What is an SBA Loan?
Lenders and SBA agencies collaborate to create Small Business Administration loan programs. When looking for a lender for their small business, borrowers turn to these programs.
Lenders like SBA lending programs because they relieve the lender of some risk by guaranteeing a portion of the loan amount. Because of this assurance, lenders can offer more flexible payment terms and cheaper interest rates to small firms than they do.
Pros of SBA loans
- SBA loans include SBA guaranties, which implies that if you default on your loan, the lender can reclaim a portion of the outstanding debt. This safety net decreases the lender’s risk and may result in the approval of an application for a borrower who would otherwise be denied. Lenders may also be more willing to work with you on extended repayment arrangements. The smaller monthly payment reduces cash flow strain, making it easier for borrowers to repay their loans.
- Small and large loan amounts are available. Borrowers can get finance for both minor and significant needs ranging from $500 to $5.5 million. However, keep in mind the constraints of each loan program as you learn more about it. For example, you may get a $5.5 million CDC/504 loan, but it can only be used to finance fixed assets.
- There are resource centers accessible to help. The SBA has resource centers to help entrepreneurs with general business advice, SBA loan information and additional support for underserved populations. These resource centers can also help you prepare the papers you’ll need when applying for a business loan.
The following are some of the SBA’s resource centers:
- Small Business Development Centers (SBDCs): These organizations assist small business owners with management issues.
- Women’s Business Centers: Advocates for expanding possibilities for women and other minorities who run businesses.
- SCORE: SCORE is a non-profit organization dedicated to assisting entrepreneurs in starting and growing their enterprises.
Cons of SBA loans
- In most circumstances, an SBA loan will require a 10 – 20% down payment. Lenders want to engage with borrowers who are willing to put money into their company. According to Blaney, SBA-guaranteed loans still have lower down payment requirements than traditional loans.
- Borrowers will be required to pledge assets as collateral by several SBA lenders. Even though the SBA guarantee lowers risk, the lender may nevertheless seek collateral and personal security from the borrower.
- If the company fails, you will be personally liable. For example, If the loan defaults, you’ll be legally accountable for repaying the amount in total, and the lender will be able to confiscate whatever collateral you offer. Also, If you don’t pay your loan, the SBA might transfer it to the Treasury Department for collection.
- The approval process is slow. The application process for a loan can take up to two months. While researching SBA loans, borrowers can contact their local SBA district office to be linked with the correct loan program and SBA-approved lender. After the lender approves the application, it must be submitted to the SBA for a second approval, which adds to the time it takes.
Merchant Cash Advance? All The Details You Need
Needing quick cash for your business could be an important decision that you need to make. A merchant cash advance (MCA) is popular for small businesses that require a loan.