By Ben Pimentel
Getting a loan from the federal Small Business Administration could give you a major financial boost. But the process of trying to get one also could give you a big headache.
SBA loans are also known as 7(a) loans, which make up the agency's flagship program. The SBA itself does not issue loans; instead, it guarantees loans issued by participating lenders, mostly banks.
SBA loans are arguably the best financing option for small businesses. But the SBA application process can be tedious and long, with strict requirements.
So should you apply for an SBA loan? NerdWallet breaks down reasons why you should or shouldn't.
Yes, go for it, if ...
... You have an established and solid business.
You're likely a good candidate for an SBA loan if you've been in business for two or more years, your business is profitable and you have positive cash flow.
If you meet these criteria and you're willing to invest the time and effort, it's worth it to aim for an SBA loan.
Low rates and long loan terms mean you wouldn't be saddled with unmanageable debt. That gives you more money for running and even growing your small business.
... It's crucial that you get the least expensive loan.
- For loan terms shorter than seven years, the rate is based on the prime rate, with a maximum spread of 2.25%. As of December 2016, that means a maximum rate of 5.75%.
- If the loan term is seven years or more, the maximum spread will be 2.75%, which means as of December, the maximum rate is 6.25%.
... You want or need more time to pay back the loan.
The SBA gives you up to seven years to pay back a typical working capital loan. The terms are even longer for other types of financing: up to 10 years if you're buying new equipment for your business and up to 25 years for real estate purchases.
No, try other options if ...
... You have shaky personal and business finances.
If your finances are wobbly, your chances of being approved may be slim. In that case, applying for an SBA loan could be a waste of time.
... You need the money now.
Applying and being approved for an SBA loan can take weeks, even months.
Even if your business and finances are strong, applying for an SBA loan wouldn't be the best option if you need financing fast to address a pressing business need.
Some SBA lenders, such as SmartBiz and Live Oak Bank, use online platforms to speed up and streamline the process. But you still must be prepared to submit pages and pages of information about you and your business, such as bank statements, tax returns and lease agreements.
Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter: @benpimentel
For related information, visit NerdWallet's resources on how to start a business. To get more information about funding options and compare them for your small business, visit NerdWallet's small-business loans page.