Business owners in search of small business loans have an agency working on their behalf -- the Small Business Administration (SBA).
This agency encourages local banks to lend money to local businesses via is SBA loan program.
How does the SBA loans program work?
If you apply for a small business loan at a bank, the bank will check your application and supporting documentation
to see if you qualify for a small business loan. If your application contains some items that might not let you
qualify for a regular small business loan, the bank can check your application against the guidelines required by
the SBA. If your application meets the guidelines set by the SBA, the bank can offer you a loan that is guaranteed by
the SBA - a federal government agency. This means that in the event the business owner defaults on the small business loan,
the SBA will pay the bank some money to help offset some of the loss it could experience.
Do I have to repay an SBA loan?
Yes. The SBA loan program was created to allow banks to offer loans to business that
might not otherwise qualify for small business loans. The business owner is still expected to pay the loan back to the bank.
If you default on an SBA loan, the bank can still pursue normal collections processing including the acquisition of any collateral
you may have pledged against the SBA loan.
What is the interest rate on an SBA loan?
The interest rate on an SBA loan is negotiated between the borrower and the lender and is based on the Prime interest rate.
The SBA does set maximum rates for SBA loans that have a fixed interest rate:
Variable rate loans may be pegged to either the lowest prime rate or the SBA optional peg rate. The optional peg rate is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan. It is calculated quarterly and published in the "Federal Register." The lender and the borrower negotiate the amount of the interest rate spread which will be added to the base rate. An adjustment period is also selected which determines the frequency at which the loan rate changes (i.e. monthly, quarterly, semiannually, annually).