The Small Business Administration (SBA) loan provides financial loans to small businesses and entrepreneurs at competitive rates. Small business owners and entrepreneurs can use this long-term, fixed-rate financing loan to purchase or repair real estate, equipment, machinery or other assets. Small business owners can also use the loans to rebuild, re-open, repair, enhance, or improve your small business.
There are three main types of SBA loans and they are:
- SBA 504 loan: The SBA 504 loan program provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation.
SBA 504 loans are available through Certified Development Companies (CDCs), which are SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA. The payment period for SBA 504 loan is up to a maximum of 25 years.
- SBA 7(a): The 7(a) Loan Program, SBA’s most common loan program, includes financial help for small businesses with special requirements. This is the best option when real estate is part of a business purchase, but it can also be used for:
- Short- and long-term working capital
- Refinance current business debt
- Purchase furniture, fixtures, and supplies
- Microloans: The microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000. The SBA provides funds to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. These intermediaries administer the Microloan program for eligible borrowers.
What’s SBA loan payoff
SBA loan payoff refers to paying off a SBA loan prior to the maturity date. For example, if you have a remaining SBA loan of $800,000 that matures in 24 years and you pay off the entire loan in your next monthly loan payment, you’re engaging in what we call SBA loan payoff.
What are the benefits of paying off a SBA loan early?
Two key benefits of paying off a SBA loan early are the following:
- Clear SBA loan debt. Once you’ve paid off your SBA loan, you’re free of the financial debt from your SBA loan!
- Free up more cash flow in the future. Paying off your SBA loan means that you no longer need to pay your SBA loan payment on a monthly basis. You’ll free up cash inflow and use the money you’d use to pay for the SBA monthly payment on other business needs.
What are penalties for paying off a SBA 504 loan early?
There is a 10-year prepayment penalty on 20-year term or 25-year term SBA 504 Loans. Similarly, there is a 5-year prepayment penalty for SBA loans with a 10-year term. For a 20-year term or a 25-year term loan, the penalty begins at the note rate and decreases by 1/10 each year until it is zero at the end of the tenth year. The note rate will vary based on the debenture rate for your loan/bond.
For example, if the loan term is 20 years with a debenture rate of 3% and you want to pay off your loan in the 1st year, you’ll pay 100% of 3%, this means the penalty rate is 3% of the total prepayment amount. If you want to pay off your loan in the 9th year, you’ll pay 20% of