The Pros and Cons of SBA Loans
The SBA (Small Business Administration) partners with traditional banks to provide financing to small business owners. Access to these loans can help small businesses achieve the financial stability they need to succeed. Still, like all financing options, SBA loans are not without risk. Before applying for an SBA loan, it is important to consider the various pros and cons associated with them.
What are the pros of SBA Loans?
- Access to capital: The most obvious reason small businesses apply for loans is because they need additional financing. If your small business has had trouble accessing the capital you need, an SBA loan may be a viable option. Once you receive your SBA loan, you’ll have cash that you can use for your business costs!
- Reasonable conditions: Although every small business 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.
- Safer cash flows: 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 help guarantee consistent payments for your employees, an SBA loan may be worth seriously considering.
What are the cons of SBA Loans?
- 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, and even once the paperwork has been reviewed, your application could be rejected. If you’re interested in applying, check out the SBA’s Loan Submission Checklist to determine if applying for an SBA loan will be worth your time.
- 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.
- Personal risk: For a business to secure an SBA loan, the 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 you will be able to responsibly pay back your loan.
It would be ridiculous to claim that SBA loans are always good or always bad for small businesses. Rather, it is important to realize that every business is different, and it is important to consider the pros and cons 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. Still, if you are unwilling to take on the risks associated with defaulting or aren’t interested in completing an extensive amount of necessary paperwork, then you may want to consider looking elsewhere.
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.