5 Unknown Facts About Business Working Capital Loan

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Are you a business owner looking to learn more about how to secure working capital funding? Business working capital loan rates, especially SBA 7a loan rates, vary. The loan rate will add to the total amount you payback on the loan so that the lender makes money on it. The payment schedule for these loans includes fixed and variable rates.

Your Loan Is Awarded Partially Based on What You Use the Money For

According to Lantern by SoFi, SBA 7a loan rates are set yearly and are backed by the Small Business Administration. They are offered by banks and lenders, but the Small Business Administration sets the criteria and amount of loan money awarded in total each year. As noted on Lantern by SoFi experts, “First, there’s the business loan prime rate. This is the rate that banks offer their best clients, and it’s tied to the federal funds rate, which fluctuates based on market conditions.”

So businesses may find that rates are better in certain years as the market fluctuates. There is more flexibility on your rate as you get your loan amount down to a minimum. The microloans offered under the SBA 7a program max out at 50,000 dollars and have a lot more flexibility in what they can be used for than the larger loans.

Business Working Capital Loans Can Be Large, Even for Small Businesses

The Small Business Administration offers 7a loans to selected candidates who meet certain criteria. One of them is that the company employs no more than 500 people. The maximum loan amount in the 7a category is 5 million dollars as of 2021. The largest loans for the 7a program covers specific things like equipment purchasing. Not everyone will qualify for the largest loans in the program. 

Candidates who are able to take out the largest loan amounts will be able to present significant time in business, a larger amount of collateral than normal (possibly in the form of savings in the business account), and a better credit score.

Your Choice of Fixed or Variable Loan Rates Is Important

There are various ways a lender can assess your loan rate for a variable 7a loan. The variable rates for this type of working capital loan contain both a peg rate, or base rate, and the added variables that get adjusted as you work through the loan period. The base rate is commonly calculated using the London Interbank Offered Rate. You could have an initial rate of a different base rate, the LIBOR, or a separately assessed peg rate offered by someone else. The peg rate is an average of the rate the federal government pays on other loans similar to the SBA loan.

You’ll Need a Competitive Application to Score Lower Fixed Rates on Your Loan

Fixed rate loans offer some savings as you pay back the full amount of the loan. Your business has some other criteria to get one of these rates, though. It must operate fully in the United States or its territories, and you must have used other financing means before applying for the SBA loan, among other criteria.

You Save Money on Your Variable Rate Loan the Faster You Pay It Down

Variable loans can cost more overall, but you have a chance to save on them if you pay them back in full within seven years. Consulting with a lender before you sign will help you assess if this will help you in the long run.

Increasing your business working capital with a loan is a smart option for many owners and executives who want to expand their operations budget. With the right lending team, you can make smart choices that will give you the flexibility you need at a competitive loan rate.