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Need money to start or expand your small business? Loans guaranteed by the U.S. Small Business Administration (SBA) can be the perfect solution for some business owners, but SBA loans aren't right for everyone. Here are the pros and cons of SBA loans.
| Pros | Cons |
|---|---|
| Open to businesses denied other loans | Extensive application process |
| Flexible loan uses | Slow approval and funding |
| Wide range of loan amounts | Good credit required |
| Interest rates are capped | Must meet eligibility standards |
| Repayment terms up to 25 years | Collateral and personal guarantee typically required |
Benefits of SBA Loans
SBA guaranteed loans have several advantages to consider.
Can Be Easier to Qualify
SBA loans don't come from the SBA, but from approved lenders the SBA partners with. The SBA guarantees 50% to 85% of the loan amount, reducing the lender's risk. This can make it easier to qualify for a loan even if other lenders have turned you down.
Flexible Loan Uses
SBA loans are available for a wide range of purposes, including:
- Starting a business
- Buying a business
- Buying land or buildings
- Working capital
- Buying equipment, machinery, supplies, furniture, inventory and fixtures
- Expanding or renovating a building
- Refinancing existing debt
Loans Come in a Wide Range of Sizes
Whether you need a little bit of money or a lot, the SBA has a loan program to suit. The SBA's primary small business loan programs—7(a), 504 and microloans—offer financing ranging from $500 to $5.5 million, depending on the loan you choose.
Interest Rates Are Capped
SBA loans may have fixed or variable interest rates. The SBA caps the interest rate approved lenders can charge, pegged to the prime rate or an optional peg rate. The interest rate for variable-rate SBA loans may rise or fall with this base rate. As of May 2024, the maximum fixed interest rates for SBA loans ranged from 13.50% to 16.50%, depending on loan amount.
Long Repayment Terms
Repaying short-term business loans in six, 12 or 24 months can be challenging. SBA loans give you more time to pay back your loan. SBA microloan terms can be up to six years. SBA 504 and 7(a) loan repayment terms generally range from 10 to 25 years.
Downsides of SBA Loans
In addition to their benefits, SBA loans have a few downsides to be aware of.
Complicated Application Process
Gathering the documentation for SBA loan applications can be time-consuming. In addition to completing multiple SBA forms, you may need to provide a business plan, personal and business bank statements and tax returns, cash flow projections, business financial statements, legal documents such as your business license and more.
Slow Loan Approval and Funding
Typically, getting approval for an SBA loan takes 60 to 90 days. Receiving funding may take a few weeks—or months—longer. In a hurry? SBA express 7(a) loans can be approved and funded much more quickly and require less documentation but are limited to $500,000. You can also speed things up by working with SBA preferred lenders, who can approve loans faster than standard SBA lenders.
You Typically Need Good Credit
Banks evaluate both your business and personal credit scores when you apply for an SBA loan. In general, you need a personal FICO® Score☉ of at least 640 to qualify; scores of 700 and higher are preferable. (SBA microloans are the exception: You may qualify even if your credit is only fair.)
You Must Meet Eligibility Requirements
To get an SBA loan, you must generally be based in the U.S. or its territories, run a for-profit business, demonstrate good business credit and have been turned down by other lenders. You'll also need to meet SBA size standards for your industry, based on your annual receipts or number of employees. Lenders may have their own eligibility standards on top of SBA requirements.
May Require Collateral and Personal Guarantee
Most SBA loans require putting up collateral, which can include your personal real estate. In addition, anyone with 20% ownership or more in the business is typically expected to personally guarantee the loan. Should you default, the SBA pays the lender the guaranteed amount, but you're responsible for the balance. Fail to pay, and the federal government could garnish your tax refund and federal benefits, such as Social Security.
Should I Get an SBA Loan?
Whether or not you should get an SBA loan depends on how quickly you need money, whether you fit the SBA's criteria and whether you've been denied other financing.
SBA loans can be a good option if:
- You've been turned down for a business loan from a bank.
- You can wait several months for loan approval and financing.
- You and your business have good credit scores.
- You meet SBA criteria and have the necessary documentation.
An SBA loan may not be the best fit if:
- You need money quickly.
- Your personal and business credit scores are fair or poor.
- You have no collateral.
- You prefer not to personally guarantee a loan.
Still unsure? SBA district offices and SBA resource partners nationwide can advise you on finding the right business loan.
Learn more >> 10 Business Loan Mistakes to Avoid
Alternatives to SBA Loans
An SBA loan isn't your only financing option. Here are some alternatives.
Business Credit Card
A business credit card can finance smaller purchases. If the card issuer reports your account to business credit bureaus, timely payments could help your business build a credit history too.
Business Line of Credit
Business lines of credit are generally revolving credit. Borrow up to your credit limit, paying interest only on what you borrow. Once you repay the borrowed funds, you can borrow against the credit line again.
Online Lenders
Business loans from online lenders generally top out at $250,000 or so and are repaid over six to 24 months via daily or weekly transfers from your business bank account. Online lenders typically have less stringent requirements, streamlined application processes and faster loan approvals. You'll need to meet the lender's minimum requirements for time in business, annual revenues and personal FICO Scores, but may qualify with a FICO® Score as low as 500.
Crowdfunding
Use business crowdfunding sites such as Fundable, Indiegogo and WeFunder to raise money for a startup or new product. Some sites gather loans from individual investors; others collect donations you repay by giving donors early access to your product.
Equipment Financing
Like car loans, equipment loans use the equipment you purchase as collateral, so you don't need collateral of your own. Specialized equipment financing companies and equipment manufacturers are good sources of equipment loans.
Trade Credit
Need financing for inventory or materials? See if vendors will extend trade credit, which could give you 30, 60 or 90 days to pay. If vendors report your account to business credit bureaus, timely payments could help build a business credit history.
Invoice Financing
If you invoice clients and need money quickly, consider selling unpaid accounts receivable to a factoring company for an upfront percentage of the invoice. The factor collects the rest and pays you, minus fees and interest (which can be costly).
Merchant Cash Advance
Businesses that take credit and debit cards and meet revenue criteria can receive cash advances against future card revenues from merchant cash advance companies. This is generally a high-interest option requiring daily or weekly payments.
The Bottom Line
When applying for any business loan, start by checking your business credit report and personal credit score. If your scores aren't up to lenders' standards, paying down debt and making timely payments can help increase them. Sign up for Experian's business credit monitoring service and you'll receive alerts on your progress, so you can spend more time focusing on your business.