There are many reasons SBA loans are the go-to financing option for small-business owners. We’ll dive into six of the most important of them in this article. We’ll also get into the less desirable realities of taking out an SBA loan, so you have all the info you need before you decide to apply.
To write this article, we consulted four experts on SBA loans to get into the details of the advantages and disadvantages of these popular loans:
- Mark Valentino and David Canet both offered their perspectives as business banking executives at SBA preferred lenders.
- Amber Young layered in finer details as a loan processing manager at an SBA preferred lender.
- Desha Elliott contributed her POV as a longtime mentor and coach to small-business owners.
Their expertise helped us paint a full picture of SBA loan pros and cons.
Pros
Flexibility on qualification requirements.
Collateral isn’t a dealbreaker (but it’s usually required).
Long repayment terms.
Wide range of loan amounts and uses.
Interest rates are capped.
Continued lender support and guidance.
Cons
Less competitive rates than some bank loans.
Long timeline from application to funding.
Hefty documentation requirements.
Possible down payment requirement.
Personal guarantee requirement for 20%+ owners.
How much do you need?
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Overview of SBA Loans
SBA loans are guaranteed by the Small Business Administration (SBA) and offered through partner lenders such as traditional banks, community banks and credit unions. A few online lenders, like iBusiness Funding, also offer SBA loans.
Programs for business funding include:
Each loan program and lender has unique eligibility requirements, but here are some general qualifications for SBA loans:
- The business is operated with the goal of making money.
- The business is located and operated in the U.S. or its territories.
- The business is 100% owned by U.S. citizens, U.S. nationals or lawful permanent residents.
- The owner has invested time and money in the business.
- The owner can’t find funding with other lenders.
Additionally, there are several factors that automatically disqualify you from an SBA loan.
Benefits of SBA Loans
Flexibility on qualification requirements
While SBA lenders often require borrowers to have good credit, SBA loans can be easier to qualify for than traditional bank loans. The Small Business Administration guarantees the loans, which helps to reduce the risk to lenders.
In addition to some flexibility on credit score, SBA loans also tend to be more flexible on operating history and collateral, Mark Valentino, president of business banking at Citizens Bank, says.
Expert on the ground
Mark ValentinoPresident of Business Banking, Citizens Bank
David Canet, managing director, Connect One Bank, SBA, considers an SBA lender to be a great place for self-employed entrepreneurs and startups to turn when a bank turns them down for a business loan. "When your conventional lender says ‘not now,’" Canet advises, "that is your first signal to go to an SBA lender. … In fact, I frequently refer to the SBA lending program as an incubator of self-employed and small businesses and entrepreneurs. It's fantastic capital that is accessible now to help you grow your business. And then in two years, once you do have that track record, then you're going back to that conventional lender and you're ready."
» MORE: SBA loans for the self-employed
Collateral isn’t a dealbreaker, but it’s usually required
The SBA explicitly states that lenders are prohibited from denying business loan applications solely based on lack of collateral. That doesn’t mean collateral is optional. Most SBA loans still require collateral, especially for loans over $50,000. Specific SBA loan collateral requirements vary by loan program.
The SBA rule, however, protects against lenders rejecting otherwise-qualified borrowers only because they lack collateral. And our four experts unanimously agreed that in practice, this holds up. Three of them point to cash flow as a more important factor in qualifying.
“One of the strengths of SBA lending is that a lack of collateral doesn’t automatically disqualify a borrower,” says Valentino. “The primary focus of SBA lending really remains the ability to repay the debt from a business cash flow standpoint.”
Amber Young, vice president, SBA loan processing manager at Beneficial State Bank, agrees. “A lot of the time borrowers turn to SBA loans because of lack of collateral. SBA loans are cash flow-based, not collateral-based,” Young says. “If [borrowers] can demonstrate sufficient cash flow to cover the new loan, then they have a good chance of getting approved.”
Desha Elliott, senior researcher for Center for Black Entrepreneurship and a longtime coach of small-business owners, told me that the inability of an SBA lender to deny an application solely due to inadequate collateral does hold up in practice. “Especially if they have a higher credit score,” she says, “and if the business has stronger cash flows.”
In fact, Valentino concluded our conversation by saying that “the most successful borrowers aren't necessarily those with the strongest collateral. They're the ones who are prepared, responsive, can clearly articulate their strategy.”
Long repayment terms
SBA loans can offer long repayment periods. For example, the maximum terms for equipment, working capital and inventory loans are 10 years. Real estate loan terms can be up to 25 years.
The obvious upside to the longer terms is lower monthly payments. But how does that translate to real, everyday benefits for business owners? In the form of “retained liquidity,” which can “dramatically improve monthly cash flow,” Valentino tells us.
Canet describes the benefit of the longer-term loan this way:
Expert on the ground
David CanetManaging Director, Connect One Bank, SBA
So think of this advantage of an SBA loan not just as lower monthly payments spread out over a longer period of time but also as more cash in hand with many potential uses.
Wide range of loan amounts and uses
SBA loan amounts can range in size from as small as $500 to as large as $5 million or more, depending on the program and your needs.
Plus, you can put the funds to use in any number of ways. For example, funds from a 7(a) loan (the most common SBA loan program) can be used to:
- Purchase, refinance or improve real estate.
- Provide ongoing working capital.
- Refinance current business debt.
- Buy and install equipment.
- Purchase furniture and supplies.
- Finance a change of ownership.
Capped interest rates
The SBA set limits on the interest rates lenders can charge. For the popular 7(a) loan program, variable loan rates are capped at 3% to 6.5% above the base interest rate and fixed rate loans are capped at 5% to 8% above the base interest rate.
» MORE: Current SBA loan rates
Lender support
Many SBA lenders offer direct support to borrowers from pre-application stage through funding, and sometimes beyond. Post-funding services can include local free or low-cost counseling and training, as well as online learning programs.
Here again is where all four of our experts had consensus. Building a strong relationship, early on, with your lender can help carry you through the SBA loan process.
Valentino pointed to the value of having an “expert help you through this process, because that’s one of the things that can cut down [the] time frame” of an SBA loan application. (See our section below for more on the long timeline for these loans.)
Canet says, “Developing that dialogue with the lender early on can really help you be successful in obtaining the capital you need.”
And Young made the point that not all SBA lenders operate with the same level of support.
Expert on the ground
Amber YoungVice President, SBA Loan Processing Manager, Beneficial State Bank
Drawbacks of SBA Loans
Less competitive rates than some bank loans
Generally, the most competitive business loan interest rates are available through traditional bank loans, particularly if you already have an established relationship with the bank and you have a strong credit profile.
Long timeline from application to funding
SBA loans can take a long time to fund. The process from submitting an application to receiving funds generally takes anywhere from 30 to 90 days.
In her years of experience coaching and mentoring small-business owners through many aspects of ownership, including SBA loan applications, Elliott said she’s seen a minimum of 60 days. Valentino confirmed the 30-to-90-day range based on his experience. But he also said, “That timeline can be on the shorter end … if the borrower coming in has all of their documentation, business plan, etc. ready to go.”
If you need a fast funding option, an online lender is worth considering. For financing you can access within a couple of weeks, check out our list of the best fast business loans. But be prepared to pay higher interest rates for shorter terms with an online loan.
Hefty documentation requirements
This is probably one of the most-known downsides to applying for an SBA loan. The process notably comes with more paperwork than a traditional bank loan, including SBA Form 413, the Personal Financial Statement, which is required for many SBA loan types.
Our four experts consistently pointed to the importance of having all of your finances organized and accurate before applying for an SBA loan. The numbers matter, Elliott emphasized, and lenders will dig in deep.
Expert on the ground
Desha ElliottSenior Researcher for Center for Black Entrepreneurship
This is where it especially helps to have an experienced SBA lender who can walk you through the process step-by-step and check all your numbers before you submit. This is also where resources like small-business coaches, mentors and community development institutions (CDFIs) can assist.
The three lenders we spoke to all mentioned the same usual suspect for negatively impacting the financial documentation and therefore prolonging the approval process: mixing business and personal finances.
“Keeping separate financials is important,” says Canet. "Individuals, small businesses will tend to bootstrap, at least at the beginning. And that's fine. We see that all the time. … It’s fine if they use a credit card or two. But I'd encourage them to keep all of their business-related expenses [separate]. … preferably have that credit card in the company name.”
Don’t have the time or resources to compile all the necessary paperwork for an SBA loan? Consider some of these nearly no-doc business loans.
Possible down payment requirement
Depending on the SBA loan program you select, a down payment may be required. For example, the SBA-backed 504 loan requires a 10% borrower contribution. SBA 7(a) loans to startups or involving a full change of ownership also require the borrower to put in 10%. And it’s important to note that’s 10% of the total project costs, not just the loan amount.
For example, you’re planning to purchase a business (which would fall under change of ownership) with a sticker price of $900,000. But you determine you’ll need $50,000 in working capital to cover expenses like rent, inventory and payroll while you get up and running as the new owner. Then, there are a total of $50,000 in closing costs and fees (to the lender, the SBA guaranty fee, appraisal costs, etc.). The total project cost is $1 million. You’ll need to contribute $100,000 as part of your loan agreement, not $90,000.
Personal guarantee requirement
In most cases, an SBA loan requires a personal guarantee. This is a signed document that holds you personally accountable for repaying the debt. Meaning if the business is unable to make the loan payments and defaults on the loan, your personal assets may be seized to pay off the debt.
Generally speaking, an ownership stake of at least 20% triggers the personal guarantee requirement across SBA loan programs.
SBA loan pros and cons for underserved borrowers
Elliott has worked for more than two decades in finance, social impact and media with a dedication to underserved communities. She’s structured millions of dollars in debt capital for Black women entrepreneurs and previously worked for Accion Opportunity Fund as a market manager, fundraiser and certified small-business coach. She had great insights to share with NerdWallet on the benefits and drawbacks of SBA loans for underserved borrowers, specifically.
The good news, according to Elliott, is that underserved borrowers are able to access SBA loans despite weaker qualifications. She’ll often guide borrowers to SBA microloans as a more accessible option.
So yes, the access is there. But it’s often conditional, Elliott explained. Her clients will typically be offered smaller loan amounts and often at higher rates.
One common pitfall Elliott has seen in her experience is outstanding debt. Borrowers frequently forget old debt they’re still paying off, including previous tax debt.
For additional context, these debts factor into a number lenders examine closely, which is your debt service coverage ratio. If your business’s cash flow is already stretched thin paying off current debt, the lender is likely to determine your cash flow can’t handle the additional weight of a new loan.
Underserved borrowers should not feel discouraged, though. “If you are able to build the relationship with the lender,” Elliott told NerdWallet, “then they’re willing to meet you where you are. But it has to be a lender who cares.”
Alternatives to SBA loans
Traditional bank loans
Although a bank loan may be more difficult to qualify for, it will generally offer the most competitive rates and terms. However, banks often require that the loan be for an existing business, not to start a business.
Since the SBA asks that you seek funding from other lenders before applying for an SBA loan, it makes sense that you would talk to some traditional lenders first. Because traditional banks also offer SBA loans, you may be able to explore both bank loans and SBA loans with the same lender.
In fact, this is another major point of consensus among the four experts we consulted on SBA loans. All recommend that if you’re considering an SBA loan, find a bank that offers both traditional bank loans as well as SBA loans. Establish a relationship with the business lending specialist at that institution. The lender can then direct you to the option that’s best for your particular circumstances and help you through the application process.
Online lenders
Online lenders are another option to consider if you’ve exhausted your options with bank and SBA lenders.
Keep in mind that these loans often have higher interest rates than those of a traditional bank and much shorter repayment terms. However, you may find it easier to qualify for an online loan. A few lenders set minimum personal credit score requirements as low as 570 and 600. You’ll often get a fast decision, too, with approval and funding within a day or less for some lenders.
