The Pros and Cons of SBA Loans
The SBA (Small Business Administration) partners with traditional banks to provide financing to small business owners nationwide. Access to these loans helps small business owners like you achieve the financial stability needed for long-term success. Still, like all financing options, SBA loans aren’t without risk, and they aren’t the right fit for everyone.
Before applying for an SBA loan, it’s important to consider the various pros and cons associated with them, which we’ll detail in this post.
What Are the Pros of SBA Loans?
1. Access to Additional Capital
The most obvious reason small businesses apply for loans is because they need additional financing to maintain their operations. Luckily, this is what the SBA offers through their funding programs.
If your small business has had trouble accessing the capital you need, an SBA loan may be a viable option. Notably, the SBA works with business owners who can’t get approved for financing elsewhere. Once you receive your SBA loan, you’ll have cash that you can use for your business costs!
2. Reasonable Terms and Conditions
Although every small business owner won’t qualify for an SBA loan, those who do are often surprised by how reasonable the terms are. SBA loans usually have lower down payments, limited (though still relatively high) interest rates, negotiable term lengths, and available restructuring options.
3. Consistent Cash Flow
Most businesses have “uneven” cash flows throughout the year. If your small business is trying to improve your cash flow, allocate capital to invest in new equipment, or ensure that you can make payroll, an SBA loan could be worth seriously considering. After all, without cash flow, it can be challenging to run your operations at the level that your customers will expect!
What Are the Cons of SBA Loans?
1. Difficult to Apply for
The SBA loan application process requires an extensive amount of paperwork (ranging from personal finance reports to cash flow projections). In addition, it takes a relatively long time for the SBA to process an application, and even once the paperwork has been reviewed, you could be rejected.
Still, if you’re interested in applying, check out the SBA’s Loan Submission Checklist to determine if pursuing an SBA loan will be worth your time.
2. Relatively High Interest Rates
Although the SBA has a limit on how high their loan interest rates can be, they can be expensive when compared to other financing options. As of December 2017, this limit (for 7-year+ loans that are greater than $50,000) is 25 percent per year. However, when compared to the interest rates you could secure through a traditional lender, the SBA’s interest rates are relatively high.
3. Personal Risk
In order to secure an SBA loan, the business owners (anyone with 20 percent ownership or greater) will inherit some personal risk. Therefore, if your business is unable to make loan payments, you may end up losing the personal assets you offered as collateral. Because of this, you should only apply for an SBA loan if you believe that you’ll be able to responsibly pay back your loan. After all, you don’t want to put your personal or business finances in danger.
Conclusion: Do Your Research Prior to Applying for an SBA Loan
It would be ridiculous to claim that SBA loans are always good or always bad for small businesses. Rather, it’s important to realize that every business is different, so it’s important to consider the pros and cons and how they could affect your company prior to applying.
If your business needs a straightforward cash flow solution but can’t obtain financing through traditional lenders, an SBA loan may be a feasible option. In comparison, if you’re unwilling to take on the risks associated with defaulting or aren’t interested in completing an extensive amount of paperwork, then you may want to consider looking elsewhere, or wait until you’re prepared to take on this responsibility.
Have you applied for an SBA loan in the past? Tell us about your experience in the comment section below.
Editor’s Note: This post was updated for accuracy and comprehensiveness in September 2020.
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.