Pros and Cons of an SBA Loan

Learn the benefits of an SBA loan for small businesses.

 

Small Business Administration (SBA) loans provide financing for businesses that are seeking more favorable loan terms or in some cases for businesses that may not qualify for a traditional small business loan. As compared to conventional financing, SBA loans offer greater flexibility in terms such as:

  • Lower down payment investment,
  • Can include working capital in the project
  • Longer repayment terms
  • Other factors designed to enhance the opportunity for success of the small business.

The SBA guarantees repayment of a percentage of the loan, which allows banks to make loans to businesses that wouldn’t typically qualify for commercial financing using normal underwriting criteria. (Think of this as an insurance policy)

There are a number of pros and cons to consider before pursuing an SBA loan. Below are some of these to help you determine whether an SBA loan is the right financing solution for your business.

 

Pros to an SBA loan

They usually have relaxed requirements as compared to conventional bank loans.

The SBA guarantee enables banks to extend more favorable loan terms and to lend to businesses that sometimes wouldn’t be able to borrow money conventionally. Businesses can use these funds for many different purposes, including:

  • Purchasing commercial real estate
  • Purchasing fixed assets such as equipment and machinery
  • Refinancing existing debt
  • Buying another business (financing goodwill)
  • Working capital

 

SBA loans usually have lower down payment requirements than traditional bank loans.

Coming up with enough cash to make a 20-30% or higher equity contribution on a traditional loan is a big challenge for many small businesses. Many SBA loans (including the popular SBA 7(a) loan) require an equity contribution as low as 10%. This enables businesses to keep more cash in their business.

 

SBA loans have longer repayment terms than conventional bank loans.

The benefits here are similar to the benefits derived from lower down payment requirements. By stretching out payment terms over a longer period of time, businesses are able to conserve cash. If the loan has a term of 10 years or less, there is no prepayment penalty, so SBA loans can be repaid sooner if without penalty. If you loan term is over 10 years there is only a 3 year pre-payment penalty.

 

Cons of an SBA loan

Applying for an SBA loan requires some additional paperwork.

The specific amount of paperwork that must be completed varies for different SBA loan programs. In all cases, however, business owners need to complete a Personal Financial Statement, SBA Borrower information form and IRS form 4506C.

In addition, borrowers will need to include historical tax returns, Profit and Loss statements, balance sheets, and in some cases projected revenue and expenses for the business.

 

Collateral may be required to secure an SBA loan, including a personal guarantee.

Collateral requirements for SBA loans will depend on the assets owned by the business as well as those being acquired with the loan. A personal guarantee will also be required.

 

The SBA loan approval process can be slow and cumbersome if you use a non-SBA Preferred Lender.

The SBA has granted special authority to certain institutions that are high-volume SBA lenders to approve SBA loans themselves, thus bypassing the SBA’s loan review and approval process. These banks are known as SBA Preferred Lenders. Going through a non-SBA Preferred Lender may result in delays with your loan application.