Small Business Administration loans are essentially bank loans that are backed by the SBA, allowing businesses to get longer loan terms and lower interest rates than a traditional bank loan. The SBA 7a loan is the most popular of these loans, making it the most applicable loan to small businesses. This calculator will not reflect accurate interest rates or monthly payments for other types SBA loans besides the 7a loan.
How the Interest Rate and Monthly Loan Payment is Determined
The SBA controls maximum interest rates banks can charge on an SBA loan, dependent on the length of the loan term (years) and the amount being borrowed. There are six different maximum interest rates for the SBA 7a loan. The calculator takes the length of term and loan amount you input, assumes equal monthly payments for the life of the loan, and then calculates the correct interest rate and resulting monthly payment accordingly.
Most SBA 7a loan interest rates are variable, fluctuating with market rates.
The Debt Service Ratio
SBA loans are not 100% guaranteed, meaning that the SBA and the lender will take a hit if you default on a loan. That’s why they use the Debt Service Ratio, which is one of the biggest determiners of whether you can qualify for a loan. Anything less than 1.25 means you will have little chance of getting a loan. Anything above means you have a chance, increasing as your ratio increases.
Simple Debt Service Ratio Formula
(Monthly Loan Payments x 12) / Annual Business Owners Income Including Owners Salary
Banks use a more complicated ratio and base their calculations off of your business’ IRS tax filings and payroll tax records. The above formula is designed to give you an estimate.
Use the below SBA calculator to find out the interest rate and monthly payment on different size SBA 7a loans, and whether you meet the minimum financial requirements.
