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Approximately 43 percent of small businesses have borrowed money to keep their doors open. For many of these businesses, SBA loans (short for Small Business Administration loans) are the best borrowing option.
Are you thinking about applying for an SBA loan? Before you move forward with the application process, read on to learn about some of the pros and cons of SBA loans.
What Are SBA Loans?
An SBA loan is a type of loan that the federal government (the Small Business Administration, specifically) secures.
The SBA doesn’t lend money to businesses, specifically. The administration instead will partner with specific lenders and set specific guidelines for them.
If the lender complies with these guidelines, the administration will secure the loan and reduce the risk for the lender. This, in turn, makes the loan application and approval process easier for small businesses.
Types of SBA Loans
There are a few different types of SBA loans for which business owners can apply. Here are the options business owners might want to consider:
- SBA 7(a) Loan: This loan is the most popular and can be awarded for as much as $5 million
- SBA 504 Loan: This type of loan is mainly used to fund specific projects (e.g., buying an existing building, buying land, etc.)
- SBA Express Loan: This type of loan is extra fast, and you can finance up to $350,000 and have your application reviewed in 36 hours or less
Because the government backs SBA loans, the application process is pretty rigorous. If you want to apply for this type of loan, you’ll need several documents. The list includes your business license, at least 2 years of tax returns for your business, at least 2 years of personal tax returns, your business’s year to date (YTD) Profit and Loss statement, your business’s YTD balance sheet, and a debt schedule.
Pros of SBA Loans
There are lots of benefits to applying for SBA loans. The following are some of the most noteworthy pros to keep in mind:
Broad Eligibility Requirements
Lots of different types of businesses can apply for SBA loans. As long you run a for-profit business that is located in the United States (or one of its territories), you are likely a candidate for this type of loan. You must also have invested your own time and money in the development of the business and have exhausted other financing options.
Little or No Collateral Needed
In most cases, lenders are not required to take collateral to secure an SBA loan. As long as you’re borrowing less than a specific amount (in the case of 7(a) loans, for example, the cap is $350,000), you typically don’t need to offer any assets up as collateral.
Lower-Than-Average Interest Rates
Compared to other types of business loans, SBA loans have lower-than-average interest rates. The SBA also has a cap on how much interest lenders can charge, as well as allowable spread, which is the specific percentage that a lender can add to the loan’s base interest rate.
Reasonable Loan Terms
The terms of SBA loans are often much more reasonable than other types of business loans, too. In addition to interest rates and allowable spread, SBA loans also tend to have lower down payments. Their term lengths are negotiable as well, and there are plenty of restructuring options available to borrowers who need help making their payments.
Consistent Cash Flow
As a small business owner, it’s not uncommon to have never cash flow throughout the year. An SBA loan can provide you with access to a more consistent, low-interest source of cash flow. That way, during those uneven times, you can keep the lights on and make sure all of your bills and employees get paid on time.
Cons of SBA Loans
While there are lots of reasons to consider applying for an SBA loan, there are also some reasons to be wary of these types of business loans. Here are some cons to think about as well:
Long Application and Approval Process
One of the most common complaints about SBA loans is the fact that the application process takes quite a while. You’re dealing with the federal government, after all.
Unless you’re applying for an express loan, you can expect to spend some time waiting to hear whether or not your application was approved. Even in the case of express loans, it takes about a month or longer to get your money, although your application will get approved within 36 hours.
Lower Borrowing Amounts
As we mentioned above, if you want to borrow more than $350,000, you will likely need to offer some kind of collateral to help secure your loan.
For folks who don’t have any collateral to offer but need to borrow a larger amount of money, these kinds of rules can be prohibitive. They may have to make do with less money, which can hold them back from growing their business as quickly as they might otherwise be able to.
Personal Risk for Business Owners
Small business loans also present personal risks for business owners. One of the main risks is, of course, the risk of losing collateral.
A borrower’s personal finances might be affected based on their loan status, too. If they default on the loan, for example, their credit score could take a hit.
Is an SBA Loan Right for You?
There’s a lot to think about when you’re trying to decide whether or not you should apply for SBA loans. Don’t forget these pros and cons as you’re weighing your options. That way, you can make the best decision for yourself and your business.
Do you need more advice on the right way to run your business and manage your funds? If so, we have plenty of other helpful articles available on our site. Check out the Money and Finance section of our site today.
