Pros and Cons of SBA Loans

close up of a business loan application with a pen sitting on top of the paper

With backing from the federal Small Business Administration (SBA), SBA loans are popular among newer small businesses—especially those that might not qualify for more traditional kinds of funding. The SBA was created in 1953 as an independent agency of the US government.

The government does not provide the actual loan funding to the small business borrower. Instead, the SBA underwrites (i.e., guarantees) the loan and leaves the actual funding and servicing to a private financial entity such as Pango Financial. SBA-backed loans are among the most popular funding choices we offer.

Reasons to choose this option include:

  • Accessibility: You can get an SBA loan even if you lack the collateral or track record to qualify for more traditional funding.
  • Amortization: Most SBA loans don’t require a balloon payment when the term ends; you can head off a potential future cash flow squeeze by structuring the amortization schedule to align with your business.
  • Little or no down payment: You won’t have to come up with a sizeable chunk of the capital you’re looking to borrow.
  • Terms: You can adjust repayment terms to provide financial breathing room if your cash flow requires it.

From a repayment perspective, the small businesses that typically take advantage of SBA loans are riskier, at least on paper, than more established borrowers. This is reflected in the loan’s cost as well as the process for getting approved. Watch for these potential downsides associated with an SBA loan:

  • Red tape: The paperwork and processing time for an SBA loan can exceed the alternatives. If you need quick easy turnaround, this might not be your best bet.
  • Higher interest: Most SBA loans come with a higher interest rate than other financing. So in the end, you’d pay more total interest than with a different kind of funding—even if the loan came with a longer term and lower monthly payments.
  • Personal guarantee: If you own 20 percent or more of your business, SBA will likely require you to personally guarantee that payments will be received on time. This places additional pressure on you to fulfill the terms of the financing contract.

So weigh this option carefully. If you’d like to learn more about an SBA-backed loan for your small business, visit Pango Financial or call 1-855-WHY-PANGO (1-855-949-7264). Our specialists will take the time to walk you through the variables help you determine if an SBA loan is right for you.