If you are having a tough time securing funds for your small business from traditional lenders and banks, it is a good idea to consider applying for a Small Business Administration (SBA) loan. The SBA unites with traditional banks to provide finance to small business owners. These loans help business owners with the stability they require to take their business forward, but it is not without any risks. The pros and cons of SBA loans must be considered before applying for one.
It is relatively easy for single or multi-unit operations to secure capital for their business. However, small businesses find it difficult to secure funds for their business and have to seek help from U.S. Small Business Administration financing. Most small-business owners prefer the SBA and its sponsored loan programs as they would otherwise experience difficulties in qualifying for traditional loans or financing. Listed below are the pros and cons of SBA loans:
SBA Loans – Pros
• Funds and Capital: All small businesses apply for a loan because they require extra funds and capital. An SBA loan is the next best option if you are unable to secure the capital you need for your business. Once your funds are approved, you will have enough cash to use for your business.
• Realistic and Practical Conditions: Many small business owners who secured SBA loans talk about the reasonable terms required to qualify for the loans. SBA loans have lower down payments, available restructuring options, and negotiable term lengths.
• Improve Cash Flow: Almost all small businesses experience irregular cash flow in a year. Securing an SBA loan is the best thing to do if you are trying to improve your cash flow, working on consistent payment for your employees or planning to invest in new equipment.
SBA Loans – Cons
• Higher Interest Rate: The higher interest rates of SBA in comparison to traditional banks can be of a serious concern, and that can be one of the biggest ‘Cons’ in SBA loans.
• Lots of Paperwork: Securing an SBA loan is very time consuming since you have to work within the government to secure this loan. A lot of paperwork is required to be completed. While conventional banks sometimes take not more than 24 hours to approve a loan, an SBA loan may take days or months to get approved.
• Personal Risk Involved: The business owner or anyone with at least 20 percent ownership or greater will have to take on a personal risk. You might end up losing personal assets if your business is unable to pay the loan amount. Apply for an SBA loan only if you are sure that you will be able to responsibly pay back your loan.
• Good Credit History: It is true that SBA loans offer capital for small businesses. However, these firms must have a good credit history. If your business does not have a good credit history, do not bother to apply for an SBA loan.
Applying for SBA requires a lot of research work, time and effort. However, the benefits outweigh the costs and the effort. Before deciding to pursue any financing option, ensure that you read the pros and cons of SBA loans and read the fine print too.
As long as you are aware of what you are getting into, an SBA loan is the right fit for your business needs. However, if you think opting for an SBA loan has too many risks associated with it or you are afraid of defaulting or turned off by the excessive paperwork involved, there are various other financing options available for small businesses. Be aware of the pros and cons of SBA loans before deciding to apply for it.