What Are The Pros And Cons Of An SBA Loan?

If you have a small business, then the chances are that you probably have heard of SBA loans. When it comes to small business loans, these are one of the leading types of loans that entrepreneurs apply for.

They are such a popular type of loan because they offer a lot of flexibility, meaning that you can pretty much tailor the loan to fit your business needs. 

So, if you are considering applying for a small business loan, then you have probably thought about applying for one of the different options that SBA offers.

These loans are supported by the Small Business Administration, and are offered by most lenders, so it makes sense that you might opt for one of these. But are they really as good as they seem? 

In this guide we’ll be taking a look at what SBA loans are, and the pros and cons of them, to help you decide if they are the right fit for you and your business. 

What Are The Pros And Cons Of An SBA Loan

What is an SBA Loan?

As we mentioned earlier, an SBA loan is a type of loan that is designed to support small businesses. The ‘SBA’ in its name stands for Small Business Administration which is a U.S. Federal government agency, set up in 1953 to support entrepreneurs.

Your only knowledge of the SBA might be that they offer these loans, but there is so much more that the agency offers to support and coach entrepreneurs. 

SBA loans are one of the best-known loans across the country because they are offered by this company. But they are also very popular simply because they are one of the best loans available.

There are tight regulations to applying for an SBA loan, but they offer excellent loan options, as well as great interest rates and terms which can be altered to suit you. They are also readily available with most lenders which makes them easier to apply for.

But, what lots of people don’t actually know is that SBA isn’t a single loan, in fact, they offer lots of different loans which you can choose from to suit your needs. So let’s take a look at some of the different loans they offer. 

Types of SBA Loans

So, as we have established, SBA actually offers lots of different loans to suit different business needs. This is something that a lot of people don’t actually realize.

But if you are looking to apply for a loan for your business, it is important that you look at the different options so that you can find the right one for you. 

The main SBA loan that you will probably encounter as a small business owner is the SBA 7(a) loan. This is by far the most popular loan that SBA offers, mainly because this loan can be used to cover a wide variety of different things.

This loan covers businesses looking to construct offices, or renovate their existing ones. It also covers businesses that are newly set-up and need money to purchase essential equipment and rent office space.

This loan can even be used to cover the payroll if your business is struggling with liquid assets. So, it is clear why this is such a popular choice. 

As a small business owner, the chances are that you will be applying for the SBA 7(a) loan. But, just for reference, there are actually 9 different loans offered by the SBA.

However, for this guide, we’re going to focus on the SBA 7(a) loan. With that in mind, let’s take a look at some benefits of this type of loan. 

Pros of SBA Loans

As SBA loans are one of the most popular across the USA, it is evident that this company is doing something right. There are lots of great things about these loans which make them so popular, so let’s take a look at some of the key benefits that they offer. 

Borrow Variable Amounts - One of the key benefits of SBA loans is that you can apply for different amounts of money. 

Some loans cap the amount that you can borrow with that loan, but the SBA 7(a) loan, allows you to request however much money you need. There is no guarantee that you will get this entire amount, but the SBA has been known to offer loans exceeding $350,000 to businesses. 

Low Interest Rates - Unlike some loan companies who charge high interest rates on the money that you borrow, the interest rates with SBA are low. 

After all, SBA was set up to help entrepreneurs, so it does make sense that they don’t charge high interest rates on money they lend. This is one of the main reasons that they are so popular. 

Very Flexible Requirements - One of the best things about the SBA 7(a) loan is that the requirements to receive this loan aren’t that specific. The SBA 7(a) loan covers all sorts of different things, like we mentioned earlier, and it certainly isn’t a niche business loan. 

If you need a loan to help kick-start your business, to overhaul its marketing, or even renovate your office space, then the SBA 7(a) could be the right one for you. 

Excellent Repayment Terms - Another excellent thing about the SBA 7(a) loan is that the repayment terms are very flexible. The SBA are a lot more flexible than some other loan companies, and this is mainly because they exist to support businesses.

Due to this, they realize that some of the repayment terms that other lenders offer are difficult to meet, which is why they offer flexible repayment with their SBA 7(a) loan. 

You Might Not Need to Give Collateral - Finally, SBA 7(a) loans are great because, depending on the amount that you want to borrow, you might not need to give collateral. For all SBA 7(a) loans beneath $25,000, lenders will not require collateral. So, they are a great choice if you have limited assets. 

Cons of SBA Loans

But, of course, there are some things about SBA loans which aren’t that great. No loan is without its negatives, and even the good ones will have some things about them which make them unfavorable.

So, to give a fair analysis, let’s take a look at some things about SBA loans which aren’t that great. 

You Need Good Credit - One of the main things that some people don’t like about the SBA 7(a) loan is that approval depends heavily on your credit score.

A lot of people struggle with the fact that their own credit score can impact their business, but it is understandable that lenders want to check if you can be trusted with their cash. However, if you do have a bad credit score, you might struggle to get an SBA loan until your score improves. 

Long Approval Process - Unlike some other lenders, the SBA approval process is fairly long which means that you might end up waiting quite a while before you get the money.

This is partly because of the amount of applications, and also because of how tight the regulations are for this type of loan. But either way, if you need money for your business quickly, then an SBA loan might not be the best choice. 

Generally Offer Smaller Loans - Something else that people struggle with when it comes to SBA loans, is the fact that they often give you less money than you request.

Even though the SBA offers loans exceeding $350,000, the majority of loans that they actually approve are the requests for smaller amounts. This might mean that you get less money than you hoped for from your loan, which is why some people opt for other types of loans. 

Large Loans Need Large Collateral - Finally, some people struggle with SBA loans because any loan over $25,000 requires collateral.

Depending on the amount that you want to borrow, the amount of collateral that you need to put forward will be higher or lower. However, it can go all the way up to 80% of the value of your home, if you put that asset forward as collateral. Due to this, some people are wary of SBA loans. 

Summary

In short, there are lots of pros and cons to SBA loans. But, generally speaking, it is accepted that they are a great loan, and a good one to choose if you need financial assistance for your business.