage rate) will be slightly higher than your effective rate.

The bottom line on SBA loan rates

SBA loans give you the best interest rates, though the application process can be complicated and time-consuming. If you find yourself in need of money fast, Medallion Funds LLC can help you get the capital you need.

Option 7(a) vs. Option 504 CDC

An SBA 504 loan is commercial real estate financing for owner-occupied properties. These loans require only a 10 percent down payment by the small business owner and funding amounts range from $125,000 to $20 million.

On the other hand, SBA 7(a) loans can be used to buy a business or obtain working capital. The maximum loan for an SBA 7(a) loan amount is $5 million.

A 504 loan’s interest rate is fixed, and no outside collateral is required. Also, fees are lower compared to a 7(a) loan. Currently, 504 loans are amortized over 20 years, and as of April 2018 they began accepting applications for 25-year term SBA 504 loans.

The interest rate on a 7(a) loan, however, can be adjustable and tied to the prime interest rate. Collateral is required, at 90 percent. These loans are amortized over 25 years.

Here’s some history and more specifics on each program: The SBA 504 loan program was designed for small businesses to finance commercial real estate or large equipment for use in business operations.

The 7(a) loan program was originally designed for higher-risk loans for things like the acquisition or starting of a business, working capital, or furniture and fixtures and leasehold improvements.

SBA 504 Loan vs. SBA 7(a) Loan At-A-Glance Comparison

Medallion Funds

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SBA 504 LOAN

(Commercial Real Estate & Equipment)
90% Fixed-Rate

SBA 7(a) LOAN

(General Purpose)

LOAN SIZE                   Minimum – $125,000
Maximum – $20 million +
Minimum – $50,000
Maximum – $5 million
INTEREST RATE • Fixed • Predominantly variable; some fixed-rate options
TERMS • 25 years – real estate
• 20 years – real estate
• 10 years – equipment
• Up to 25 years – real estate
• Up to 10 years – business acquisition, equipment
• 5 to 7 years – working capital
• Weighted average for mixed-use requests
DOWN PAYMENT • 10% borrower • Minimum 10% borrower(often more)

Other Comparisons (details for lenders)

SBA 504 LOAN

(Commercial Real Estate & Equipment)
90% Fixed-Rate

SBA 7(a) LOAN

(General Purpose)

ELIGIBLE BUSINESS SIZE • Business net worth not to exceed $15 million
• Average net profit after taxes for 2 consecutive years not to exceed $5 million
• Determined by industry type
• Annual sales not to exceed range of $750,000 to $33.5 million for retail, service and agriculture
• Number of employees not to exceed range of 100 to 1,000 for wholesale and manufacturing
LOAN STRUCTURE • 50% bank loan
• 40% CDC loan
• 10% borrower down payment
• Loan structure negotiable; dependent on risk
• 10% down payment (minimum)
PROCEEDS USE • Purchase existing building
• Land acquisition and ground-up construction (can include soft cost development fees)
• Expansion of existing building
• Finance building improvements
• Purchase equipment
• Expand, acquire or start a business
• Purchase or construct real estate
• Refinance existing business debt
• Buy equipment
• Provide working capital
• Construct leasehold improvements
• Purchase inventory
PROGRAM REQUIREMENTS • 51% owner occupancy for existing building
• 60% owner occupancy for new construction
• Equipment must have minimum 10-year economic life
• 51% owner occupancy for existing building
• 60% owner occupancy for new construction
• All assets financed must be used to the direct benefit of the business
COLLATERAL • Generally, project assets being financed are used as collateral
• Personal guaranties of the principal owners of 20% or more ownership are required
• Subject assets acquired by loan proceeds
• Pledge of personal residence unless bank can justify why unnecessary
• Personal guaranties of the principal owners of 20% or more ownership are required
FEES • Fees are financed in the 504 loan
• Fees are negotiated for the 50% bank loan
• Servicing fee (lowest allowed by SBA) for CDC plus a legal review fee
• Fees can be financed in the 7a loan
• Fees vary with the size of loan paired with 504 loan
• Additional .25% charged on any loan portion above $1 million