Pro: Lower Fees
SBA loan fees are often lower than other types of small business loans. You can expect an upfront guarantee fee relative to the overall loan amount and maturity time.
Similarly, SBA loans have annual service fees in terms of what is guaranteed and the remaining loan balance. This is reassessed annually.
Pro: Competitive Interest Rates and APR
SBA loans are structured in a way that keeps the total amount repaid highly competitive. For example, SBA loans could offer rates capped at a 10% APR. However, online firms typically offer loans with APRs of 18%-25% or even higher.
Over the life of a loan, this could save small business owners thousands of dollars in fees, interest, and other costs.
Pro: Bigger Loan Amounts
SBA loans typically provide larger maximum borrowed amounts than other small business loans. For example, an SBA 7(a) loan offers up to a $5 million maximum amount.
You will not see amounts this high with online lenders or banks which often top out between $500,000 and $1 million. Remember that your exact funding amount is based on the terms agreed upon with the lender.
Pro: Longer Loan Terms
SBA Loans also provide borrowers more time to repay. This translates into lower monthly rates and less annual expense in repaying the loan.
The precise loan term is decided based on how you will use the money.
- Inventory or working capital: 10 years to repay.
- New or upgraded equipment: 10 years to repay.
- Buildings or other real estate: 25 years to repay.
Con: Difficult to Qualify for Loan
The SBA guarantee does lower the risk for lenders when it comes to potential defaulting. However, this guarantee makes the requirements and eligibility stricter for SBA loans than others.
In most cases, you will have to have great credit (680 or higher), several years (3 and preferably 5) of business operation, and optimistic business finances before you will be approved. These loans are not for businesses that need rescuing or are in trouble.
Con: You Need a Personal Guarantee
The SBA guarantees a certain amount of the loan in case of default. Besides this guarantee, you need to also offer a personal stake by way of a guarantee to secure the loan.
Any owners with a 20% or higher stake must provide an unlimited personal guarantee. What this means is that the lender can still recover the loan amount and any additional fees if the business is shut down or fails to repay the loan in any way. They recover this money through any means necessary by the personal guarantors — from owner savings, retirement accounts, or other assets.
Con: Slower Access to Loan Money
If you need fast or immediate access to money, SBA loans are not the right option for you.
These loans frequently take longer to process (30 to 90 days) and distribute than other loans. The exact amount of time depends on your lender and your SBA loan.
In most cases, it will take from one to three months before you have access to the money.