Pros And Cons Of Sba Loans

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For many business owners, Small Business Administration (SBA) loans are a fantastic option. These federally guaranteed loans provide business owners who meet the SBA’s eligibility requirements with flexible terms and affordable costs.

However, there are some drawbacks to SBA loans. Here are some of the benefits and drawbacks of SBA loans.

If a borrower can’t get an SBA loan, they might want to look into online lenders.

Overview of SBA Loans

The Small Business Administration backs SBA loans, which are made available through partner lenders like conventional banks, community banks, and credit unions. SBA 7(a), SBA 504, and SBA Microloan programs are available for financing businesses.

Some common uses of SBA loans include:

Improvements to existing business property.

Buying real estate.

Purchasing equipment, supplies and other business items.

Establishing a new business.

Acquiring or expanding an existing business.

Maintaining working capital.

Refinancing some types of business debt.

Although there are specific eligibility requirements for each loan program and lender, the following are some prerequisites in general for SBA loans:

The business is operated with the goal of making money.

The business is located and operated in the U.S. or its territories.

You’ve invested time and money in the business.

You can’t find funding with other lenders.

Advantages of SBA Loans

Credit flexibility. While SBA lenders often require good credit, SBA loans can be easier to qualify for than some traditional bank loans. The Small Business Administration guarantees the loans, which helps to reduce the risk to lenders.

Long repayment terms. SBA loans can offer long repayment periods. For example, the maximum terms for equipment, working capital and inventory loans are 10 years. Real estate loan terms can be up to 25 years.

Wide range of loan amounts. SBA loan amounts can range in size from as small as $500 to as large as $5 million or more, depending on the program and your needs.

Set maximum interest rates. The SBA set limits on the interest rates lenders can charge. For the popular 7(a) loan program, variable loan rates are capped at 2.25% to 4.75% above the base interest rate and fixed rate loans are capped at 5% to 8% above the base interest rate. The prime rate and Libor rate are common base rates, but the SBA can pick an optional rate, too.

Continued support. Some SBA loans offer continued support after your loan funds. This can include local free or low-cost counseling and training, as well as online learning programs.

Drawbacks of SBA Loans

Less competitive rates and terms versus banks. Generally, the most competitive interest rates are available through traditional bank loans, though SBA loans do often offer lower costs than some online lenders.

Long approval times. SBA loans can take a long time to fund, up to two to three months. If you need a fast funding option, an online lender is worth considering.

Possible down payment requirement. Depending on the SBA loan program you select, a down payment may be required. For example, for the SBA-backed 504 loan requires a 10% borrower contribution.

Must contact other lenders first. An SBA loan can’t be your first stop in seeking financing for your business. One of the eligibility requirements for an SBA loan is that you’ve exhausted options for funding from other lenders.

How Much Do You Need?

Alternatives to SBA loans

Although obtaining a bank loan may be more challenging, it typically provides the most competitive rates and terms. However, banks frequently demand that the loan be used for an existing business rather than a startup. It makes sense that you would speak to some traditional lenders first since the SBA requests that you seek funding from other lenders before applying for an SBA loan. You might be able to investigate both bank loans and SBA loans with the same lender since traditional banks also provide these types of loans.

Online lenders

If you have exhausted all of your options with banks and SBA lenders, you should think about turning to online lenders (though it’s important to note that many online lenders also provide SBA-backed loans).

Remember that these loans frequently have higher interest rates and possibly shorter repayment terms than those offered by a traditional bank. However, you might find it simpler to be approved for an online loan because some lenders only require a minimum personal credit score of 600. Additionally, some lenders may provide you with a prompt decision, with approval and funding in one day or less.

Other alternatives to SBA loans that may be appropriate for you include equipment financing, invoice factoring, or business credit cards.

About the author: Lisa Anthony has more than 20 years of experience in banking and finance and works as a small-business writer at NerdWallet. Read more.

FAQ

What are the disadvantages of an SBA loan?

• Strict underwriting requirements. Some of the strictest underwriting requirements that small business owners can encounter are associated with SBA loans.
• Extensive paperwork. …
• Long application timelines. …
• Personal guarantee or down payment may be required. …
• Flaws with COVID-19 funding.

Is it smart to get an SBA loan?

Small business owners typically find SBA loans appealing due to their guaranties and interest rate caps. However, drawbacks include long loan closing processes and collateral requirements.

Do SBA loans have to be paid back?

Key Takeaways. Small businesses can grow their operations with SBA loans for long- or short-term capital, asset purchases, or startup costs. Small businesses are required to repay loans from SBA partner lenders that they receive.

Can you get in trouble for SBA loan?

False statements can lead to severe criminal penalties when used to obtain an SBA loan. If found guilty of a federal crime involving loan fraud, they could spend time in prison and pay hefty fines.