If you are thinking of launching your very own business and are looking for funding sources, you are certainly not alone. The numbers show that a record number of new businesses were launched in the US last year, with every indication suggesting that 2021 will be another unprecedented year for entrepreneurs.
Close to 500,000 businesses have been newly launched in the past 12 months, with many of the people behind those businesses being first-time entrepreneurs. If you are on the hunt for funding, you have probably looked into SBA loans for business.
The Small Business Administration is a Federal Government program that is one of the largest sources of funding for American entrepreneurs, with more than $22 billion worth of loans dispensed in 2020. If you want to know the pros and cons of SBA loans before you apply, read on to learn more.
Pros of SBA Loans for Business
Little Collateral Needed
First off, it is important to keep in mind that one of the main benefits of SBA loans is that you often need very little or even zero collateral. Although a down payment is often required (which can be as high as 20% of the loan amount), you often do not need to pledge collateral for any loans worth less than $340,000.
Favorable Repayment Terms
Unsurprisingly, the repayment terms on SBA loan options are usually generous and not as punitive as private loans. A small business loan aims to help entrepreneurs get their dream business off the ground and succeed, thus creating more jobs for all Americans. As such, interest rates are low and penalties for late payment, although strict, are not quite as severe as many bank loans.
Huge Number of Use Cases
If you’re wondering “what is an SBA loan good for?”, the answer is “pretty much anything”. As long as your business operates in the US and aims to deliver a profit, you’re good to go. The SBA is not concerned with the type of industry you wish to operate in (although it will scrutinize this in your application). All types of industries are eligible, without exception.
Cons of SBA Loans for Business
One of the major cons of SBA loans is that you are personally liable for the debt. There is no limited liability arrangement here. If your company goes bust and you fail to make repayments, you are personally on the hook and the SBA can pursue you to the full extent of the law.
Small Loan Amounts
For entrepreneurs with larger capital requirements, SBA loans might seem disappointing. The maximum loan amount is $5 million and there is no possible avenue for borrowing an amount greater than this. What’s more, the maximum amount is rarely granted, even if you have a stellar application. Keep this in mind before you apply.
Get Your Business Off to the Best Possible Start
Understanding how SBA loans for business work can help you make informed choices as a first-time entrepreneur. For more tips for better business practice, we have got you covered. Check out our dedicated Business guides to get your company off to the strongest possible start in 2021 and beyond.