SBA loans can be a pump in the arm for a small business. They provide lower interest loans and broader qualifying criteria than a traditional lender. However, you must be aware of some aspects of an SBA loan before tackling the process. Several online resources help you secure an SBA loan, including this guide from AdvancePoint (https://advancepointcap.com/blog/easy-sba-loan/.)
Learning the pros and cons of an SBA loan is simple and easy but takes time. Not taking that time can land you in a financial arrangement that costs you more than you anticipated.
Here are some SBA pros and cons.
Pros of SBA loans
The following are the benefits of the SBA loan program.
1. Easier eligibility requirements
Many lenders tend to shy away from lending small or new business money because of each risk. Research shows that SBA loans are easier because their criteria are extensive. To qualify for an SBA loan, you must:
- Be registered and legal as a for-profit enterprise
- Have your headquarters in the USA or a US territory
- Invest your own time and money in your business
- Have failed to secure a traditional business loan
- Your company does not earn more than $41.5 million in revenue
- Your company has 1500 employees or less
There are also industry-specific requirements that you must meet to qualify for a business loan. These standards apply to the annual revenue a small business brings in and its number of employees.
Meeting the standards is not an automatic qualification for an SBA loan. The standards set the program parameters. If you meet the criteria, you are eligible to apply for an SBA loan.
2. SBA guarantee
Another aspect of the broader criteria is that the SBA guarantees an SBA loan. If you default on the loan, the SBA covers a portion of the financial exposure assumed by the lender. That reduces the risk of losing the loan outright and provides a safety net to lenders, which theoretically opens them up to take more of a chance on a small business.
The SBA loan guarantee does not mean you will automatically be eligible for an SBA loan. It is a factor that helps a lender justify taking a risk on you. You still must meet whatever lending criteria the lender requires to get them to lend you the money you want.
Because the SBA guarantee ensures a lender will not lose the entire loan amount, lenders might be open to longer repayment terms and lower monthly repayment requirements. Better payment options can help alleviate the pressure put on a small business every month to make the loan payment. It also can free up cash flow.
3. Interest-rate caps
Part of the purpose of the SBA program is to get loans for businesses that might not qualify with a traditional lender, but it is not the sole purpose. The other reason the SBA loan program exists is to make loans affordable to small businesses. Higher interest rates can discourage a company from securing an SBA loan or make it unaffordable. To help prevent that, the SBA caps the loans its lenders extend to small businesses.
The cap combines a base rate hinged on the prime rate, LIBOR, or the optional peg rate. All interest rates are capped, which means if lending rates surge, an SBA loan interest rate can only increase a set and predictable amount. That helps small businesses be able to afford a loan.
4. Non-traditional lending amounts are available
A small business can borrow anywhere from $500 to $5.5 million. A broad range helps small businesses by letting business owners borrow smaller, targeted, and larger loans than many traditional lenders would consider. The more general criteria to qualify for the SBA loan program also means it is somewhat easier to secure a larger loan.
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Cons of The SBA Loan Program
As with any loan, a few things to consider regarding securing an SBA loan exist.
1. Down payments are usually required
Specific SBA loan programs require a down payment. Those include:
- 7 (a) loan programs, both standard and express
- 504 loan program (including refinancing)
- Community Advantage Loans
Depending on a few variables, you can expect to pay between 10 and 20 percent of the loan amount in the form of a down payment. The point of the down payment is to ensure that the borrower also assumes some risk.
2. Collateral requirements apply for some borrowers
The SBA lender is fronting the money. The SBA will cover a portion of a defaulted loan, no matter what happens to you or your business. Collateral may also be required to ensure the risk to both parties is minimal. Generally, the amount of collateral is contingent on the amount borrowed.
3. Default does not get you off the hook
The lender can seize any amount of collateral you put up if you default. The SBA can also forward your debt to the US Treasury for collections. Treasury debt can lead to a few different financial penalties, including higher interest rates, pay garnishments, and fines.
4. Bureaucracies crawl
If you are in a hurry for an SBA loan, you might want to try and figure something else out. The loan application process lasts several weeks and can take over two months. The groups that process your loan application include:
- The local SBA office
- SBA lenders
- The national SBA organization
- Other government entities to ensure federal compliance on your part
5. Your credit does matter
You will likely not qualify for an SBA loan if you have credit issues. The threshold credit rating for an application is at least 680. The SBA will reject your loan application if you have a credit score of less than 680. There are, though, other government programs that might be able to help you out.
The SBA loan program can help small businesses grow, get through a cash crunch or endure a more challenging economic environment. It does have requirements, though. Understanding the pros and cons of the program is key to ensuring that you get the most out of your SBA loan.
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