Small Business Administration (SBA) loans are one of the best financing options available to small businesses, offering low interest rates, long repayment terms, and flexible use of funds. However, the interest rate on your SBA loan can vary depending on a number of factors. Understanding these factors and how to influence them can help you secure the best rate possible. Here are the insider tips you need to know to lock in the most affordable SBA loan rates.
Improve Your Business and Personal Credit Scores
Your credit score is one of the biggest factors lenders consider when determining your SBA loan rate. Both your business and personal credit scores play a role in your eligibility and the interest rate you receive. Lenders want to see that you have a history of repaying debts responsibly, and a high credit score indicates low risk.
To improve your chances of securing the lowest rates, make sure you:
- Pay all bills on time
- Reduce existing debt
- Check your credit report for errors and dispute any inaccuracies
- Maintain a low credit utilization ratio (ideally under 30%)
Lenders prefer working with borrowers with personal credit scores of 680 or higher and business credit scores in the 80s or above.
Strengthen Your Business’s Financials
Lenders assess your financial health when offering SBA loans, and a strong financial profile can lead to lower interest rates. Before applying for an SBA loan, make sure you have the following in order:
- Solid cash flow: Demonstrating consistent revenue and profitability reassures lenders that you can repay the loan.
- Up-to-date financial statements: Accurate balance sheets, income statements, and cash flow projections can provide a clear picture of your business’s financial position.
- Low debt-to-income ratio: A low ratio signals to lenders that your business is not over-leveraged and has the ability to take on additional debt.
The better your business’s financials, the more negotiating power you’ll have when securing a favorable interest rate.
Offer Collateral to Reduce Risk
While SBA loans are typically partially guaranteed by the government, offering collateral can still help you secure a lower interest rate. Collateral reduces the lender’s risk and increases their confidence in your ability to repay the loan.
This could include business assets like equipment, inventory, or real estate. Offering personal guarantees, where you pledge personal assets in the event of default, may also result in better loan terms.
Choose the Right SBA Loan Program
SBA offers several loan programs, each with different interest rates and terms. Choosing the right one for your needs can help you secure the best rate. Some of the most popular SBA loan programs include:
- SBA 7(a) Loans: These are the most common and versatile SBA loans, used for everything from working capital to real estate purchases. They tend to have competitive rates, especially for businesses with strong credit.
- SBA 504 Loans: These are used primarily for purchasing real estate or large equipment, often with lower fixed rates than the SBA 7(a).
- SBA Express Loans: These loans provide faster access to funds but may come with slightly higher rates due to the expedited process.
Selecting the right program for your business can make a significant difference in the overall cost of the loan.
Apply with Multiple SBA-Approved Lenders
SBA loans are issued by approved lenders, such as banks, credit unions, and nonprofit organizations. Each lender can offer different interest rates based on its criteria. It’s a good idea to shop around and apply with multiple lenders to compare their offers.
Some lenders may have more favorable terms depending on their internal policies and your business’s profile. Negotiating with multiple lenders can help you lock in the best rate for your SBA loan.
Conclusion
Securing the best SBA loan rates requires preparation and strategy. By improving your credit score, strengthening your business’s financials, offering collateral, choosing the right loan program, and shopping around with multiple lenders, you can maximize your chances of getting the lowest possible rate. These insider tips will help ensure your business can access the financing it needs at an affordable cost, setting you up for long-term success.