Is an SBA loan the right type of financing for your small business?
Here are some pros and cons to consider:
Pros
SBA loans usually have low interest rates.
Although the interest rates on SBA loans will vary based on your business’s qualifications, the SBA sets guidelines on the maximum rates a lender can charge.
Therefore, aside from bank loans themselves, it’s hard to find more affordable financing than SBA loans.
SBA loans offer long repayment terms.
With SBA loans, repayment terms typically range from 10 to 25 years—so you don’t have to worry about payments cutting into your business’s cash flow.
In addition, whereas many online loans are repaid on a daily or weekly schedule, SBA loans are repaid on a monthly schedule.
SBA loans can be used for a variety of purposes.
SBA 504/CDC loans aside, one of the biggest benefits of SBA 7(a) loans and SBA microloans is they can be used for virtually any business purpose.
This gives you flexibility with your funds, although you should always have a plan for your financing before applying for a loan.
SBA loans require low down payments.
Not all SBA loans have down payments, but those that often require them—SBA 7(a) and SBA CDC/504 loans—usually ask for 10% of the total amount you’re borrowing.
This is a fairly low down payment, considering that traditional bank loans may ask anywhere from 20% to 30%.
Cons
SBA loans can be difficult to qualify for.
Although SBA loans can be easier to access than bank loans, you’ll still need to meet fairly high-level criteria to qualify. For most SBA loans, you’ll need at least a few years in business, strong annual revenue, and excellent personal credit.
If you’re a newer business, SBA microloans may offer more flexible requirements.
The SBA loan applicaiton process is lengthy.
SBA loans require a document-heavy application that includes several SBA-specific forms, among other paperwork. Because many SBA lenders are banks, they don’t always offer online applications and you may have to visit a branch location to apply in-person.
In addition, the underwriting and approval process is notoriously slow. It can take anywhere from 60 to 90 days.
If you’re interested in an SBA loan—but want to expedite the process—you might want to learn more about the SBA Express loan.
SBA loans may require collateral.
The SBA expects that all loans are secured in some way—which means your lender may require that you offer up collateral on your loan. These requirements will vary based on the type of loan and the lender.
That said, all SBA loans will require a personal guarantee from anyone who owns 20% or more of the business.