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The Pros and Cons of the SBA

Why the SBA is Great or What is the Upside of Working with the SBA

Some reasons entrepreneurs may want to go through the SBA for financing, include:

  • SBA usually finances businesses for very favorable terms.
  • Businesses will not be impacted with renewal fees, interim appraisal costs or untimely balloon payments.
  • Banks and other lenders are more willing to finance risky ventures because of SBA’s guarantee program.
  • Some praise the SBA for its quickness and successful loan process although of course, there is the other side of the argument as well. This largely depends on who you end up working with on your SBA loan.
  • The SBA guarantees loans
  • The SBA caps the interest rates the banks can charge

Why the SBA sucks or what are the potential downsides of SBA financing?

Some reasons entrepreneurs may not want to go through the SBA for financing, include:

  • SBA loans generally require more documents because they are directly funded by lenders and backed by the government. The bureaucratic paperwork can be daunting or overwhelming especially for time-starved small businesses.
  • The SBA has size-standard guidelines, so not all businesses can qualify for its financial programs.
  • The SBA has a $1.5 million maximum guarantee to any individual borrowers or related entity that controls more than 20 percent of a business interest with an outstanding SBA loan. For larger real estate-based concepts, the $1.5M guarantee may limit the borrower to one SBA loan outstanding at any given time.
  • Can’t use credit card for down payment
  • None of the SBA’s programs involve free money, government grants or no-interest loans.
  • Some believe SBA fees are high
  • Business owners have to demonstrate to the lender that they are suited to run the business – due to prior failures, lenders are much more rigid on this aspect.
  • SBA lenders use the borrower’s personal assets as collateral
  • They don’t fund high risk businesses without track records, e.g. startups. For those types of businesses, entrepreneurs are advised to look for angel investors or venture capital investment who will take equity in your company in anticipation of downstream upside.