Learn the Advantages and Disadvantages of an SBA Loan
Learn the benefits of an SBA loan for small businesses.
Small Business Administration (SBA) loans are a terrific financing alternative for businesses that are seeking more favorable loan terms or in some cases for businesses that may not qualify for a traditional small business loan. As compared to conventional financing, SBA loans offer greater flexibility in terms of required borrower equity investment, inclusion of funds for working capital, length of time of repayment and other factors designed to enhance the opportunity for success of the small business. The SBA loan program is utilized by long-standing businesses, start-ups and everything in between.
The SBA guarantees repayment of a percentage of the loan, which allows banks to make loans to businesses that wouldn’t typically qualify for commercial financing using normal underwriting criteria.
There are a number of benefits and drawbacks to consider before pursuing an SBA loan. Below are some of these advantages and disadvantages to help you determine whether an SBA loan is the right financing solution for your small business.
Advantages of an SBA loan
They usually have relaxed requirements as compared to traditional bank loans.
The SBA guarantee enables banks to extend more favorable loan terms and to lend to businesses that sometimes wouldn’t be able to borrow money conventionally. Businesses can use these funds for many different purposes, including:
- Purchasing fixed assets such as equipment, machinery and commercial real estate
- Refinancing existing debt
- Buying another business
- Bolstering working capital
SBA loans usually have lower down payment requirements than traditional bank loans.
Gathering enough money to make a 20-30% or higher equity contribution on a traditional loan is a big challenge for many small businesses. Many SBA loans (including the popular SBA 7(a) loan) require an equity contribution as low as 10%. This enables businesses to keep more cash in their coffers instead of tying it up in fixed assets.
SBA loans usually feature longer repayment terms than traditional bank loans.
The benefits here are similar to the benefits derived from lower equity contribution requirements. By stretching out payment terms over a longer period of time, businesses are able to conserve critical cash. If the loan has a term of 10 years or less, there is no prepayment penalty, so SBA loans can be repaid sooner if cash flow allows.
Both new and established businesses can apply for SBA loans.
SBA loans can be used to start a new business or expand an existing one. Businesses in practically any industry that meet the SBA’s size regulations are eligible to apply, including franchise businesses.
Disadvantages of an SBA loan
Applying for an SBA loan requires some additional paperwork.
The specific amount of paperwork that must be completed varies for different SBA loan programs. In all cases, however, business owners need to complete a:
- Personal financial statement (SBA Form 413)
- Borrower information form (SBA Form 1919)
- Request for tax transcripts (IRS Form 4506T)
In addition, borrowers will need to include business financial statements with their SBA loan application, including historical tax returns, P&L statements, balance sheets, and in some cases projected revenue and expenses for the business.
Collateral may be required to secure an SBA loan, including a personal guarantee.
Collateral requirements for SBA loans will depend on the assets owned by the business as well as those being acquired with the loan. A personal guarantee will also be required.
The SBA loan approval process can be slow and cumbersome if you use a non-SBA Preferred Lender.
The SBA has granted special authority to certain banks that are high-volume SBA lenders to approve SBA loans themselves, thus bypassing the SBA’s loan review and approval process. These banks are known as SBA Preferred Lenders. Going through a non-SBA Preferred Lender may result in delays and complications with your loan application.
Choose the right bank for your SBA loan
Your choice of bank will be critical to the success of your SBA loan endeavor. Cadence Bank is a Preferred SBA Lender, which allows us to deliver a streamlined loan approval process. Our dedicated 20-person SBA loan department is experienced in helping many different types of small businesses successfully navigate the SBA loan approval process.
Are you ready to take another step toward small business success? Contact us if you have questions about SBA loans or wish to begin the application process.
Cadence Bank is committed to your success. Let us show you how we can help.
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.