If you’re planning to apply for an SBA small-business loan, here’s something you should know: The federal agency just got nearly $5 billion more for the program.
You should also know it’s not your only option. The Small Business Administration loan program is popular among many small-business owners looking for inexpensive financing. The upside is the cost. The downside is that the approval process is rigorous and could take months. Alternative lenders offer borrowers a much quicker — although pricier — choice.
Here’s some background about the new legislation.
The good news about SBA 7(a)
The SBA’s flagship loan program, known as 7(a) loans, makes it possible for banks to offer government-backed small-business loans at fairly low interest rates.
President Obama on Tuesday signed legislation raising SBA’s lending guarantee cap, allowing the program to resume after a brief suspension. The measure increases the guarantee limit for the fiscal year ending in September to $23.5 billion from $18.75 billion, which the agency exhausted last week.
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“It is good news for small-business owners,” Adriaan van Zyl, chief executive of California Business Bank, tells NerdWallet.
A prolonged suspension of the SBA small-business loans program would have meant serious problems for some entrepreneurs, van Zyl says.
“Waiting an extra two or three months to obtain financing could mean missed opportunity,” he says, adding that those opportunities “could very well have gone to large corporations, perhaps without the same job-creating effect. It is generally known that small businesses create two out of three new jobs in the U.S.”
When it suspended its loan program last week, the SBA said the agency’s 7(a) program had “experienced unprecedented demand from America’s small-business community.” This year, the SBA said it had approved more than 45,000 loans worth $16.5 billion, up 25% from the same period a year earlier.
“The SBA’s flagship lending program is back on track,” SBA Administrator Maria Contreras-Sweet said in a statement. “We have seen record levels of lending this year, showing us that America’s small businesses are thriving and yearning to grow.”
What to do if you don’t have time to wait
Although SBA-guaranteed loans are known to be less expensive, the process of obtaining them usually takes months.
But small-business owners have other options, says Sam Hodges, founder of Funding Circle. In any given year, the SBA loan guarantee program supports only 5% to 8% of small-business lending, he tells NerdWallet.
“If you need less than $100,000, your business might do better with short- or medium-term funding from an alternative lender,” says Stephen Sheinbaum, founder of Bizfi, an online small-business loan marketplace. Its higher cost may be worth it “if you are going to lose a business opportunity by not having funding.”
Be cautious and do your due diligence
Joe Powaga, underwriting director at Opportunity Fund, a nonprofit small-business loans company, offers a note of caution: Many alternative lenders offer loans “at less favorable terms,” meaning “higher rates and shorter terms.”
To get more information about funding options and compare them for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
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