Pros and cons of SBA loans
Key takeaways
SBA loans are backed by the Small Business Administration, a government agency
SBA loans can have competitive interest rates
Borrowers have to exhaust other funding options before they are approved for SBA loans
The Small Business Administration is a government agency that supports small business owners and entrepreneurs in the U.S. One way they do this is by offering SBA loans.
SBA loans aim to make it easier for small businesses to get the funding they need to launch and operate. In the 2023 fiscal year — which ended September 30, 2023 — the SBA issued more than 57,000 7(a) loans for a total of $27.5 billion, and 5,900 504 loans for $6.4 billion. The greatest percentage of 7(a) loans were issued for less than $50,000.
While there is no perfect funding option, SBA loans offer favorable terms and government backing, making them a valuable choice for many small businesses.
But with their lengthy approval process, SBA loans aren’t for every business. Like all business funding options, there are pros and cons to using SBA loans. Before you apply for funding, it’s wise to consider the advantages and disadvantages of SBA loans.
What is an SBA loan?
SBA loans provide small business owners with a low-interest, government-backed loan to help fund their businesses. These loans are administered by third-party lenders equipped with training and funding through the SBA.
There are a few different types of loans business owners can apply for. All loan types require that the business is for-profit and meets SBA size requirements. The right loan type for each business depends on its needs, size and purpose.
7(a) loans: This loan program is the SBA’s most popular. The maximum loan amount for a 7(a) loan is $5 million. The funds can be used for short and long-term working capital, refinancing current business debt and purchasing furniture, fixtures and supplies. This is the best SBA loan option for purchasing real estate.
CDC/504 loans: 504 loans are administered by Certified Development Companies. CDCs are community-based partner organizations empowered by the SBA. The maximum loan amount for a 504 loan is typically $5 million, but it can be up to $5.5 million. Loan funds can be used for fixed assets that promote job creation and business growth.
Microloans: Microloans provide smaller chunks of funding for businesses at $50,000 or less. They are administered by non-profit community organizations. Funds can be used for a variety of reasons to rebuild, reopen, repair, enhance or improve small businesses.
Community Advantage: The Community Advantage (CA) loan program was designed to assist small businesses in underserved markets. These loans are offered by community-based, mission-focused lenders. The maximum loan amount available through the CA program is $350,000.
SBA Express: The SBA Express program offers an accelerated review process that includes an SBA response to your application in as little as 36 hours. This funding program offers revolving lines of credit with a maximum loan amount of $500,000. These loans can be used for short- and long-term working capital, inventory purchases, construction financing, renovations and purchasing real estate.
Export Express: Exporters can obtain SBA-backed financing for loans and lines of credit of as much as $500,000 with this loan. Applications for this program receive a response within 24 hours. These loans can be used to cover the costs of participating in foreign trade shows, finance export orders and expansions, equipment purchases and inventory or real estate acquisitions.
CAPLines: SBA CAPLines are lines of credit that come in four different forms, which include Seasonal CAPLines, Contract CAPLine, Builders CAPLine and Working CAPLine. Up to $5 million can be made available through CAPLines. The way the money can be used depends on the type of CAPLine.
While each SBA loan type differs in its requirements and purpose, they all exist to empower U.S. small businesses.
Program | Loan Size | Purpose |
|---|---|---|
7(a) | $5 million | Short and long-term working capital, refinancing current business debt and purchasing furniture, fixture and supplies. |
CDC/504 | $5 million | Fixed assets that promote job creation and business growth |
Microloans | $50,000 or less | Funds can be used for a variety of reasons, including to rebuild, reopen, repair, enhance or improve small businesses. |
Community Advantage | $350,000 | Working capital, operating expenses, tenant improvements, equipment, business acquisition and refinancing of business debt. |
SBA Express | $500,000 | Short- and long-term working capital, inventory purchases, construction financing, renovations and purchasing real estate. |
Export Express | $500,000 | Cover the costs of participating in foreign trade shows, finance export orders, expansions, equipment purchases and inventory or real estate acquisitions. |
CAPLines | $5 million | Variety of purposes, including funding costs of financing seasonal increases in costs, such as inventory or labor, or to help finance the labor and material costs for specific projects. |
Compare SBA loan pros and cons
Pros | Cons |
|---|---|
Your loan is government backed | You have to use other funding first |
Favorable interest rates | Stacks of paperwork |
Longer repayment terms | Long waiting period |
Extra support available | You can’t use the money for everything |
Variety of loan types available | Collateral may be required |
SBA loan pros
There are a lot of reasons SBA loans are great. They offer a favorable funding option for many small businesses without the extra costs carried by some other business funding options. These government business loans can be the right next step for many business owners. Here are some advantages of SBA loans.
Variety of loan types available
The SBA offers loan types that cater to different business needs. They also have some temporary loan programs designed to address specific challenges.
For example, they offered several types of business funding for COVID relief. And until Sept. 30, 2024, the SBA is offering a Community Advantage Loan to help small businesses in underserved markets. Small business owners can likely find an SBA loan that will fit their needs.
Government-backed with support
A backed loan means the SBA will shoulder the debt if you default on the loan. This allows the lender to get back a portion of the loan, even if you cannot make the payments. This kind of backing gives lenders more incentive to lend to your business than they might have to lend to you with a conventional business loan that isn’t government-backed.
Multiple SBA loan types include support for the business until the loan is repaid. The SBA provides counseling and education to help you start and run your business. The SBA also has business resource centers focused on specific types of business owners, including women-owned businesses and veteran-owned businesses.
Favorable interest rates
Because SBA loans are backed by the government, they also typically have lower interest rates than other small business loans. You can have a fixed or variable rate; rates are set based on the Prime rate, LIBOR or the SBA optional peg rate.
SBA loan rates vary by loan type and lender. You can find the exact rates expected for SBA loans currently by speaking to a local SBA lender.
Variable rate loans
7(a) loan amount | Maximum rate | |
|---|---|---|
$50,000 or less | 15.00% | |
$50,001 to $250,000 | 14.50% | |
$250,001 to $350,000 | 13.00% | |
Over $350,000 | 11.50% |
Rates current as of November 2023; calculated with current prime rate of 8.50%.
Fixed-rate loans
Loan amount | Interest rate |
|---|---|
$25,000 or less | 16.50% |
$25,001 to $50,000 | 15.50% |
$50,001 to $250,000 | 14.50% |
Over $250,000 | 13.50% |
Rates current as of November 2023; calculated with current prime rate of 8.50%.
Longer repayment terms
With SBA loans, you have longer to pay off the loan than most business loans. Typically, you have up to 10 years to pay off a conventional business loan. With an SBA loan, you may have up to 25 years to pay it off. You can adjust those terms, too, as the purpose is to cater to the needs of the business rather than get paid back as quickly as possible.
SBA loan cons
SBA loans aren’t perfect and won’t be the right funding source for every business owner. Here are some of the key disadvantages of using an SBA loan.
Strict requirements
If you have personal assets or money that you can use, the SBA requires that you use it before applying for one of their loans. Therefore, SBA loans won’t work if you have personal equity or other funding options you haven’t used for the business yet.
Each SBA loan specifies how you may spend the money. For example, the 7(a) loan is the best SBA loan option for purchasing real estate. However, you may plan to fund one need only to realize that you need funding more for something else. Sticking to the strict guidelines for SBA loan funds may prevent you from making necessary pivots on how you use the funding.
Stacks of paperwork
The list of documents required to apply for an SBA loan is extensive. You will fill out forms with your and the business’s financial information. You will also need to provide a business plan, resume, business financial statements, previous loan applications and your business license, just to name a few.
Your lender will provide you with the entire list of documents needed, but know that you will be doing a lot of paperwork to apply for an SBA loan. Plus, you may be required to provide additional documents once you apply.
Collateral may be required
Even though SBA loans are guaranteed, some loans still require that you provide collateral. For example, with a 7(a) loan over $500,000, the SBA requires that lenders take collateral on the loan. For other types of SBA loans, collateral is required for loan amounts above $50,000. The amount of collateral may be less than other loan types, but it is still a requirement that business owners will need to consider.
Long waiting period
The SBA approval timeline varies by loan type. You could wait anywhere from 36 hours to 90 days for your loan application to process, depending on the loan type and the lender. Actually receiving money takes longer still.
The longer end of this time frame is quite long compared to other business loan options. With other loan options, you can get funding as quickly as a few days after applying. Bank loans may take a month or two, but even they don’t typically take 90 days to fund.
SBA loan alternatives
If you decide you want to explore other funding options, there are a variety of funding alternatives. Consider these options if you don’t want to apply for an SBA loan:
Personal equity
If you have money squirreled away, consider using it to fund your business. Of course, this option does mean risking personal assets should your business suffer.
Venture capital
If you’ve seen the show Shark Tank, you have an idea of how venture capital works. You can look for individual private investors or venture capital firms and present your business in hopes of getting an investment.
Conventional business loans
Similar to SBA loans are conventional loans. Typically funded by banks or online lending institutions, conventional business loans usually have less favorable terms than SBA loans, but they can still be a good funding option for small businesses.
Business credit card
Business credit cards’ requirements aren’t quite as strict as loans. Consider this option if you need a small amount of funds that you can pay back quickly. There are many benefits that come with business credit cards, including rewards programs, expense tracking and various money-saving perks. Another benefit of business credit cards is that you do not need a formal business structure to apply for a card.
Crowdfunding
Platforms like Kickstarter and GoFundMe have made crowdfunding a popular option. As a business owner, you can post your idea and ask individuals to donate a small amount in hopes that you will raise the funds you need for your business.
Grants
Small business grants are a form of funding provided by the government. This includes the federal, state and local governments. Some large corporations also provide grants. Obtaining a grant typically requires undergoing a highly specific application process.
Bankrate insight
Grants are often available to communities that have historically had a harder time obtaining funding. This includes grants for:
Bad credit business loans
Bad credit business loans are business loans for business owners with poor credit. These loans, which include term loans, microloans, secured loans and invoice factoring, are known for having lower credit score requirements and less daunting eligibility requirements.
Frequently asked questions about SBA loans
What are the benefits of an SBA loan?
SBA loans typically come with lower interest rates and longer repayment timelines than traditional loans. These loans are also government-backed and provide more support than other types of loans, including counseling and education.
What are the risks of an SBA loan?
Some SBA loans still require that you provide collateral. Should you default on the loan, you may be putting your business or personal assets at risk.
What businesses are eligible for an SBA loan?
For-profit businesses that meet the SBA requirements are eligible for SBA loans. Each loan type comes with different eligibility requirements, but one of the main requirements is that you must have exhausted all other methods of funding for your business.
