Why an SBA Loan May Not Be What Your Business Needs

  • August 12th, 2017
  • Matt Hilton

As a small business owner, when you think about obtaining financing, an SBA loan is usually one of the first options that comes to mind. While in many financial situations these loans are just the ticket, an SBA loan is not a perfect fit for every small business. SBA loans are a viable option for businesses without a lot of established credit and they often offer lower monthly payments, but they may come with higher interest rates and require more paperwork than other loans. Here are the important details you need to know before you consider applying for one:

Pros:

  • The loan is guaranteed by the SBA (Small Business Administration) so lenders are more willing to approve loans for applicants who have limited business credit or collateral and as a result would normally be denied funding.
  • SBA loans typically require lower down payments than traditional business loans from a bank.
  • An SBA loan can be structured with longer loan terms in order to reduce monthly payment amounts.

Cons:

  • SBA loans can have higher interest rates than traditional business loans.
  • SBA loans require much more paperwork and the approval process generally takes more time than most other loan types. Many financial institutions say the turnaround time is 1–4 weeks, but more often than not it takes longer than that.
  • There are several restrictions surrounding eligibility for this funding: business ownership, the industry of the business and more.

Even if your business does qualify for an SBA loan, consider all of your funding options before you apply. There are several specialty and general business loan types, and chances are, you will qualify for multiple financing options. The challenge then is in choosing the option for funding that best fits your business’s needs. Here are a few of the choices and the most important points to consider as you weigh the options:

Business Credit Cards:
They’re exactly what you think they are. They’re just like regular credit cards but for business expenses.

Uses:

  • Day-to-day business expenses
  • Business credit building
  • Purchasing inventory

Pros:

  • Quick approval process
  • Flexible use
  • A great way to begin building a business credit profile, which can help you become qualified for larger business loans
  • Many have rewards programs like a small percentage of cash back or travel rewards

Cons:

  • Not a good option for large purchases like equipment or real estate
  • APR is generally high and can make payments expensive if card is not paid off on time
  • Late payments affect your personal and business credit

Business Lines of Credit:

In many ways, a line of credit is similar to a credit card, but there are some key differences. Lines of credit are much more flexible than credit cards, especially with cash withdrawals. There are also secured and unsecured lines of credit.

Uses:

  • Short-term, recurring business expenses, such as inventory
  • Payroll
  • Covering costs up front for future projects

Pros:

  • Very flexible access to funding
  • Better APR than most credit cards
  • Builds credit
  • Establishes a relationship with a lender

Cons:

  • Generally restricted to companies that have been in business for two or more years
  • More in-depth approval process than business credit cards

Equipment Loans:

As you can imagine, this form of funding is used to obtain equipment for a business. Whether it’s a pizza oven for your restaurant, a tractor for your farm or a 3D printer for your cutting-edge start-up, an equipment loan can help you get it.

Uses:

  • Purchasing equipment

Pros:

  • Low APR
  • Helps build business credit
  • The equipment purchased acts as collateral for the loan

Cons:

  • Often requires a high down payment
  • Requires good credit in order to get a good APR
  • Equipment can depreciate quicker than the loan gets paid off

Merchant Cash Advance:

Cash advances are generally given to merchants based on credit card sales. Essentially, the lender providing the cash advance is purchasing future credit card sales.

Uses:

  • Pay off other debts
  • Avoid late fees with operating costs (utility bills, rent, etc.)
  • Payroll
  • Paying for vendor services

Pros:

  • High approval rates
  • You don’t need perfect credit to qualify
  • No collateral required

Cons:

  • Often times APR is higher
  • Lenders may charge various fees

This list is more of a highlight reel than an exhaustive encyclopedia of loan types, but you can see there are many options for small business funding outside of an SBA loan. If your bank is unable to get you the financing you need, don’t sweat it. Generally, a local bank is only proficient in a small handful of these loan types; getting your loan application denied by a bank is far from the end of the line for your business. Online lending marketplaces, such as Lendio, work with a wide variety of lenders and loan types to help you get the funding that suits your specific needs. While an SBA loan is a valuable resource for many small businesses, it is not a one-size-fits-all loan product. Before you apply, assess your needs, do your research and weigh all of the options to determine which type of loan or line of credit will help you build and grow a successful business.

About the Author

  • Matt Hilton

Matt is a digital marketer and writer. He has a passion for entrepreneurship and for helping small businesses. He’s worked with multiple startups and has helped dozens of small businesses with their online marketing. If he’s not in the office, he’s either out fishing or spending time with his wife and daughter.

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