Having access to the right financing at the right time is key to growing a business — especially if you need to invest in fixed assets for expansion. While there are many financing options available, small business owners can face challenges when trying to get a business loan due to various factors, for example, if they have a low credit score or lack of cash flow.
These companies can apply for loans backed by the U.S. Small Business Administration (SBA), which are designed to help small business owners access funding to grow their ventures. SBA loans provide favorable terms and access to educational resources from the SBA.
While SBA loans are a great resource for small businesses that have exhausted other funding options, they also come with some constraints. In this article, you’ll learn about what SBA and non-SBA loans are, their pros and cons, and how to decide which option is better for your business.
What to Know About an SBA Loan
The SBA doesn’t directly lend to small businesses. Instead, it backs the loans made through their partner lenders — such as banks, community development organizations and microlending institutions. The SBA guarantee lowers the risk for lenders, so they’re more willing to provide financing to small businesses.
SBA loan amounts range from $500 to $5.5 million. The 504 Loan Program provides long-term, fixed-rate financing that small businesses can use to acquire fixed assets (e.g., land, commercial real estate, renovation, furniture, equipment) for expansion or modernization.
You can use Lender Match — a free tool on SBA’s website — to find participating SBA-approved lenders. You’ll likely be asked to produce a business plan, amount and use of funds, credit history, collateral and financial projection for the application process.
What to Know About a Non-SBA Loan
Business owners can also apply for many types of non-SBA loans and financing, such as business term loans, short term loans, working capital loans, equipment financing, business lines of credit, merchant cash advances, commercial loans and account receivable financing.
Lenders (e.g., PayPal, Bank of America, American Express, Chase, Kabbage, etc.) establish their own guidelines for these loans, which are not limited by government maximums in loan proceeds. Borrowing from traditional lenders, such as banks and credit unions, often involves an elaborate application process that requires multiple documents and backing with collateral. Meanwhile, alternative lenders have a much more streamlined process and often don’t require collateral to back the loans.
The loans can typically be used for any purpose, including the purchase of fixed assets. Most traditional bank business loans start at $250,000 and typically require excellent business and personal credit scores for approval. Terms for traditional business loans can be very different, depending on factors such as your credit standing, type of business, cash flow, collateral, business forecast and more. Interest rate, repayment terms and turnaround time can also vary widely, so it’s important to compare different lenders before making a decision.
Pros and Cons of SBA Loans
SBA loans offer several benefits to small business owners who have difficulty getting approved for conventional loans. While its generous term lengths and low down payment requirements are attractive, there are also some drawbacks. You should weigh the pros and cons of an SBA loan before deciding whether it’s the right funding option for you.
Pros of SBA Loans
- Thanks to SBA’s backing, small business owners can secure loans with lenders that would otherwise be reluctant to enter the small business market due to the higher risks.
- The 504 program offers fixed interest rates, which gives you better control over your loan repayment and budget.
- The 504 program provides 90% financing and requires no collateral other than the property acquired. It also has longer loan payment schedule and no balloon payments.
- SBA provides tips and resources to help small business owners navigate the application process.
Cons of SBA Loans
- You must meet the general guidelines for qualifying for an SBA loan, such as being a for-profit company, doing business in the U.S. and having exhausted other financing options.
- There are usage restrictions for the 504 loans. It can’t be used as working capital and can be used only for specific purchases such as existing buildings, land, the building or improvement of facilities and new equipment.
- The 90% financing means you need to cover 10% of the project amount. Because investment in fixed assets can be rather high, you might still have to come up with a substantial amount of cash.
- The SBA requires a personal guarantee. If you can’t repay the amount you’ve borrowed, you could risk losing your business or personal properties.
Pros and Cons of Non-SBA Loans
There are many types of traditional loans available to small businesses. Choosing the right financing option can help you get the funding you need to grow your business. While these loans offer more flexibility, you should be aware that there are also some challenges.
Pros of Non-SBA Loans
- Neither you nor the lender is limited by government maximums on loan proceeds. You can take out any amount as long as the lender approves the funds.
- The application and approval process is often faster compared to SBA loans. This could be a better option if you urgently need cash.
- These loans can be used for a wide variety of purposes with fewer restrictions.
Cons of Non-SBA Loans
- Most lenders require a high credit score, sufficient cash flow and collateral for a loan application. You might find it difficult to land a loan if you don’t have a good credit score or if you lack funds in the first place.
- You might need to navigate complex guidelines and requirements set up by lenders to mitigate risks. Any sign that implies you’re a risk, such as a poorly written business plan or lack of experience, could cause an application to be denied.
- Different lenders offer loan types and terms that often vary widely from each other. Without proper guidance, it can be hard for small business owners to navigate the many choices and the complex application process.
Is an SBA Loan or Traditional Loan Better for Your Business?
Which option is better for your business depends on your specific circumstances, so it’s important to evaluate the pros and cons based on your business requirements.
SBA loans are designed for borrowers who have difficulty qualifying for traditional financing and have exhausted other options. It offers many small business owners the opportunity to get the funding they need to affordably grow their businesses, thanks to the favorable rates and terms.
Although the qualification process is more stringent, non-SBA loans offer more flexibility and choices so you can use the funds as you see fit. The approval process often takes less time, so it’s a better option if you need funding fast. However, it’s not always easy to get qualified for the large amount required for fixed asset purchases.
No matter which financing option you pursue, you’ll need to come prepared with some basic documentation such as business plan, credit history, collateral and financial projection for the application process. Also, as with any loan, make sure that your company is profitable so you can repay your debt within the terms of the loan.