Pros and Cons of an SBA Loan
Robins Financial is dedicated to our mission to be Member Focused, Financial Partners, Community Proud. We empower our members with the financial knowledge and resources they need to make informed decisions and achieve their financial goals.
We want to make sure your business has the tools it needs for growth and success. We are proud to offer a variety of commercial loans to get you started, including our Small Business Administration (SBA) loan. In this article, we will dive into the different types of SBA loans, as well as the pros and cons of using an SBA loan to grow your business.
What is an SBA Loan?
An SBA loan is a loan supported by the U.S. Small Business Administration, which allows financial institutions, such as your credit union, to provide business loans with more favorable terms or more flexible underwriting criteria than conventional loans. These loans are typically used to help cover startup costs, working capital needs, expansions, real estate purchases, and more.
Types of SBA Loans
There are several government small-business loan options available – each with its own terms and conditions. The best option for your business will depend on what you plan to use the funding for.
- SBA 7(a) Loans:
- Most common type of SBA loan
- Maximum loan amount of $5 million
- Typically used to fund working capital, equipment and supply purchases, and real estate and business expansion.
- SBA Express Loans:
- Maximum loan amount of $500,000
- Typically used to fund similar items as a normal SBA 7(a) loan, however the SBA Express loans can offer faster approval time with a lower borrowing maximum.
- SBA 504 Loans:
- Maximum loan amount of $5 million
- Typically used to buy land, real estate, equipment, machinery, furniture or fixtures. They can also be used to build or upgrade facilities, including utilities, streets or parking lots.
Pros of Using an SBA Loan
An SBA loan may be just what you need to get your business started. Some benefits of choosing an SBA loan include:
- Competitive Interest Rates: SBA loans generally offer lower interest rates compared to conventional loans, making them more affordable for small businesses.
- Lower Down Payment Requirements: SBA loans, though most require a down payment, they are typically low which can help preserve working capital for other business needs.
- Longer Repayment Terms: These loans often come with longer repayment terms, which can reduce monthly payments and improve cash flow management.
- Flexible Use of Funds: SBA loans can be used for various purposes, including working capital, equipment purchase, real estate, and refinancing existing debt.
Cons of Using an SBA Loan
While SBA loans are a more favorable financing option for business owners, they do come with certain drawbacks. These can include:
- Strict Qualifications: SBA loans come with strict eligibility criteria. Typically, you’ll need several years in business, strong business finances, and good credit history to qualify.
- Lengthy Application Process: Depending on your lender and the type of SBA loan you apply for, it can take anywhere from one to three months to access funds.
- Collateral Requirements: SBA loans typically require an unlimited personal guarantee (a legal agreement that holds you personally responsible for your business’s debt in case of default) from anyone who owns 20% or more of the business. Depending on the loan and your business’s qualifications, you may also need to put up physical collateral.
Understanding these pros and cons of using an SBA loan can help determine if this financing option is right for your business. Still need help deciding? As your trusted financial partner, we are here with the tools and knowledge to help your business thrive. To speak with a Commercial Lender, please call us at 478-923-3773 x. 2240. You can also visit the University of Georgia’s Small Business Development Center website to take advantage of additional resources to help you small business thrive.
Read our other blog articles to help you gain the financial knowledge you need to succeed.