Question 1

What is an SBA loan and how does it differ from a term loan?

Accepted Answer

SBA loans are partially guaranteed by the Small Business Administration, which reduces risk for lenders and typically results in lower interest rates (5-10%) and longer repayment terms (up to 25 years). Traditional term loans from banks or online lenders may have higher rates but faster approval and fewer requirements. SBA 7(a) loans are the most common type, available up to $5 million for general business purposes.

Question 2

What is an origination fee on a business loan?

Accepted Answer

An origination fee is a one-time charge by the lender to process your loan, typically 1-3% of the loan amount. It is usually deducted from your loan proceeds, so if you borrow $100,000 with a 2% origination fee, you only receive $98,000 but repay $100,000. This increases your effective APR above the stated interest rate. Always compare effective APR when shopping for loans.

Question 3

How is effective APR different from the interest rate?

Accepted Answer

The interest rate is the annual cost of borrowing the principal. The effective APR (Annual Percentage Rate) includes the interest rate plus all fees — origination fees, closing costs, and other charges — expressed as an annualized rate. The effective APR gives you the true cost of the loan and is the best metric for comparing offers from different lenders.

Question 4

What credit score do I need for a business loan?

Accepted Answer

Requirements vary by lender type. SBA loans typically require a personal credit score of 680 or higher. Traditional bank loans may require 700+. Online lenders may accept scores as low as 500-600, but charge higher interest rates. In addition to your personal credit score, lenders evaluate business revenue, time in business, industry risk, and collateral.

Question 5

Should I pay off my business loan early?

Accepted Answer

Paying off early saves you interest, but check for prepayment penalties first. SBA 7(a) loans with terms of 15+ years may have a prepayment penalty in the first 3 years (5% in year 1, 3% in year 2, 1% in year 3). If the interest saved exceeds the penalty, early payoff makes financial sense. Also consider whether that cash could earn a higher return invested back into your business.

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