Advantages and Disadvantages of SBA Loans

Small business owners often face the daunting task of navigating complex financing options. Among the most popular choices for a loan is the Small Business Administration (SBA) loan. However, like all financing options, SBA loans have advantages and disadvantages that need to be considered.

In this post, you’ll learn about the pros and cons of SBA loans, get answers to some of the most frequently asked questions, and be exposed to alternative sources of financing that can help your small business. 

What is an SBA Loan?

An SBA Loan is a form of financing offered by the Small Business Administration (SBA), a U.S. government agency, to help small businesses. These loans are not directly issued by the SBA, instead, the SBA partners with approved lenders, like banks and credit unions, and guarantees a portion of the loan. 

This partial guarantee lessens the risk for loan providers, increasing the likelihood of small businesses getting the capital they need. SBA loans are specifically designed to help small businesses obtain working capital, purchase equipment or real estate, require existing financing, or even fund a business acquisition. They come in various forms, with the most common being 7(a) loans, 504 loans, and Microloans, each catering to different small business needs.

SBA Loans Pros and Cons

As you consider financing options for your small business, it’s vital that you understand the pros and cons of SBA loans. That way, you can make the best decision for your company’s needs. SBA loans offer a variety of benefits that can support your growth, but they also come with certain drawbacks that can impact your borrowing experience. 

Advantages of SBA Loans

Lower Interest Rates: SBA loans often have lower interest rates compared to conventional business loans. This makes them more affordable for small business owners.

Flexible Repayment Terms: SBA loans offer a variety of repayment terms. This allows small business owners to choose a term that best suits their cash flow and other financial needs.

Larger Loan Amounts: The SBA guarantee allows lenders to offer higher loan amounts. For the majority of 7(a) loan programs, the SBA is capable of guaranteeing up to 85% for loans totaling $150,000 or less, while loans exceeding $150,000 receive a guarantee of up to 75 percent. This can be beneficial for small businesses in need of more substantial funding for their growth or expansion. 

Wide Range of Uses: SBA loans can be utilized for many different purposes. These include working capital, equipment financing, property purchases, business acquisitions, and more. 

Support for Underserved Markets: The SBA aims to support businesses owned by women, minorities, and veterans, providing opportunities for these groups to get the financing they need that may be difficult to acquire through other, more traditional options. 

Disadvantages of SBA Loans

Lengthy and Complex Application Process: Applying for an SBA loan often requires a lot of paperwork and can be quite time-consuming. As a result, they may not be a go-to option for small businesses in need of quick funding. 

Strict Qualification Criteria: Sba loans have stringent qualification requirements. These may disqualify some businesses from obtaining funding. Requirements include a strong credit score, a demonstrated need for the loan, and a viable business plan. In fact, only 20% of SBA applications are approved.  

Collateral Requirements: Most SBA loans require collateral from the business owner , which can put personal assets at risk. 

Fees and Closing Costs: SBA loans often come with fees and closing costs that increase the overall cost of borrowing. These include a guarantee fee, origination fee, and other expenses. 

Floating Rates: SBA loans are often tied to the prime rate and reset as the prime rate changes, which can be both upward and downward adjustments. This results in less predictable monthly payments compared to fixed-rate loans, which can be a disadvantage for businesses that rely on stable monthly expenses for budgeting purposes. 

Limited Funding: SBA loans have maximum amounts (in most cases is $5 million). These amounts may not be enough for small businesses with greater financing needs. 

SBA Loans FAQs

Is It Easy to Get an SBA Loan?

Getting an SBA loan is not necessarily an easy process for every small business owner. The application for SBA loans can be lengthy and complex. Applications typically require extensive documentation and thorough financial analysis. 

Additionally, applicants must meet strict eligibility criteria. This includes a strong credit score, a demonstrated need for the loan, a viable business plan and, in many cases, a personal guarantee as well as collateral. The approval process can also take longer compared to alternative financing options, as it involves both the lender and the SBA reviewing and approving the loan application. 

How Long Does it Take to Get an SBA Loan?

The time it takes to obtain an SBA loan can vary significantly. Factors influencing this can include the loan program, the lending institution, and the complexity of the loan application process. However, generally speaking, the process can take anywhere from a few weeks to several months.

SBA 7(a) loans, the most common type of SBA loan, can take anywhere from 2 to 3 months. 

Microloans, which are smaller loans up to $50,000, are usually processed faster. They can take anywhere from a few weeks to a few months. Lastly, SBA 504 loans, which are used for acquiring fixed assets (ex: equipment), typically have a longer processing time given their complexity. They can take 3 to 6 months (or longer) in some cases. 

Are SBA Loans Secured or Unsecured?

SBA loans are typically secured loans, meaning that they require collateral to back the loan. The collateral can come in the form of business assets like real estate or inventory, or personal assets from the business owner themself. However, specific collateral requirements may vary depending on the SBA loan type and the lender’s policies. 

In addition to collateral, SBA loans can also require the business owner(s) to provide a personal guarantee. Personal guarantees hold the individual(s) responsible for repaying the loan if the business itself fails in its obligations to do so. 

Conventional vs SBA Loan: What’s the Difference?

Conventional business loans and SBA loans are both financing options for small businesses. That said, the two have some key differences:

Lender and Guarantee:  Conventional business loans are provided directly by banks, credit unions, or other financial institutions with no government backing. SBA loans, on the other hand, are partially backed by the Small Business Administration (SBA), which is a U.S. government agency. While the SBA does not provide funding directly, it does partner with approved lenders to provide loans to small businesses. This guarantees a portion of the loan and lowers the risk for the partnering lender.

Interest Rates: SBA loans generally offer lower interest rates compared to conventional business loans. The SBA sets maximum interest rates for their loan programs, which are typically below market rates. Conventional business loans have interest rates determined by the lender. They are based on various factors like the borrower’s creditworthiness or prevailing market conditions.

Loan Terms: SBA Loans often provide longer repayment terms. This can result in lower monthly payments for borrowers. Conventional business loans may have shorter repayment terms. However, this can vary depending on the lender and the purpose of the loan.

Application and Approval Process: The application process for SBA loans can be more complex and time-consuming when compared to conventional business loans. The approval process for SBA loans also involved both the SBA and the lender. For this reason, SBA loans can have a longer waiting period before funding is received. 

Can You Use an SBA Loan to Buy a Franchise or Business? 

Yes, SBA loans can be used to buy a franchise. The Small Business Administration (SBA) usually supports franchisees through its 7(a) Loan Program. However, to be eligible for an SBA loan for buying a franchise, the franchise must be SBA-approved (until recently, it had to be listed in something called the SBA Franchise Directory). Additionally, you must meet the standard eligibility criteria for an SBA loan. This includes factors such as a strong credit score, a demonstrated need for funding, and a business plan that’s viable. 

Can You Use SBA Loans for Medical Practices?

Yes, you can use SBA loans for medical practices. Medical professionals, such as doctors, dentists, and optometrists, can benefit from SBA loan programs. They can use the programs to establish, expand, or improve their practices. The SBA 7(a) loan is commonly used for medical practices, as it can help with acquiring or starting a practice, financing working capital needs, purchasing equipment, renovating facilities, and more. 

SBA Loan Alternatives 

Conventional Bank Loans: Banks and credit unions offer various small business loan options that can provide suitable funding. That said, they typically have stricter eligibility criteria and require more documentation and collateral for approval.

Business Line of Credit: A business line of credit provides flexible access to funds. This enables business owners to access financing as they need it, up to a pre-established credit limit. Business lines of credit are often suitable for managing cash flow or financing short-term needs.

Equipment Financing: Equipment financing is a suitable option for purchasing equipment, as the loan is secured by the equipment itself. As a result, equipment financing often provides easier qualification and lower interest rates.

Invoice Financing: Invoice financing (also called factoring and accounts receivable financing), permits companies to exchange their unpaid invoices for instant cash, thereby addressing any cash flow concerns.

Crowdfunding: Crowdfunding platforms empower companies to raise capital by soliciting contributions from pools of people online. They’re particularly useful for startups, innovative products, or creative projects.

Unsecured Loans: Personal or commercial unsecured loans can be acquired for a wide range of uses without having to provide a lender with collateral. With providers like Unsecured Funding Source, you can get the funding your small business needs without having to put any of your personal assets at risk.

Alternative Lending: Alternative lenders like Unsecured Funding Source also offer a variety of other financing solutions to small business owners that might not be eligible for conventional bank financing or SBA loans. These lenders often have more lenient eligibility criteria, streamlined application processes, and faster funding times. They are often able to provide a range of options tailored to meet the unique needs of small business owners.

Why Alternative Lending May Be Best For Your Small Business

Alternative lending may be the best way to fund your business, especially if you’re seeking a financing option that’s easily accessible and flexible. The application process is often streamlined, with minimal paperwork and faster funding times. 

Additionally, compared to SBA loans, alternative lenders offer:

Easier Qualification: Alternative lenders usually have more lenient credit and eligibility requirements compared to SBA Loans. This makes it easier for businesses to get the financing they need.

Faster Application and Funding Process: Alternative lending often features a streamlined application process. It’ll require far less documentation and offer faster approval and funding times.

Flexibility: Alternative lenders offer a wide range of financing options. This ensures that businesses can find a solution that fits their unique situation and requirements.

No Government Involvement: Unlike SBA Loans, alternative lending does not involve government backing or oversight, which can make the process less complex and bureaucratic.

Available for Various Business Stages: Alternative lenders cater to businesses at different stages. Whether it’s for a startup or an established company, alternative lenders provide financing solutions for a broad range of situations.

Customizable Repayment Terms: Alternative lenders often provide more flexible repayment terms and schedules. This allows small business owners to take more control over cash flow and reduce financial stress.

No Collateral Requirements: Many alternative lenders do not require collateral, which makes it easier for businesses without significant assets to obtain financing. It also keeps personal assets protected from risk. 

Adaptability: Alternative lenders generally offer funding options that are more adaptable to changes in the market or economic conditions, as they are not constrained by strict government regulations. This allows them to adjust their lending criteria and financial solutions to better serve the needs of their small business customers.

How Jumpstart Finance Can Help Your Small Business

At Jumpstart Finance, we understand how difficult it can be to find the financing solution right for your small business. That’s why we offer a variety of unsecured loans that come with quick pre-approvals, competitive rates, and a simple application process. 

Are you looking to acquire a business or franchise? If so, our Jumpstart Loan^SM is specifically designed to help get your business off the ground. 

Additionally, our Medical Practice Loans are able to help a variety of medical professionals. Whether you’re a doctor, dentist, veterinarian, or other healthcare provider looking to expand your business, we’ve got you covered.

Regardless of the small business you’re growing, understand that you don’t need to put your assets at risk for funding. If you have further questions or are interested in applying for a loan with no collateral, let’s talk! You can reach out to us at 866-475-4254 or apply now online.