SBA Loans: Pros and Cons Guide

SBA Loan Pros & Cons - A small business owner is thoughtfully contemplating the advantages and disadvantages of Small Business Administration (SBA) loans, including factors like competitive interest rates and the potential for lower monthly payments. The image captures the essence of making informed financial decisions as they weigh their options for funding their small business.

Key Takeaways:

  • 💰 Low‑cost financing – SBA loans offer large loan amounts (up to $5M) with lower interest and longer repayment terms thanks to the government guarantee.
  • 📉 Lower risk for lenders – The SBA guarantees up to ~85% of the loan, so that banks can offer better rates and terms.
  • 🏦 Multiple loan types – Options include 7(a), 504, Microloans, and Disaster Loans—covering everything from real estate and equipment to startup funding.
  • Lengthy process – Applications involve extensive paperwork, strict requirements, and can take weeks or months to be funded.
  • Strict eligibility – Generally requires good to excellent credit, a strong business history, collateral, and personal guarantees—approval rates are often below 50%.
  • 🔁 Flexible use of funds – Can be used for working capital, expansion, real estate, equipment, disaster recovery, and more.
  • 🛠️ Startup option available – The Microloan program supports newer businesses with smaller loans (up to $50K), though rates may be slightly higher.
  • 🤔 Alternatives exist – If SBA isn’t a fit, alternatives include fintech lenders, lines of credit, equipment financing, and merchant cash advances.

SBA loans are often considered the most beneficial small business financing option as they typically offer high borrowing amounts at low cost. Despite the advantages of government-backed loans, they come with their share of disadvantages.

With many small business financing options available today, selecting the best one can be challenging. SBA loans offer the lowest-cost business financing, but you’ll have to go through stringent government requirements, and it takes a long time to fund the loans.

If you’re considering an SBA loan, you should know all the pros and cons before starting the application process. This guide will cover the benefits and drawbacks of SBA loans, how to apply, and help you decide if it’s the right lending option for your business.

Specifically, we’ll answer these questions and more:

Join our Newsletter for great tips and updates.

    We will help you grow your small business.

    What are SBA Loans?

    SBA loans are government-backed small business financing packages that offer some of the best benefits available on the market. SBA loans are backed by the U.S. Small Business Administration and offered through partner lenders. The US Small Business Administration (SBA) governs the program and sets rules and regulations for participating lenders.

    The SBA does not underwrite or fund the loan. Instead, small business owners apply to one of three SBA-approved financial institutions: commercial banks, credit unions, or alternative business financing facilitators (like United Capital Source). Alternative lenders typically refer to online lenders.

    While it doesn’t fund the loans, the SBA partially guarantees loans (up to 85%). The government guarantee provides extra security for the lender. Since they take less risk, lenders can offer higher borrowing amounts at lower interest rates and longer terms than other small business loan options.

    The SBA takes further actions to reduce financing costs by capping the maximum interest rates and limiting the fees lenders can charge. Lenders must apply for SBA approval and are subject to SBA oversight. SBA loans typically offer longer repayment terms compared to other business loans.

    Many small business owners seek this type of financing as SBA loans tend to offer competitive rates and extended terms. Additionally, SBA loans often offer substantial funding. An SBA loan may be more accessible than a traditional bank loan, but alternative business loans offer much less stringent qualifications than SBA or traditional loans.

    What types of SBA Loans are available?

    The loan program offers several lending packages to cater to the diverse needs of small business owners. Let’s look at some of the packages available.

    SBA 7(a) Loans

    The SBA 7(a) loan is the most common financing package in the program. Borrowing amounts go up to $5 million with repayment terms of 25 years for real estate and 10 years for all other loans. The program also includes CAPLines of credit, which carry terms of seven years.

    Interest rates depend on the loan amount, maturity, and whether the rate is fixed or variable. The maximum variable interest rate is the prime rate + 4.75%, and for a fixed rate, the maximum is the prime rate + 8%.

     SBA CDC/504 Loans

    The SBA 504 loan program provides funding for major fixed assets. It requires working with a Certified Development Company (CDC). The maximum borrowing amount is $5 million or $5.5 million for special energy projects, not to exceed $16.5 million for a total of three such projects.

    Businesses can use SBA 504 loan proceeds to purchase real estate, equipment, and machinery, or make renovations such as adding a curb or parking area. SBA real estate loan terms go up to 25 years, and all other loans go up to 10 years. Interest typically does not exceed 3% of the loan amount, and most loans carry an average APR of 5% to 6%.

    SBA Microloans

    The Microloan program is the only SBA lending package specifically for startups and newer businesses. All other loans require a minimum of two years of business experience. Business owners can use the funds for working capital, real estate, and equipment, but cannot use the funds for refinancing business debt. Loan amounts go up to $50,000 with a maximum borrowing term of 7 years. Interest rates are usually between 5%-7%.

    Disaster Loans

    SBA disaster loans are available for small businesses impacted by a natural disaster. Economic Injury Disaster Loans (EIDLs) are the most common disaster loans for small businesses. Business owners can also apply for a physical damage loan to cover costs that insurance and other programs won’t cover.

    Disaster loans have a maximum borrowing amount of $2 million, and terms go up to 30 years. Repayments are deferred for the first 12 months. Interest rates on EIDL loans cannot exceed 4%.

    What are the pros of SBA Loans?

    You’ll sometimes hear SBA loans called the “gold standard of small business financing.” Let’s look at what makes them so desirable.

    Government Guarantee

    In most business financing arrangements, the loan is based solely on your personal and business financials and qualifications. With SBA loans, the federal government acts almost like a cosigner on the loan, as the SBA guarantees a certain percentage of the loan. If the business fails and the borrower defaults, the government pays the lender for the guaranteed portion of the loan. That added security of the loan guarantee creates options that aren’t available with other loans.

    Borrowing Amounts for Any Budget

    Lenders have more security to offer, allowing them to lend higher amounts. For comparison, some lenders only provide up to $250,000. With a $5 million maximum, small business owners can make significant investments in growth.

    However, if your business does not require a substantial loan, smaller loan amounts are also available. The wide range of available borrowing amounts means there’s a loan to fund most business needs.

    Low Interest Rates & Limited Fees

    The SBA caps interest rates, limiting what lenders can charge. Since the government agency partially guarantees the loans, lenders take less risk and can offer lower rates than the maximum in many cases.

    The SBA also sets limits on the fees lenders can charge. You won’t have to worry about extraneous costs such as application fees. Providing a set maximum interest rate helps business owners plan for costs more effectively. You will have to pay a guarantee fee on the portion of the loan the SBA guarantees, however.

    Longer Repayment Periods

    You’ll have longer to pay off a loan through the SBA than other forms of small business financing. With terms of up to 10 years or 25 years for real estate, you can keep your monthly payment low and have more cash flow for other business expenses. SBA loans are available in both variable and fixed-rate options.

    Various Business Purposes

    Among the different SBA lending packages available, the loans provide funding for virtually any business need. The 7(a) loan offers a wide range of funding, but there are also specialized loans available.

    The SBA’s primary small business loan programs are the 7(a) loans, 504 loans, and microloans. 504 SBA loans are specifically for purchasing fixed assets such as real estate and large equipment. SBA Express loans provide expedited funding and typically require less documentation than standard SBA loans.

    There are specifically designed export loans for growing an export business, microloans for startups and new businesses, and the Community Advantage pilot program provides funding for businesses in underserved areas. In addition, SBA express loans can provide faster funding, although they carry lower borrowing amounts and higher interest rates.

    Examples of SBA loan uses include:

    • Working capital.

    • Commercial real estate purchases.

    • Equipment financing.

    • Business debt refinancing.

    • Expansion & hiring.

    • Business acquisition.

    • Supply and inventory purchases.

    Build Business Credit

    SBA lenders are required to report to the appropriate credit bureaus, meaning that paying off your loan can improve your credit score. An improved credit score can help you secure additional financing at lower costs when you need it.

    Combination Financing

    It’s possible to combine an SBA loan with other loans. Combined financing creates more options for your business to expand, invest in new opportunities, or fund a specific project.

    What are the cons of SBA Loans?

    While there are numerous advantages to the loan program, it also has a few downsides that you should be aware of.

    Stringent Approval Requirements

    For the most part, you’ll need an excellent credit score, established business history of at least two years, and strong annual revenue to qualify. Some loan packages are available for borrowers with lower credit scores or newer small businesses, but typically have smaller borrowing amounts and potentially higher interest rates. Traditional lenders usually have the most stringent approval requirements for SBA-backed loans.

    Different Requirements for Different Lenders

    A challenging aspect of the program is that the SBA does not establish specific requirements beyond its basic eligibility criteria. That leaves each SBA lender to set different underwriting requirements.

    That often makes it difficult to know when you qualify and where. It’s not uncommon for small business owners to have to submit a loan application to multiple lenders before finding one that accepts them.

    Exhaustive Documentation

    SBA loans require in-depth documentation for both personal and business finances. You’ll need to prepare multiple years’ worth of personal and professional tax returns and income statements. In addition, you’ll need to provide business licenses, deeds, leases, and complete SBA forms, and lenders might require additional documents.

    Long Funding Process

    The application process is time-consuming, particularly due to the extensive paperwork and documentation required. SBA-approved lenders must apply to the SBA, which then determines whether to guarantee the loan. If you work with an SBA-preferred lender, you may not need SBA approval and can potentially speed up the process.

    Even after SBA approval, the lender must approve and underwrite the loan. All told, it could take between 60 and 120 days to close and fund an SBA loan. For comparison, there are some online loans you can apply for in minutes and receive funding the next day or even the same day.

    Down Payment

    SBA loans typically require a down payment, which can range from 10% to 20% of the loan amount. The SBA refers to the down payment as an equity injection. In most cases, the down payment is 10% of the loan amount. The SBA prefers to work with businesses willing and able to invest in themselves. In this way, all three parties – the SBA, the lender, and the borrower – put some risk in the loan.

    Personal Guarantee

    Nearly all SBA loans require an unlimited personal guarantee, which is essentially a legally binding promise to repay the loan in full. If a borrower defaults on the loan, the lender and the SBA can pursue personal assets to cover the loss. SBA loans generally require personal guarantees from owners with more than a 20% stake in the business.

    Collateral Requirements

    Loans under $25,000 typically don’t require collateral. Loans over $350,000 must be “collateralized to the maximum extent possible.” For loans between $ 25,000 and $350,000, the SBA instructs lenders to follow their collateral policy for non-SBA loans with a similar lending amount.

    Financing of Last Resort

    SBA loans are considered a last resort option, available only when applicants are unable to find financing elsewhere. Borrowers must contact other lenders before applying for an SBA loan, demonstrating that they have exhausted all other options.

    Restricted Industries

    The SBA prohibits the following types of businesses from the loan program:

    • Real estate investment firms.

    • Companies engaged in speculation.

    • Gambling businesses such as casinos.

    • Rare coin and stamp dealers.

    • Multilevel marketing (pyramid scheme) businesses.

    • Religious businesses, charities, and other nonprofits.

    • Government agencies.

    • Lending institutions.

    SBA Loans Pros & Cons Summarized

    Here’s a quick summary of the pros and cons.

    Pros:

    • The US Small Business Administration partially guarantees the loans.

    • Available borrowing amounts range from $0 to $5 million.

    • Low interest rates and favorable repayment terms.

    • There is a loan package available to meet virtually any business need.

    • You can use them to build business credit.

    • It’s possible to combine an SBA loan with other small business loans.

    Cons:

    • Usually requires an excellent credit score & strong business financials.

    • Specific requirements vary between SBA lenders.

    • Requires extensive documentation as part of the application process.

    • It could take up to 120 days to close and fund an SBA loan.

    • Down payment & personal guarantee required.

    • You may have to offer up collateral to secure an SBA loan.

    Who is eligible for an SBA Loan?

    The SBA’s basic eligibility requirements are:

    • Be a for-profit business.

    • Do business and be physically located in the US or its territories.

    • Have invested personal time and money in the business.

    • Exhaust all other financing options (SBA loans are a last resort financing option.)

    Each lender sets its own qualifications. Approved businesses we work with here at UCS typically meet the following minimum qualifications:

    • Credit score of 650+ (some lenders say 680+).

    • $360k in annual revenue.

    • Two+ years in business.

    Cash Flow

    In its guidelines, the SBA states:

    “The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral… If the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.”

    Simply put: You must have the cash flow to support the payments on the loan.

    How to apply for an SBA Loan:

    United Capital Source can help you apply to an SBA-approved lender following these steps.

    Step 1: Ensure You Qualify.

    You’ll need a credit score between 650 and 700 and a healthy, consistent cash flow. How you intend to use the money also plays a significant role. You’ll need a detailed plan of how the funds will help you invest in and grow the business.

    Step 2: Gather Your Documents.

    Be prepared to provide:

    • Driver’s License.

    • Business license or certificate.

    • Voided Business Check (for business bank account information).

    • Bank Statements.

    • Credit Report/Statement of Personal Credit History.

    • Business Tax Returns.

    • Credit Card Processing Statements.

    • Personal Tax Returns – 3 Years.

    • Business Tax Returns – 3 Years.

    • Business Plan (Not in all cases).

    • Personal Financial Statement.

    • List of Real Estate Owned or Business lease, if applicable.

    • Debt Schedule/Loan/Rent/Lease Documentation

    • Deeds/Title/Ownership documentation for any collateral/Security

    • Current Profit & Loss Statements and Balance Sheet Year-to-Date

    • A/R and A/P Reports

    • United Capital Source 1 Page Application

    Step 3: Fill Out the Application.

    You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.

    Step 4: Speak to a Representative.

    Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.

    Step 5: Receive Approval.

    SBA Loans through our network generally take 3-5 weeks to process. Once approved and your file is closed, funds should appear in your bank account in a few business days.

    Frequently Asked Questions

    Here are the most common questions about SBA loan pros and cons.

    Since SBA loans are not a one-size-fits-all business financing option, they may not be the right choice for every business. While they offer the lowest-cost financing, the lengthy funding times and high approval requirements exclude many companies. The loans have a 25% approval rate at large banks and a 49% approval rate at small banks, so most applicants must look for financing elsewhere.

    Most SBA loans require a personal guarantee from any owner with at least 20% equity in the business. A down payment of 10% to 30% of the loan amount is often required for SBA loans. Lenders may require physical collateral to secure SBA loans.

    Another reason an SBA loan might not be the best option is if you need the money sooner. As a small business owner, you’re most likely considering a business loan to take advantage of new opportunities, expand your business, upgrade equipment, or cover working capital needs. Waiting weeks or months might not be possible if the business need is more urgent.

    That being said, if you do meet the requirements and have the time and patience to deal with the lengthy application and approval process, the SBA loan program is probably the best option.

    Can I get an SBA Loan program with bad credit?

    No, SBA loans usually require good to excellent credit. There are several SBA loan programs available to borrowers with low or no credit. Still, they typically have lower borrowing amounts, higher interest rates, and other specific requirements, such as establishing a business in an underserved area.

    If you need business financing, but don’t have the credit or meet the specific circumstances for an SBA loan, consider bad credit business loans. While these loans will have a higher interest rate, you could use them as bridge financing while repairing or building your credit.

    Some borrowers may consider business credit cards as a financing solution to cover business expenses until they can qualify for small business loans. In some cases, it may be possible to use personal loans for business purposes, although it’s generally recommended to avoid mixing business and personal finances.

    What are my other Small Business Loan options?

    If you determine that SBA loans are not right for your business after reviewing the pros and cons listed above, you might be wondering about other small business options. Luckily, there is no shortage of financing options to meet your specific business needs.

    With the growth in alternative online lenders powered by fintech advances, you can find business financing with flexible requirements and lightning-fast funding. Consider one of these small business loans for your needs:

    SBA Loan Pros & Cons – Final Thoughts

    A small business owner stands confidently in their shop, smiling and holding a document that represents their recent approval for an SBA loan. The image conveys a sense of success and optimism, reflecting the positive impact of the Small Business Administration's loan program on small business owners.

    In many ways, SBA loans are the most advantageous small business financing options on the market. You can borrow up to $5 million and receive a low interest rate, along with the longest repayment terms.

    While the low cost and lower monthly payment are attractive options, SBA loans are also the most time-intensive application process, and there’s no guarantee you’ll get approved. Less than half of SBA applications receive approval.

    Ultimately, you must decide whether your business can afford to wait for the lengthy underwriting and funding process while risking not getting approved, or if the higher cost of a quicker funding time and lower approval threshold is worth it.

    Contact us if you’re ready to apply for an SBA loan or pursue another small business financing option. Our loan experts can help you find the best funding package for your business needs.

    We will help you grow your small business.

    Share this post:

    Written by

    Most Recent Articles

    Ready to grow your business? See how much you qualify for:

      Current monthly sales deposit average to your business bank account?

      How much Working Capital would you like for your business?

      AL AK AZ AR CA CO CT DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY DC
      Need Instant Help?
      Call Us Now At:

        Current monthly sales deposit average to your business bank account?

        How much Working Capital would you like for your business?

        At UCS, we understand the value of your time and want to ensure that your application has a great chance of approval. Please take note of the following details before applying:
        • To be eligible, it’s necessary to have a business bank account with a well-established U.S. bank such as Chase, Wells Fargo, Bank of America, Citibank, or other major banks. Unfortunately, online-based bank accounts like PayPal, Chime, CashApp, etc., are not permitted.
        • When describing your current average monthly sales deposits to your business bank account, please provide accurate information. Our approval process is based on your current business performance, and it’s essential to provide accurate details about your current sales in the first question on the application form. We cannot approve applications based on projected revenues after receiving funding.
        We appreciate your understanding and cooperation in ensuring a smooth and successful application process.
        5/5
        |
        1500+ 5 star reviews
        5/5
        1500+ 5 star reviews

        Take a minute, Get a FREE Consultation

        Your Connection is
        securely encrypted

        $1.3+ Billion Matched to US Businesses