What is an Sba Loan and are There Any Pitfalls? Weighing the Pros and Cons

30.2 million small businesses exist in the American marketplace. While each of those companies possess unique qualities, what unites them all is the fact they needed money to get started. Therein lies the value of taking out a loan.

Applying for SBA loan

Getting a business loan is a rite of passage for most entrepreneurs. Can you guess what one of the first questions money-seekers ask when they’re hunting down funding?

“What is an SBA loan?”

SBA loans are loans facilitated through the federal Small Business Administration. These loans carry pros and cons, many of which we discuss below.

Taking SBA loans

The Pros of SBA Loans

We’ll start our what is an SBA loan exploration on a positive note by outlining this loan class’s pros. As it turns out, SBA loans have several benefits that entrepreneurs find helpful including:

Flexible Approvals

Loans that are offered through the SBA are backed by the federal agency which enables lenders to be more bullish when it comes to approvals. That fact makes it so borrowers that don’t qualify for more traditional loans may find luck acquiring an SBA product.

SBA loans are by no means guaranteed which we’ll talk more about in our cons section. Still, if you have a less than stellar track record as a borrower and are looking for flexible opportunities, working through the Small Business Administration is an option.

A Breadth of Information

When you go on the SBA’s website, one of the first things you’ll notice is the wealth of information it features. Therein lies another key advantage of working through the SBA.

The agency has a vested interest in protecting American business owners and consequently provides a wealth of information regarding funding opportunities, verbiage that exists in loan terms and other relevant things. That contrasts what you may find when working directly with online lenders who’s aim is to get you into a loan that’s as advantageous to them as possible.

Money You Can Count on

The SBA doesn’t work with just any lender. They carefully curate lending opportunities that they present to business owners.

As more fly-by-night lenders go bankrupt or get in trouble for illegal lending practices, knowing that you can count on an SBA loans’ reliability is a big benefit. That’s especially true if your business’s access to cash-flow is critical to its operation.

Taking SBA loan

The Cons of SBA Loans

No lending product is free of drawbacks. Loans that are backed by the SBA are no exception. Here are four drawbacks that you’ll need to contend with when borrowing through the SBA:

The SBA Is Not a Lender

There’s a common misconception that SBA loans are government loans. This is not the case.

The SBA is a federal agency but they are not a lender. When you take on an SBA loan, you’ll be borrowing from a bank with terms that are flexible because the SBA assumes a portion of the liability when it comes to the possibility of your default.

Given that your loan is being funded by a private, for-profit entity, you can expect to pay your fair share in interest and fees. Note that not all SBA-backed loans are created equal. Before you bite on an SBA product that has unfavorable terms, be sure you’ve browsed all of your options.

Credit Matters

If you have a checkered borrowing history and are turning to the SBA to get a loan funded, know that the answer may still be no.

Private lenders, even with government help, still can’t afford to take on loans that present high-risks while also offering fair terms. Doing so could create a financial disaster if the economy were to hit a snag.

If you suspect that your credit is too damaged to qualify for an SBA product, work on rehabbing it prior to applying. Simple ways to do that include paying down your existing debt, allowing yourself time to accrue a track record of positive debt management and checking your credit report for errors.

You’ll Need to Prepare a Pitch

Business loans are unique in that most lenders will want to understand your full intentions before lending. To showcase what your company is doing, you’ll want to have a business plan prepared.

Since creating business plans isn’t everyone’s forte, this requirement may make it difficult for certain borrowers to secure funding. For help putting together a business plan, explore this resource.

SBA Loans Aren’t Always the Most Competitive Option

Just because a loan is government-backed doesn’t mean it’s your best option. Private lenders that don’t work with the SBA could provide loan products that are more attractive than SBA products and routinely do.

Be sure to do your diligence when it comes to exploring alternative options to ensure you’re getting the best deal.

Loan officer counselling client

What Is an SBA Loan Without a Solid Business? … Not Much

No matter how good or flexible an SBA loan is, without a solid business in place, your loan is going to be a bad investment.

Our team recommends taking the time to drill into your business model before seeking financing to fund your concept. Only with proper planning and testing will you be able to get the most out of your borrowed money.

Do you still have questions regarding what is an SBA loan? Are you curious about related topics? We’ve got you covered!

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