Pros and Cons of SBA 7(a) Loans
Since the SBA encourages the growth of small businesses rather than producing profits, its loan programs are often more affordable and accessible than traditional bank loans. However, there are some important drawbacks to consider prior to applying.
To help you determine if the SBA 7(a) loan is right for your business, we’re going to review the pros and cons of this product. Let’s get started.
Pros of SBA 7(a) Loans
1. Easier to Secure Than Traditional Loans
Key Takeaway: Lower risks means lenders are more likely to approve SBA 7(a) loans.
When you apply for an SBA loan, you’ll apply through a traditional bank, not the government. However, the government guarantees 75 to 85 percent of the loan, thereby reducing risk for the lender. As a result, many banks will approve SBA 7(a) loan applications that they would’ve ordinarily rejected for traditional financing.
2. Lower Interest Rates
Key Takeaway: The SBA sets a reasonable maximum interest rate, ensuring that loans are affordable.
The SBA stipulates maximum interest rates for their loan programs. Currently, the maximum interest rates for SBA 7(a) loans ranges between 7 and 9.5 percent, depending on the amount and terms. For a business loan, these interest rates are quite affordable. However, lower interest rates can sometimes be secured with traditional loans.
3. Lenient Down Payment Requirements
Key Takeaway: SBA 7(a) loans require a down payment of just 10 percent.
Often, lenders want to see you put some of your own money towards your investment. This gives you a financial stake in your project, and ties your interests directly to your business’ success. As such, many lenders require a 20 percent down payment. However, lenders will often accept down payments of just 10 percent with SBA 7(a) loans. This allows you to preserve your personal cash while reducing the burden created by a down payment.
Cons of SBA 7(a) Loan
1. Lenders Have a Lot of Discretion in Setting Loan Terms
Key Takeaway: While the SBA does set some rules, lenders still have a lot of leeway in both approving and structuring loans.
Many of the benefits we outlined above are subject to the discretion of the lender. Although there are maximum interest rates, some lenders might charge less, while others will charge the full rate. In addition, some lenders may ask for a higher down payment or will cover a smaller portion of the costs.
Further, lenders often charge higher fees for SBA7(a) loans than typically charged for private loans.
2. Personal Collateral May Be Required
Key Takeaway: You’ll likely have to use valuable assets as collateral, greatly increasing your risks.
Putting liens on property is standard for the SBA. If you have valuable assets, your lenders may ask that you put those assets forward as collateral. For example, a lender may require that your house or business real estate be tied to the loan. If you default, the SBA could seize your property.
3. The Application Process Can Be Strenuous
Key Takeaway: You’ll have to apply to individual lenders, and your credit score will be evaluated.
When you receive an SBA 7(a) loan, you’re receiving loan directly from a lender. The government guarantees but doesn’t provide the loan. As such, you’re going to have to complete each lender’s application process, which may vary. SBA 7(a) loans take an average of 45 days to approve.
In addition, lenders will look at your credit history very closely when evaluating your application. While lenders have a lot of discretion and can set their own requirements, you’ll often need a score of 620 or higher.
Conclusion: SBA 7(a) Loans Are Great, but Come with Drawbacks
SBA 7(a) loans are among the best financing sources for small businesses. They’re affordable, typically come with generous terms, and can be easier to obtain than traditional loans. However, that doesn’t mean they’re perfect. Other funding sources may be more affordable, with easier application processes and more lenient prerequisites.
Either way, when evaluating funding opportunities, you should carefully consider both the benefits and drawbacks. Hopefully, after reading this post, you’re able to decide if SBA 7(a) Loans are worth pursuing.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.