SBA Loans Are Great, But Can You Recreate Them On Your Own?

  • By Patrick Sherrill
  • Published 6/19/2017

It’s no secret that in the world of small businesses the SBA loan is king. But what makes it so great? In this article, we explore the components of a SBA loan that make it the most sought after form of financing for small businesses. In addition, we discuss how borrowers can recreate many of those same benefits through alternative loan products.

What is a SBA loan?

Each year, the Small Business Administration (a United States Government Agency) provides low interest loans to small businesses. The agency itself doesn’t actually lend any money; rather, it guarantees a percentage of qualified loans issued by specific banks and other participating lending institutions.  

Why is a SBA loan so great?

A SBA loan is more borrower focussed than any other business loan on the market. It has the following components that make it more flexible and easier to repay than most other lending instruments. 

Annual Percentage Rate (APR):  

It’s a fact of life, everyone needs to get paid. In the world of finance, the Annual Percentage Rate (APR) is where these costs reside. In its simplest form, APR is the annual cost you incur for borrowing money. It is made up of two components: interest rate and fees. One of the greatest appeals of the SBA loan is its significantly lower APR compared to alternative forms of small business financing.

Interest rate:

On the high end, an SBA loan will offer somewhere in the ballpark of 8%, while a traditional bank loan might offer 14% and alternative lenders 30%. The disparity in APR between the SBA loan and alternative small business loans is largely driven by the interest rate. How is this possible you might ask? One word: risk.  

The interest rate that a lender charges a borrower is a function of risk. The riskier the borrower is perceived to be, the higher the interest rate. However, with an SBA loan, much of a borrower’s perceived risk is mitigated by a government guarantee of a percentage of the loan should the borrower default. This allows the lender to offer much lower rates. If the takeaway is that mitigating risk lowers your interest rate, the question should be what are other ways you can mitigate risk? We’ll offer some suggestions later.


The second component of the APR is fees. This too is an area where SBA loans stand apart. Traditional bank lenders can charge additional fees ranging from 2% to 5%, while alternative lenders can charge anywhere from 5% to 30% or higher. The SBA loan, however, charges a “guarantee fee” ranging between 0% and 3.75% of the funds guaranteed.


The next critical area that makes the SBA loan a highly sought after financing option is its term, or the period of time allotted to pay the loan back. An SBA loan can offer terms between 5 and 25 years. This is compared to traditional bank loans of between 3 and 10 years, and alternative financing of between 3 months and 5 years. Why is this important? Let’s use an example to show the impact that a loan term can have on a borrower.

In our simplified example, let’s say we are taking out a zero-interest, $100,000 loan to be paid back over four years. Our annual payment is $25,000. If, however, we take out the same loan but extended the term from four years to ten years, our annual payment is $10,000.

The proposition is simple, by extending the time required to pay down a loan, you reduce the amount of cash you need to suck out of your business each year. For small businesses, where keeping cash in the business for as long as possible often is the difference between success and failure, this is critical. A longer loan term is not without its downsides, the chief of which is that you will pay more interest over the life of the loan. However, many small businesses view this as a worthwhile consequence if it means keeping cash in the business during their earliest, most critical years. 

So with lower fees, lower interest rates, and longer terms, an SBA loan seems to be a no-brainer. However, with over 30M small businesses in the U.S. and only 74,000 SBA loans approved in 2016, access to and qualifying for an SBA loan can be difficult. In fact, the SBA requires small businesses to meet certain criteria, including size requirements, financial standing, credit minimums, type of industry, and no access to alternative, reasonably-termed financing. However, rest easy knowing that millions of small businesses thrive each year without an SBA loan, and we have some ways you can replicate its benefits on your own. Let’s explore. 

Replicating the Benefits of an SBA Loan

Mitigating Risk and Lowering Your Interest Rate:

As we’ve discussed, it is the perceived risk of your business that drives your interest rate. When assessing the risk of your business, lenders look at metrics such as your years of experience in the business and industry, the cash flow your business produces, how much cushion you have to be able to pay back that loan over time, your personal and business credit, etc. As you prepare your loan application, it’s critical to have a complete understanding of these areas of your business in order to help your lender accurately assess your risk. Another lever often used in the small business lending space is a Personal Guarantee. Essentially, a Personal Guarantee is a promise that you and any other persons party to the agreement will pay back the loan personally should your business default. While this does mean that your personal assets are on the line should your business not perform, it is a giant step forward in mitigating the lender’s perceived risk of your business and earning yourself lower interest rates. We should note, the SBA loan does require a Personal Guarantee.

All of the concepts mentioned so far are pretty commonplace when it relates to trying to secure a lower interest rate. Now let’s consider another option that is often overlooked: borrow a portion of your loan from your peers . Many might consider the idea of raising a portion of their loan from their friends and family as intimidating; however, the truth is that it can help you achieve pretty affordable financing for your business at a time when it needs it most. Let’s jump back into another example:

Let’s assume I needed $100,000 to grow my business. In Scenario #1, I borrow $100,000 from the bank at 13%. In Scenario #2, I borrow $30,000 at 5% from my friends and family, and the remaining $70,000 from the bank at 13%.  In Scenario #1, because I am borrowing the complete amount from the bank, my interest on the loan is the full 13%. In Scenario #2, because I am borrowing only a percentage of the amount I need at 13% and the rest at 5%, my total interest rate is a weighted average of the two, or 10.6%.

By raising a portion of the total loan from your peers, you can lower your total interest rate and provide your friends and family with a nice return on their investment. Furthermore, there are services, such as Able Lending’s Backer Recruitment Dashboard, that not only facilitate the entire due diligence and documentation process for borrowing funds from your peers, but also allow you to raise additional funds directly from Able Lending. Having a third party platform manage the entire documentation and payment process provides the legitimacy, security, and confidence to those from whom you wish to borrow.

Longer Loan Term:

Another way that you can replicate the SBA loan is by considering loan financing with longer terms. As you search for financing, you may encounter “instant” short-term options ranging from three to twelve months, but rest assured, there are plenty of longer-term loan products out there, ranging from one to ten years.  As mentioned above, the benefit of this is that you can extend your payments over a longer period, thus lowering the amount of each payment and keeping more cash in your business. Also mentioned above, there is a downside to a longer term, namely that you will be paying interest longer and therefore pay a higher aggregate amount over the life of the loan. While many small businesses consider this an acceptable tradeoff, there are ways to get the best of both worlds. You just need to know where to look.

Prepayment Penalties:

While SBA loans are the industry standard for small business financing, even they charge prepayment penalties. So what is a prepayment penalty and why does it matter? A prepayment penalty is exactly as it sounds. It is a penalty charged to the borrower for paying down the balance of the loan earlier than planned. When deciding whether they should give you a loan, banks and capital providers calculate how much they think they will profit from the loan through interest payments and built-in fees. One problem they face when assessing how profitable the loan will be is how quickly the borrower might pay down the loan. To really bring this picture home, let’s consider the following example. 

Let’s say Bank A makes a five-year, $100,000 loan at 12% monthly compounded interest. The total interest pocketed by the lender over the life of that loan is $33,466.69. If the borrower were to pay off that loan in 3 years through prepayments, the total interest pocketed by the lender would be reduced to $19,571.52, or nearly cut in half.

To protect against this, many banks and capital providers will restrict the borrower’s ability to pay down the loan quicker by charging a prepayment penalty. The SBA Loan, in fact, does this as well. So what does this mean for you as a borrower? Simply put, finding a loan with no prepayment penalty can save you money.

Using the previous example, if your business begins to take off, having the option (not the obligation) to pay down your loan quicker can save you nearly $14,000 or 40% in interest payments. You also realize the same savings if you were to refinance your loan. The beauty of having no prepayment penalty is that you have the option to pay down the loan quicker if your business-needs change. With that said, you will likely find that most lenders charge prepayment penalties.  Able Lending, however, offers no prepayment penalty on all of its products, providing you with the flexibility to pay off your loan as you see fit.

Final Word

At the end of the day, while terms, rates, fees etc. are critical, it is equally important to find a financial partner that you can trust and that has the ability to grow with you. In the world of payday loans, MCAs, aggressive lenders, and large banks where you’re likely to get lost in the shuffle, having a lender that truly knows you and your business needs can pay dividends down the road.

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