Is an SBA Loan Right for Your New Business? Pros and Cons Explained

SBA loans are a kind of loan that is partially guaranteed by the U.S. Small Business Administration and is issued by the participating lenders which are generally banks.

If you think that the lending standards of these loans are simple, you may get caught up here, as SBA loans have strict standards of qualification. This is one of the best loans for small businesses as they come with flexible terms and low interest rates for qualified applicants.

In this article, you will get to learn about the pros and cons of SBA loan for new business and the types of SBA loans available, to give you a clear picture of the ones which are right for you.

Understanding SBA loans

A SBA loans are small business loans, which help in covering the needs of working capital, real estate purchase, startup costs, any type of business expansion and much more. This type of financing is facilitated by private lenders but is backed by the federal government, especially by the Small Business Administration.

As of the 2025 fiscal year, which began on October 1, 2024, more than $18 billion in SBA 7(a) loans had already been approved, highlighting the strong demand for SBA loans for new business growth and expansion.

Working of SBA loans

When applying for an SBA loan for a new business, you’ll work directly with a business bank, credit union, or other approved lender. Once your application is submitted, the lender seeks a loan guarantee from the Small Business Administration (SBA). This guarantee means that if you default, the SBA will repay a portion of the loan to the lender, reducing the lender’s financial risk.

To secure an SBA loan, the SBA requires an unconditional personal guarantee from anyone who owns 20% or more of the business. This guarantee makes you personally liable for repayment if your business cannot meet its loan obligations.

The combination of the SBA’s backing and the personal guarantee gives lenders more confidence to approve financing, especially for startups and small businesses that may not qualify for traditional loans.

Once approved, your lender will handle the loan closing and distribute the funds. Repayment is made directly to the lender, typically on a monthly schedule.

Pros of SBA loan for start up business

Even though SBA loans maybe liked by entrepreneurs for funding their small business ideas, it has certain pros and cons associated with it. Below are some of the advantages of these types of financing options.

Competitive rates

Under federal guidelines, participating lenders determine SBA loan interest rates by adding a predetermined spread to the current prime rate.

Note that a loan's annual percentage rate differs from the interest rate. The APR includes all loan fees in addition to the interest rate.

APRs usually vary drastically between SBA lenders and non-SBA lenders. For example, an online lender specializing in SBA loans may cap its variable APR at around 14 %, while major online small-business lenders that don't offer SBA loans have loans with APRs as high as 99%.

You can also take help of the SBA loan calculator to get an estimate of your monthly payments and determine the amount you will spend on interest, as per the multiple rates, when you apply for SBA loan for new business.

Low fees

Fees for SBA loans usually consist of an upfront guaranteed fee based on the loan amount and maturity and a yearly service fee based on the guaranteed portion of the outstanding balance. The SBA reassess its fee structure each year.

There are no upfront guaranteed fees on SBA Express loans to veteran-owned businesses.

The fee structure of SBA is reassessed every year, and there is no requirement of upfront guaranteed fees on SBA Express loans to businesses owned by veterans.

Longer terms

Talking about the perks of getting an SBA loan for new business, small business owners get more time than usual to repay the amount borrowed. This will help you to have funds that can be used for other business activities.

Your loan term will be based on your plan for using the money. Below are some of the current maximum maturities:

• Equipment: 10 years
• Working capital or inventory loan: 10 years
• Real estate: 25 years

Large loan amounts

The amount of loan you will receive from SBA loan for new business will depend on the type of loan you are selecting, along with your business qualifications. Although there are chances that you will be able to secure a good loan amount.

SBA loan programs like the 7(a) loan and the 504/CDC loan offer significantly higher funding amounts than most traditional financing options. The 7(a) program provides up to $5 million, while the 504/CDC program offers up to $5 million, or up to $5.5 million for small manufacturers and qualified energy-related projects.

These amounts far exceed the typical loan limits of online lenders and many banks, which often cap loans at $500,000 to $1 million. For entrepreneurs seeking the best small business loans for new businesses, SBA loans present a compelling option due to their higher limits and favorable terms.

Cons of SBA loans

Every loan that offers advantages also comes with certain disadvantages. Below mentioned are some of the disadvantages of SBA loan for new business.

Hard to qualify

Even though the risk of lenders who offer you these loans doesn’t have to carry a lot of risk as it is backed up by the government, you will have to qualify for the eligibility criteria for getting an SBA loan. The criteria are generally that you need to have an established business, a good credit score, and strong business finances to get these start-up small business loans.

Slow to fund

When you apply for an SBA loan for a new business, it takes around one to three months for the funds to be released. This also depends on the type of SBA loan you choose for business loans for start-up companies. The application process of this loan is extensive and demands excessive documentation.

Require some form of collateral

SBA loan for new business requires an unlimited personal guarantee from anyone who owns 20% or more of the business. There is a possibility that lenders will ask you to provide a limited or unlimited personal guarantee.

Your loan and business qualification will determine the physical collateral you need to provide or make any down payment. For example, SBA 504 loans have a down payment of 10% or more.

Conclusion

An SBA loan for new business can be a powerful funding tool for entrepreneurs looking to start or expand their ventures. With competitive interest rates, low fees, longer repayment terms, and access to larger loan amounts than many traditional lenders, SBA loans stand out as one of the best financing options.

However, strict eligibility requirements, longer funding timelines, and the need for personal guarantees or collateral should be carefully considered. By understanding the pros and cons, you can make a more informed decision and choose the SBA loan program that best fits your business’s needs and goals.

FAQs about SBA loan for new business

Can a brand new business get an SBA loan?

While securing an SBA loan for new business is possible, it's not guaranteed and requires careful planning. Although SBA loans are typically geared toward businesses with an established track record, certain programs—like SBA 7(a) loans and SBA microloans—can be viable to start up small business loans under the right circumstances. Strong business plans, industry experience, and solid financial projections may qualify startups. Working with an experienced lender and understanding SBA requirements can improve your chances of approval and help you secure the funding needed to launch or grow your business.

How long do you have to be in business to get an SBA loan?

While there isn't a strict and enforced timeline, most SBA lenders want businesses to have been in operation for at least two to three years to qualify for an SBA loan. However, the SBA also approves loans for businesses with less than two years of operating history. Towards the end, the decision lies with the lender and their requirements.

Is it hard to get a small business loan for a new business?

In general, SBA loan eligibility is determined by several key factors: the nature of the business’s operations, its ownership structure, and its location. To qualify, businesses must typically meet SBA size standards, demonstrate the ability to repay the loan, and have a legitimate and sound business purpose. Even if a borrower has less-than-perfect credit, they may still be eligible for startup funding, especially if other aspects of the application, like the business plan or cash flow projections, are strong.

Which SBA loan is easiest to get approved for?

Among SBA loan options, SBA microloans and SBA Express loans are generally considered the easiest to qualify for. Microloans are ideal for startups and small businesses, thanks to their smaller loan amounts and more flexible eligibility criteria, making them a strong option for those with limited or non-traditional credit histories. On the other hand, SBA Express loans offer a faster application and approval process, though they typically come with lower SBA guarantee levels than standard SBA 7(a) loans.

What disqualifies you from getting an SBA loan?

There are multiple factors that will disqualify you from getting an SBA loan for new business, such as insufficient collaterals or equity, poor credit score, no solid business plan. These are the factors that play a major role in assessing your risk of default. Some other factors may also include bankruptcies, criminal history, negative taxable income, and inability to obtain financing anywhere else.

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