If you’re a small business owner, you’ve probably faced trouble in small business financing. Finding the right loan in this climate can also be overwhelming and difficult.
That’s where the Small Business Administration comes in to save the day. For many budding entrepreneurs, the SBA can offer that loan you’re looking for to get your business going. That being said, there are a lot of benefits to applying for an SBA loan instead of regular loans.
In this article, we’ll highlight the benefits and drawbacks that come with it. So, without further ado, let’s dive right in!
What are SBA Loans for Small Businesses?
For those who have never heard of SBA, SBA Loans for Small Businesses are government-backed loans specifically catered to help small businesses out with their financing. And unlike regular, conventional loans, the SBA gives a lot of benefits to all who come to their aid.
As a small business owner, you’ll get longer repayment terms, lower interest rates, and relaxed qualification requirements. The SBA also offers different types of loans. Their most popular are the SBA 7(a) loan and SBA Microloans.
One is used for various business-related reasons, and the latter offers smaller loans to startups and small communities. Here’s an SBA preferred lender list 2024 you can check out!
Types of SBA Loans for Small Businesses
Now that we’ve covered what an SBA is, let’s take a brief look at some of the types of loans they offer to small business owners:
- SBA 7(a) Loan: This is the most common type of SBA loan, and the max amount you can get out of a 7a loan is $3-5 million. You can use the loan for a number of reasons, such as purchasing furniture, supplies, and fixtures, refinancing current business debts, and for either long or short-term working capital as well.
- SBA 504 Loan: Not as common as the SBA 7a loan, the 504 Loan plan is mainly used for financing equipment and real estate purposes. The maximum loan amount you can get for a 504 loan is usually around $5 million, however, that can be changed to $5.5, too, if needed. These funds can then be used for growing your business and for fixed assets that will eventually help create jobs.
- SBA Microloan: The SBA Microloan is another popular type of loan many small business owners make use of. And that’s exactly what it does – provide small loans to startups and upcoming small businesses from up to $50,000. Microloans are usually given by nonprofit community organizations, and they can be used to reopen, repair, rebuild, improve, and even highlight small businesses.
Benefits of SBA Loans for Small Businesses
Now that you have an idea of what SBA is, let’s take a look at the benefits they offer to small business owners and rising entrepreneurs.
- Lower Interest Rates
As mentioned before, SBA Loans for Small Businesses have lower interest rates compared to regular business loans. That’s because the SBA are backed by the government, and as a result, this poses less risk for the lender
So, this helps them to offer much lower interest rates to business owners like you and many others who are looking for a more effective financial solution.
- Longer Repayment Terms
Another great thing about SBA Loans for Small Businesses is that they also give you longer repayment loans. Unlike regular business loans, which have a fixed repayment term of up to five to ten years, SBA loans can extend up to 20 years.
This, of course, depends on the kind of loan you take. If it’s for working capital or equipment loans, then you can get up to ten years! This longer repayment method helps small businesses to branch out their payments over a more acceptable period of time.
- Lower Down Payments
Compared to conventional business loans, which require you to make down payments of 15-20%, SBA Loans for Small Businesses ask for a much lower down payment.
They only require down payments as low as 10% and 0% if it’s for real estate or disaster loans. This benefit not only reduces the costs for those who are applying for the loan, but it also makes it super easy for a small business to get the financing they are looking for in regular business loans.
- Easy to Qualify
If your business is fairly new or has less stable credit history or collateral, then have no fear, because SBA Loans for Small Businesses are fairly easy to qualify for than regular business loans.
Thanks to the government being involved, this poses less risk for the lenders who then become willing to approve the loan. Even if the business doesn’t meet the strenuous requirements of conventional lenders.
The SBA loans are designed specifically to help those who are struggling to expand their business because of financial restraints and small communities as well.
- Backed by the Government
We’ve mentioned this a few times already that SBA loans are backed by the government and this adds a certain amount of security.
For instance, if the SBA loan you’ve taken defaults for any reason, then the government steps in and guarantees that portion to the lender, minimizing their loss. Thanks to this, the lenders are able to offer more lucrative loan terms like longer repayments or lower interest rates.
Drawbacks of Applying for SBA Loans
With benefits comes some drawbacks, and SBA Loans for Small Businesses are no different. Here are some of the drawbacks you might face:
- The Application Process is Lengthy
While you can get an SBA loan, the process usually involves a rather comprehensive application compared to regular business loans.
Not only that, but the process can ask for additional documentation like financial statements, collateral valuations and business plans and can also be very time consuming as well. This makes the applications process to be arduous and lengthy for startups and small businesses.
- Requirements are Strict
SBA Loans for Small Businesses are easy to apply for than normal business loans, but this can change in some cases.
The SBA have strict requirements that businesses have to meet before their loans are approved, such as providing collateral, meeting specific size standards and having a valid credit history.
The business that fail to meet the requirements then they’ll have a hard time to be eligible for an SBA loan.
- Limited Loan Amounts
There are limitations when it comes the loan amounts and this can be lesser than what businesses need sometimes. And while the maximum amount can vary depending on the type of the SBA loan, it’s not likely that it’ll be enough for businesses that have larger projects or ideas in mind.
So, in this case, small businesses might have to explore other financial options to meet their goals.
- Longer Repayment Terms Come with a Cost
Longer repayment loans can be very beneficial for some businesses, but they can also come with a catch, for instance, a higher interest cost over the life of that loan.
If you’re looking for long repayments for your business, then be careful because you might end up paying more in interest than you would have compared to loans with a shorter repayment term.
Furthermore, a longer repayment loan can also make it tough for businesses to limit their investments in potential growth opportunities and to manage the debt load as well.
- Providing Collateral
While it’s true that SBA Loans for Small Businesses are almost always guaranteed, there are some types of loan that require you to give them some collateral.
For instance, if you’re applying for 7a loan for over $400,000 then the lenders will take collateral on that loan. There are other types of loans that require you to give oke collateral if the loan is above a certain amount. And this amount can vary, but the requirement for collateral does not.
- A Long Waiting Time
You might be wondering how quickly your loan will get approved, but did you know that the approval time can vary by the different loan types SBA has?
That’s right, you might have to wait anywhere from 48 hours to even 80 days for your loan to get processed. And keep in mind this all depends on the type of SBA loan you’ve applied for.
In contrast to other business loans, it’s possible you’ll have to wait for a long time to get the amount you initially applied for. So, if you’re thinking of applying then be ready to have a lot of patience because you’re going to need it!
Final Thoughts
In conclusion, SBA Loans for Small Businesses is a great opportunity to expand their reach by giving the access to the capital and support they need.
Thanks to the lower interest rates and easy qualification requirements, the SBA is a much more compelling alternative to regular business loans.
If you’ve ever taken loans from the SBA, don’t forget to share your experience with us.
