What are the benefits and disadvantages of SBA loan?

An SBA loan is one of the most popular types of financing for business owners. The reasons are because they offer large loan amounts, low interest rates and some of the best repayment terms available. There are many benefits of getting an SBA loan. It’s important to also consider the drawbacks before deciding which type of financing is best for you. SBA loans are popular and in high demand. If you feel like it is not the best fit for you, there are a lot of other great options available.  

Advantages:

•   Long repayment terms 
•   Low interest rates   
•   Broader eligibility requirements 
•   A variety of options 

Disadvantages:

•   Lots of documents required and a slow approval process 
•   A down payment and collateral could be required    
•   Strong credit is required  
•   A personal guarantee is commonly required   

Advantages overview 

1. Long repayment terms 

Because a large percentage of the loan is guaranteed to the lender by the SBA there are long terms available. The shortest term on these loans is typically 1 year and the longest term is 25 years. This allows you to have a low monthly payment, so the debt doesn’t have a big impact on your cashflow. 

2. Low interest rates  

Interest rates on SBA loans are calculated by the base rate (prime rate) and a capped increase in the interest rate that the lender can charge on top. The good news is that the SBA sets a limit on the amount lenders can increase the rate to prevent them from being too high. This varies per product but is capped at 4.75% for example on a 7 (a) loan over 7 years and under $25,000.

3. Broader eligibility requirements 

Lenders are much more willing to approve a business because normally 75%-85% of your loan is covered by the SBA in the event of default. They are willing to take on more risk as they know they will get paid back even if a business was to default. This has also made banks more willing to work with small businesses who historically would have had difficulty obtaining tradition financing because of their lower revenues and loan amounts.

4. A variety of options

The SBA has included a variety of options to meet your need. Some are quicker than others such as the SBA Express loan. Some provide larger loan amounts such as the 7(a) and the Capline even allows you to get a line of credit. You can access the full amount again once you’ve paid off the line of credit in certain situations. 

Disadvantages overview 

1. Lots of documentation needed and a slow approval process 

One of the major drawbacks of an SBA loan is how long it takes to get financing. The most time-consuming part of the SBA application process for a business owner is gathering all the documentation required before you even apply. If you’re short on time or don’t have the documentation required in order this many not be the best option for you. This documentation typically includes things such a Year to date Profit and loss Statement, Balance Sheet Statement and financial projections for example. On average SBA loans typically take 2-4 months to close. An exception to this is an SBA Express loan which could reduce the processing times by 2-3 weeks. 

2. A down payment and collateral could be required 

This will vary depending on the product you choose, the lender you work with and the size of the loan you’re requesting. There is typically a down payment of between 10-20% of the loan amount. The lender will also normally require collateral unless the loan amount is under $25,000. If the loan amount is over $350,000 a lot of collateral will be required. If you don’t have enough business collateral, personal collateral can also be used toward the financing. 

3. Strong credit is required 

Although the is technically no minimum credit score for SBA loans, the banks normally require minimum credit scores which range from 640-680. It’s important to build up strong credit prior to applying for an SBA loan as they are a lot more focused on credit than online lenders for example. 

4. A personal guarantee is commonly required 

The lender will usually require any owner with over 20% ownership to personally guarantee the loan. Some lender may also require owners with a lower ownership percentage to guarantee it also. This will allow the lender to go after personal assets in the event of default.

Other financing options aside from SBA loans 

Although there are many benefits of an SBA loan there is a lot of work involved in applying for these loans and it’s a slow process so it may not be the best option for every business owner. The majority of these loans can take a couple of months or longer to be funded so it is not a quick process. It’s important to consider the opportunity cost and decide if your time is better spend working on your business and generating revenue instead of putting time and effort towards the long application process. 

SBA loan versus a short-term loan from an online lender 

Although an SBA loan is a great option for many businesses. Depending on the situation it may be better to obtain a faster short-term working capital loan. Creditfy could provide funding in 24-48 hours of when you apply. Funding even if it’s at a higher cost and shorter term. These loans are typically approved in a few hours and there is limited documentation needed to apply. They will also typically require less owners to sign off on the deal. Most lenders will just ask for 50% ownership to sign off. It’s also important to consider how long you need the financing for. The total repayment on a short-term loan may actually be less if you just need the funding for a short period. With SBA loan, the interest will compound over a long time. 

Having said that an SBA loan is a great option for business owners in a lot of situations, especially if you do not need the financing quickly. Apply when you’re ready!