The Small Business Administration Loan has long been one of the cheapest and most accessible borrowing alternatives for small business owners in America. But if you’ve been considering applying for an SBA business loan recently, you’ve likely sensed that as some kind of surprise. After all, you’ve probably wondered why you’ve heard that SBA loan rates are so high, and so different from what they used to be. So, knowing what happened and how to time your application will help you secure better financing for your business. Staying informed in today’s changing economic climate can really make a difference in the cost of your loan.
The Reason Behind Today’s Higher SBA Loan Rates
The increase in SBA loan rates stems from a domino effect being felt across the U.S. economy. SBA loans, including the widely-used 7(a) loan program, utilize a variable rate structure based on the prime rate, which is set by the federal funds rate. When the Federal Reserve raised interest rates aggressively to curb the highest inflation the country has experienced in 40 years, everything that utilizes a borrowed form of capital, including mortgages, credit cards, and even SBA business loans, became more expensive. The rates remain high despite the recent slowdown in inflation, as the Fed is now nervous about lowering rates too quickly. While the federal funds rate is high, SBA loan rates stay high.
First Trigger Point: Inflation
Inflation is like a ripple that eventually includes everything in its circle: consumer spending, business operations, and even SBA financing. When inflation was soaring between 2021 and 2023, the Federal Reserve’s primary method to bring it down was increasing interest rates.
Inflation gets higher → Federal funds rate gets higher → Prime rate goes up → Interest rates on SBA loans go up
Even though inflation is getting lower, its consequences are still visible. Inflation is a risk that lenders and regulators are still talking about, thus they give loans cautious pricing. This is why there is an upward push on the SBA loan rate, especially those with a variable-rate SBA 7(a) loan.
The Federal Funds Rate: The Biggest Effect
The federal funds rate is considered to be the short-term target interest rate set by the Federal Reserve, and SBA loan rates are not based on this interest rate, although one of its largest percentages, prime interest, changes with each Fed move when it changes this interest rate.
Today’s world has:
- A higher baseline interest-rate level than before
- The outlook is for fewer and slower interest-rate cuts
- Continued uncertainty about economic growth
Such conditions ensure high prime interest rates, and this is why interest on SBA loans rates feel so higher than before, really, business owners were experiencing an exception to the normal interest rate conditions and had enjoyed relatively low interest rates from 2010 to 2020. The new normal has set in.
The Timing of an SBA Loan Application is Important
At this time in the economic cycle, timing can significantly affect the SBA loan rates you receive. Consider the following points:
1. Wait for a Rate Cut from the Federal Reserve if You Can.
If your business can wait 3–6 months and economists are projecting the Federal Reserve will cut rates, it may pay off with lower rates. Whenever the Fed cuts the federal funds rate, the prime rate generally falls quickly after, making it less expensive for lenders to price SBA loan rates.
2. Apply Sooner if Your Business Needs Capital Now
If money is tight with cash flow, waiting too much longer to apply may affect your business even worse than potentially higher interest rates. Rates are high, but rate decreases will be slow, not an overnight crash. With increasing economic uncertainty, it is entirely possible that lenders will tighten their approval process.
3. Make Sure You are Borrowing from the Best Lender Possible
Even based in a higher-rate environment, the best SBA lenders still have a competitive spread, speed in the process, and overall service. The lender margin (the % over prime) can be quite varied when comparing lenders. A good lender could save you thousands of dollars over the life of the loan.
Conclusion
The economic climate from 2024 to 2025 has changed the way SBA loan rates are calculated. Factors such as high inflation and a tight federal funds rate have resulted in a situation where borrowing through the SBA is pricier than it has been in the last few years. However, small businesses keep on using the SBA programs extensively as they are the ones offering more extended terms, less down payment, and a security guaranteed by the government. Knowing what is causing the SBA loan rates, deciding when is the right time, and cooperating with the Best SBA lenders, you will be able to obtain powerful financing that will be beneficial for your business growth in the long run.
