Prime + 1 Is Not As Low As SBA Goes

What "SBA pricing" actually is

Start with what SBA pricing is, because it is not what most borrowers think. The SBA does not set your interest rate. It sets a ceiling.

On a variable-rate 7(a) loan, your rate is Prime plus a spread, and the SBA caps how large that spread can be. Within that cap, the number is negotiable. The floor is up to the lender. The ceiling is up to the regulation.

So when a bank tells you "this is as low as SBA goes," what they usually mean is "this is as low as we feel like going." Those are very different statements. One is a rule. The other is a preference. And you almost never get to see the difference, because you are only ever hearing one lender's preference at a time.

Why one bank has no reason to sharpen the pencil

None of this requires a villain. A single relationship lender behaves exactly the way its incentives tell it to.

• It has no competitive pressure on the deal, because it is the only one at the table.

• It has no visibility into what another shop would quote, so it prices to its own comfort.

• It quotes a spread that clears its own credit committee without a fight.

Put yourself in the loan officer's seat. Why would you lead with your absolute best number when the borrower is not talking to anyone else? You would not. You would quote something reasonable, leave yourself room, and move on. That is not a scandal. It is what happens when there is only one bidder.

The issue is not the bank. It is the market of one.

What competition actually does to the number

Now change one variable. Instead of one lender, the same package goes to 20 or 25 SBA lenders at once, and they all know it.

Rates compress, and they compress fast.

Let's put real numbers on it. Take a $3.5 million acquisition loan. The difference between Prime plus 1 and Prime flat is a single percentage point. On that balance, that is roughly $35,000 in the first year alone. Over a standard 10-year SBA term, as the balance amortizes down, the total difference lands somewhere close to $190,000.

That is not a rounding error. That is a down payment on the next deal, or two years of a key hire, sitting on the table because the borrower took the first number he was handed.

And a point of spread is often the conservative version of the gap. When lenders genuinely compete, the movement shows up in a lot more than the rate.

The rate is not even the expensive part

If you only shop the rate, you are shopping the smallest lever. The terms competition also moves tend to cost you more than a point of spread ever will:

• Equity injection. One lender wants 12.5 percent down, another is comfortable at 10. On a $3.5M deal, that is $87,500 out of your pocket that you either keep or you do not.

• Guarantee and collateral. Whether a lender demands a lien on your home, cross-collateralizes other assets, or asks for outside guarantors changes your personal risk far more than a fraction of a point.

• Fees. Packaging fees, closing costs, and prepayment terms vary widely and rarely show up in the quoted rate.

• Structure. How a lender treats a seller note, a standby, or a working capital tranche can be the difference between a deal that closes and one that stalls.

The lowest rate attached to the worst terms is not the best deal. You compare the all-in cost, or you do not really know what you are choosing between.

How to actually run this

You do not need to spend three weeks making 25 phone calls. The mechanics are simple, even if doing them well is not:

1. Package the deal once, cleanly, the way an underwriter wants to see it. 2. Distribute it to a wide set of lenders who actually fund deals like yours, at the same time. 3. Let them know it is a competitive process. That single fact changes the first number you get. 4. Compare offers on all-in cost, not headline rate: spread, injection, guarantee, fees, structure.

This is the entire reason CapFlow runs every deal as a competitive process. We take one clean package to 20 or 25 SBA lenders, and we do it with tooling that makes running that many conversations at once manageable. We are not guessing at where the market is. We are watching two dozen lenders tell us, on your specific deal, in real time.

The Bottom Line

When a bank tells you a number is as low as SBA goes, hear it for what it is: one lender's opening position, not the market's answer. The SBA does not decide your rate. Whether the lender believes it has to compete does.

One quote is a data point. It is not the market. The only way to know what your deal is actually worth is to make lenders bid for it.

If a lender ever told you a rate was the best you could possibly get, did you test it, or take it? I would genuinely like to know.

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