When considering financing options, many business owners explore Small Business Administration (SBA) loans with their bankers, including the SBA 7(a) program. The 7(a) program is one of the SBA’s most popular programs, offering flexibility, longer terms and potentially lower down payments compared to other financing options. The 7(a) could be a practical option for your business if you’re undertaking one of the following:
- Business startup
- Growing quickly – perhaps you just landed a big account
- Purchasing or expanding an existing business
- Purchasing machinery
(For complete eligibility requirements, visit the SBA website.)
Banks originating 7(a) loans can offer these loans with either variable or fixed interest rates. Because a loan’s rate structure has a long-term impact on the interest expense you pay, it’s important that you know how each rate could affect your business.
Benefits of Fixed Rate SBA 7(a) Loans
As a business owner, you do your best to manage the costs of your products and services, but many cost elements are out of your control (materials, utilities, healthcare, quality labor, etc.). One business expense you can help control, though, is the interest rate on your loan. A fixed rate loan allows you to control your interest rate expense for a defined period of time.
In this upward rate environment, a fixed rate may be a more cost-effective choice for your company – when rates increase, borrowers with variable rate loans pay more in interest. For example, you may be requesting a $500,000 loan to put an addition onto your building or buy some additional equipment and inventory. It’s possible you’re working with a lender that says they can do that loan via the SBA 7(a) program, but the terms are the following: $500,000 loan for 25 years and a variable rate of Prime + 2.00%, or 7% as of today. In rough terms, this is a monthly payment of $3,565. Under this scenario, let’s assume the Fed moves forward with two more rate hikes this year and next. That changes the rate to 8% and ultimately changes the monthly payment to $3,896 in order to pay off the loan in 25 years. This would mean a $331 monthly increase in your cost. With a fixed rate loan, though, you would not incur the additional expense of increased interest rates.
Benefits of a Variable Rate 7(a)
The opposite holds true for a variable rate. If rates are predicted to go down and stay down for an extended period of time, a variable rate could be the better option, as it allows you to secure a low rate initially and benefit from lower payments going forward.
If you’re considering an SBA 7(a) loan, make sure you look at both the variable and fixed rates options to understand what will work best for you in all rate environments. At Investors Community Bank, we recognize that variable rates can put a strain on the borrower when rates rise. Therefore, it’s often our recommendation to obtain these government-backed loans with a fixed rate when feasible. If you work with a bank that offers you only a variable rate 7(a) loan, you may want to consider getting a “second opinion” from other banks that understand the value a fixed rate loan could have for your business.
Transparency and advocating for the best interests of its customers is a critical part of Investors Community Bank’s mission. Is it something you can expect from your current bank? Learn more about what to expect by taking our quick evaluation, What You Should Expect From Your Business Bank.