A relatively steady stock market and a stable economy have both continued to support growth in small business lending throughout the United States. This is good news for anyone in the market for an SBA loan.
In the 2017 fiscal year, the SBA approved more than 68,000 loans in its 7(a) and 504 loan programs totaling more than $30 billion in support for small business.
The data shows significant growth in SBA’s smaller loans, including a record number of dollars lent in the microloan program, as well as a relaxation of equity requirements. All of this means that SBA financing has become easier for small business owners to acquire in recent years.
But is an SBA loan right for you? Although SBA financing is in the midst of a boom, these loan programs aren’t always ideal or right for everyone.
If you’re in the market for an SBA loan, here are some pros and cons to consider.
The Pros of SBA Loans
1. SBA Loans Open Doors to Capital
Unlike traditional bank loans, SBA loans programs are secured by the government. With the SBA guaranteeing the loan (up to 85%), lenders can lower their qualification criteria and provide capital to those who may not qualify for financing elsewhere.
2. Get Up to $5 Million in Capital
Whether you need $500 or $5 million, loans guaranteed by the SBA range from small to large making them a flexible option for funding small business growth. Although the average loan amount is around $370,000.
3. Terms and Conditions are Reasonable
Although rates and funding amounts can vary from bank to bank, SBA loans offer lower down payments, longer repayment terms, and refinancing options to reduce debt than traditional bank loans. The SBA also caps interest rates—although rates can still vary and, in some instances, can be high.
4. Multiple uses for your funds
Whatever your business growth or expansion goals, chances are there’s an SBA loan that will support them. You can use the loans for a variety of purposes, including “start-up” (although we’ll clarify this later), expansion, equipment purchase, working capital, inventory, or real-estate purchases.
Some lenders do set restrictions on how you may use the loans, so if you go this route, be sure to check with an SBA-approved lender when applying for a loan.
The Cons of SBA Loans
1. Application Timeframes Can Be Long
Chief among the cons of obtaining an SBA loan is the amount of paperwork involved: financial records, insurance forms, bank statements, tax documentation, business plans, credit information, resumes, the loan application itself, and more.
Once that’s done, an SBA-approved lender will assess your application to determine whether you qualify for the loan. If approved, you’ll have to fill out another round of paperwork. It could take two or three months—or even longer—before you find out if you’re approved, and if so, get your business funds.
2. Good Credit is a Must
SBA-approved lenders can be selective about approving loans and typically won’t fund businesses with low personal and/or business credit scores, or those with less than ideal finances. In some instances, they may also require borrowers to put up collateral in order to secure financing.
3. New Businesses May Not Qualify
Your business must be at least two years old to qualify for an SBA loan. That’s a problem if you are one of the over 400,000 new businesses that appear every year in the United States and need operational capital just to get started!
4. Restrictions on Expenses
Depending on the SBA loan you choose, you may face some restrictions about the ways in which you can use the funds. Restrictions will vary depending on the loan. If your desired use doesn’t fall within SBA restrictions, you may need to explore other options.
5. Government Shutdowns Halt Everything
Government shutdowns have become increasingly commonplace with three shutdowns in 2018 alone. Each time this happens SBA employees are furloughed, and the agency stops processing loan applications, adding additional cycles to an already lengthy application process.
If an SBA Loan Isn’t Right For You
Every lending option has its pros and cons, and while SBA loans have become more accessible, an enduring challenge is the time it takes to prepare your loan application and get approved.
In cases where you need faster access to funds, it can make sense to turn to alternative lenders that offer speedier loan approvals.
Thanks to advances in fintech, lending decisions are getting faster than ever. Fundbox, for example, has a simple online registration process and you can expect decisions about financing in as little as minutes, not weeks.
Instead of relying on credit scores alone, Fundbox connects to your accounting software or business bank account for a more holistic view of your business performance. If you’re approved, you can get funds deposited into your account as soon as the next business day. No more piles of paperwork, no application approval delays, no more being at the mercy of a shuttered government.
If you’re seeking funds for a time-sensitive situation or business opportunity, this is an option you should consider.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.