The Pros and Cons of SBA Loans

Ezra Cabrera

March 15, 2019
sba loans long island

When choosing the right financing for your business in Long Island, it’s crucial you weigh the options that are available to you. Remember that the type of financing you choose can impact your business for years to come.

With that said, do you know SBA loans Long Island are a great financing tool for small businesses?

They are, but they are not for everyone.

SBA loans have gained immense popularity among small business owners because of their flexibility, but unfortunately, it has its own share of disadvantages. So, before you apply for an SBA loan, make sure you’re aware of all of the pros and cons.

Pros of SBA Loans

Flexible Terms and Conditions: Almost every small business owner in need of financing can apply for an SBA loan due to their reasonable terms. They have negotiable term lengths, offer restructuring options, charge lower down payments, and have limited interest rates.

Steady Flow of Cash: Small businesses often face cash flow issues throughout the life of their business. SBA loans are a great source to improve cash flow as well as the purchasing of new equipment, and making payroll. Without a steady flow of cash, you’ll definitely have a hard time running your business efficiently.

Additional Working Capital: Every business needs working capital in order to maintain its operations. Most business owners who apply for SBA loans do so in order to obtain additional working capital. The Small Business Administration works with business owners who have difficulty getting approved for financing elsewhere. Once you receive the money, you can immediately use it to fund your business.

Low Interest Rates: The SBA loan’s interest rates are composed of a base rate and an allowable spread. The latter refers to the percentage lenders can add to the base rate. The Small Business Administration sets a limit on how high lenders can charge and this depends on the type of SBA loan you’re applying for. For example, the maximum spread for 7(a) loans shouldn’t be more than 2.5% on loans with a maturity of less than seven years and no more than 2.75% on maturities longer than seven years.

Small and Large Loan Limits: Some business owners don’t need to borrow much, but banks don’t often extend small loan limits. SBA loans offer amounts ranging from $500 to $5 million. Most types of SBA loans allow you to use the funds for any business purpose, but some have restrictions. For example, you can only use CDC/504 loans to finance or refinance equipment purchases and construction projects.

Cons of SBA Loans Long Island

Application Difficulties: When you apply for SBA loans, you’re required to submit an extensive amount of paperwork, from cash flow projections to personal financial history. Furthermore, the application process can take months before you get approved, and even after the SBA has reviewed your paperwork, you can still get rejected.

Visit SBA’s Loan Submission Checklist to see whether applying for an SBA loan is worth your time and effort.

Personal Risk Involved: Business owners need to pledge some of their personal assets to secure the loan. This means that if your business can’t repay the loan, lenders have the right to repossess the personal assets you put up as collateral. Plan carefully, and be certain you’re able to make the monthly loan repayments before you apply for an SBA loan.

Comparably High-Interest Rates: SBA loans put a limit on how high their interest rates go, but it’s still relatively expensive compared to other kinds of financing. As of December 2017, the limit for SBA loans greater than $50,000 (with 7+-year amortization) is 25% every year.

Slow Underwriting and Approval Process: Once you’ve applied for an SBA loan, it could take a while before you qualify and receive funds. It often takes a few weeks to approve a guarantee, though it could be longer depending on the deal. The application process could take as long as two to three months. If you need funds ASAP, you might want to look for other options.

Poor Credit is Typically Not Accepted: Credit rating plays a huge role in the SBA loan application process. More often than not, applicants with poor credit scores are denied a loan. Business owners with a personal credit score of 680 or higher will have a greater chance for approval.

Weigh Your Options Carefully Efore Applying for an SBA Loan

In your search for the type of loan best suited to meet the needs of you and your business, it’s vitality important you weigh the pros and cons of every loan source to see how it will affect your business.

Ezra Cabrera
Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.

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