What Are the Pros and Cons of SBA Loans?

Last Updated January 6, 2025

SBA loans can be a valuable way for businesses to get a much-needed cash infusion. SBA loans can be used for a wide range of purposes, such as purchasing real estate, inventory, and equipment, or to improve working capital.

While there are several benefits of SBA loans for small business owners looking for a working capital boost or to scale their company, there are also some cons to consider—and the pros and cons of SBA loans can vary depending on the type of loan you get. By understanding the advantages and disadvantages of SBA loans, you can make the right funding decision for your business.

What Are SBA Loans?

As noted earlier, SBA loans are loans that are partially backed by the U.S. Small Business Administration. Business owners with more than a 20% stake in the business must also provide an unconditional personal guarantee (which makes them personally liable for the loan).

This reduces the risk for a lender when they extend a loan to a small business, which makes them more likely to offer higher loan amounts and more favorable terms to small business owners.

Under this program, small business owners apply for a loan with a lender who is an SBA partner. The lender then applies for a loan guarantee with the SBA. If you are approved, the lender moves forward with closing the loan and distributing the funds. You repay the lender directly, similar to how you would repay a traditional bank loan.

So, are SBA loans good? Let’s dive into the key advantages and disadvantages of SBA loans you should consider.

Pros of SBA Loans

The following are some of the primary advantages of SBA loans:

Lower Interest Rates

The interest rate on SBA loans is determined by a base rate combined with an additional markup rate from the lender. However, even with the lender markup, all SBA loans have a capped maximum interest rate, which helps make repayments more affordable. Other lenders don’t have such caps in place, which can result in much higher interest rates, especially if you’re running a business with poor credit.

It’s important to note that the maximum interest rate will vary between different types of SBA loans (such as 7(a) loans and microloans). Small business owners should compare rates to ensure they get the best interest rate available for their needs.

Varied Loan Amounts Available

SBA loans are available in amounts ranging from $500 to $5.5 million, offering far greater flexibility in financing different business needs. The maximum amount available through SBA loans is much higher than what would typically be made available through traditional bank loans or alternative lending programs.

Longer Repayment Terms

SBA loan terms vary depending on what you need to use them for, but they generally offer lengthy terms, which results in lower monthly payments. For example, the maximum loan maturity on an SBA loan used for equipment, inventory, or working capital is 10 years. Loans used for real estate can have terms up to 25 years in length. Even microloans offer terms of up to seven years.

Flexible Use Cases

SBA loans can be used for a wide range of business expenses (though this can vary between different types of SBA loans). Depending on the type of SBA loan you take out, you can use your funds for working capital, purchasing, refinancing, or renovating real estate, buying equipment, inventory, supplies, and office furniture and fixtures, refinancing existing business debt, or even facilitating ownership changes.

Thanks to the flexibility generally offered by SBA loans, you can be confident that you’ll have sufficient cash flow to carry out these and other important business activities without creating financial distress.

Good Alternative If Your Business Doesn’t Qualify for Traditional Loans

The primary purpose of an SBA loan is to help businesses that don’t qualify for other types of financing. In fact, it is a requirement that you exhaust attempts at obtaining other forms of financing at a reasonable rate before you apply for an SBA loan. Thanks to the lowered risk for lenders, businesses are more likely to get approved for an SBA loan than a traditional bank loan—and at better rates than they might otherwise have obtained.

Cons of SBA Loans

While SBA loans offer several advantages, there are a few downsides of SBA loans to consider as well:

Lengthy Application and Funding Process

If you’re hoping to get funds quickly, an SBA loan isn’t for you. A lengthier approval process that involves both the lender and the government often takes one to three months to see funds disbursed to a business. Quick approval and funding aren’t an option with SBA loans.

Personal Guarantee Required

If you own more than a 20% stake in the business, you are required to provide an unlimited personal guarantee for the loan. This leaves you personally liable if the business defaults on the loan.

Prepayment Penalties

SBA 7(a) loans are actually subject to a prepayment penalty if you pay more than 25% of the outstanding loan balance within three years of opening the loan. 504 SBA loans also have prepayment penalties. This means trying to pay off your outstanding debt ahead of time will actually hurt you financially.

Down Payment and Collateral

SBA loans often require a down payment of 10% to 20% of the loan amount to receive funding. Many lenders also require that small business owners offer additional physical collateral. This reduces risk for the lender while increasing your own financial risk.

Usually Not an Option for Startups

Even though SBA loans are meant to help small businesses, they usually aren’t viable for startups. This is because SBA loans require that recipients be operating a for-profit business, and most lenders require some kind of credit history before they are willing to lend—two factors that startups often can’t fulfill.

Types of SBA Loans

There are several different types of SBA loans available. With differing attributes, they also offer distinct advantages and disadvantages.

7(a) Loan Program

The most commonly used SBA loan, the 7(a) loan program provides loans up to $5 million. Several types of 7(a) loans are available, including loans with fixed and variable rates, small loans, and express loans that offer expedited funding. 7(a) loans can be used for a broad variety of business activities, with minimal restrictions. Interest rates tend to be higher for smaller loans.

Best for: Working capital, funding purchases of equipment and supplies, real estate purchases and renovations, business expansion, and ownership changes.

504 Loan Program

Among the pros and cons of SBA 504 loans, it is important to note that these loans have more restrictive usage options than other SBA loans. They cannot be used for inventory purchases, real estate investments, or working capital. Instead, they are used for the purchase of fixed, long-term assets. 504 loans offer lower interest rates and repayment terms of 10 to 25 years depending on the asset that is being financed.

Best for: Purchasing fixed assets such as real estate, equipment, machinery, land, furniture, or fixtures. May also be used for facility upgrades.

Microloan Program

Focused on serving startups, women-owned businesses, and businesses in low-income areas, the SBA microloan program offers loans up to $50,000. Microloans have greater flexibility in terms of eligibility requirements while also offering competitive interest rates and repayment terms of up to seven years. These loans typically require collateral.

Best for: Working capital as well as smaller-scale purchases of equipment, inventory, and other business supplies.

Disaster Loan Program

SBA disaster loans offer up to $2 million to help businesses recover from physical or economic damage after a disaster. SBA disaster loan benefits are only available to businesses affected by a declared disaster, such as a hurricane or wildfire.

Best for: Repairing or replacing business property, inventory, and equipment, as well as working capital to cover economic damages from a declared disaster.

Working Capital Pilot Program

The Working Capital Pilot (WCP) program is a line of credit program offered by the SBA. Available to businesses in operation for at least 12 months, this offers a flexible funding option for financing a variety of business activities. This program currently offers transaction-based lines of credit that can be used for multiple reasons during the 60-month term, as well as asset-based lines of credit that are backed by collateral.

Best for: Businesses in need of flexible financing for a variety of small business growth activities.

SBA Loan Alternatives

If SBA loans don’t seem right for your situation, there are several SBA loan alternatives that might work better for your needs, including:

• Invoice factoring: Selling outstanding client invoices for a cash advance.
• Short-term loans: Covering immediate needs but have higher interest rates and shorter repayment periods than standard loans.
• Equipment or inventory financing: Financing a specific purchase without upfront capital.
• Equity financing: Selling an ownership stake in the business to an outside investor in exchange for funding.
• Grants: Qualifying businesses can receive a grant from the government or a private organization with no repayment requirements.
• Crowdfunding: Collecting small donations to bring your product to market through a platform like Kickstarter or GoFundMe.

In-Summary: Benefits and Downsides of SBA Loans

SBA loans offer distinct advantages for many small business owners (such as favorable loan terms and amounts), but they aren’t without their disadvantages. By understanding the pros and cons of SBA loans and how your business stacks up against their lending requirements, you can determine if these loans are right for you and navigate the small business loan industry with confidence.

Michael McCareins

Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.