Everyone is concerned about rising interest rates. As a result, many potential home buyers have put the brakes on buying a home until they see where interest rates are going to land, and home sellers are receiving fewer offers, if any, as rates have jumped. Not to be forgotten among those anxious about rising rates – small business owners.
Many small business owners have staked the future of their company on U.S. Small Business Administration (SBA) loans. The majority of these loans are variable interest rate loans.
Let’s look at how SBA loan rates are calculated and answer some questions on everyone’s mind about some “what ifs” concerning future rate increases.
How SBA Loan Rates Are Calculated
The SBA sets a maximum rate SBA lenders can charge for their loans.
There are two components to an SBA loan: the “fixed base rate (prime)” and the “allowable interest spread.” While the fixed base rate is the same for all loans, it can vary based on prime rate fluctuations. The allowable interest spread is constant once a loan is made, but is a graded percentage based on the loan amount.
For example, if the prime interest rate is 5% and a loan of $100,000 has an allowable interest spread of 2.75%, the SBA lender may charge a borrower up to 7.75%.
In addition to interest charges, a “guaranty fee” on the portion of the loan guaranteed by the SBA of up to 3.75% is charged, depending on the loan size (loans under $15,000 do not have a guaranty fee, while loans over $1 million have a guaranty fee of 3.75%).
Frequently Asked Questions: SBA Loans & Rising Rates
What are the current prime rate and allowable interest spread for SBA loans?
The prime rate is currently 4.75%, and the allowable interest rate spread is 2.75%, making the current SBA loan rate 7.5%.
If the Fed raises rates by 75 basis points (.75%) today, how quickly will the SBA prime rate increase?
SBA rates adjust quarterly, so borrowers would not be impacted until the earlier of 1/1, 4/1, 7/1, or 10/1 following a rate increase.
For variable rate SBA loans, are future rate increases tied strictly to the prime rate, or can the lender determine future increases?
The variable rate paid by a borrower is strictly affected by fluctuations in the prime rate, which the Federal Reserve dictates. Therefore, lenders cannot arbitrarily change a variable rate established by contract.
How does a rising rate environment impact underwriting by lenders?
Like home loan underwriting, rising interest rates affect SBA underwriting to some degree. For example, if rates are currently 7.50% and a bank believes rates will increase to 8.25% after the Fed’s next meeting, they might underwrite new loans using a “stress test” by adding up to 2% to the current rate. However, that doesn’t necessarily dictate their final decision.
While the current environment of rising interest rates is unpleasant for individuals and small business borrowers, interest rates are still historically low. With the current 30-year fixed-rate mortgage rate at 5.55%, an unsecured SBA loan of 7.50% can still be considered an excellent value by a business in need of working or acquisition capital.