The Pros and Cons of SBA Loans

Written by  Katie Ziraldo

Edited by  Dawn Daniels

+ 1 More

Updated Jan 20, 2026

SBA loans come with many benefits, including broad eligibility requirements and capped interest rates that keep loan costs affordable. Some loans even come with additional resources for small business owners.

However, businesses must show that they’ve exhausted other financing options to qualify, and funding can take up to 90 days. An SBA loan may not be the best financing option for every business, and understanding the pros and cons can help you compare your options.

Key takeaways: SBA loan pros and cons

What are SBA loans?

SBA loans are small business loans offered by private lenders and backed by the U.S. Small Business Administration (SBA). Eligible businesses can borrow between $500 and $5.5 million to fund almost any expense, though restrictions and limits vary by loan program.

SBA loans are guaranteed, which means the SBA agrees to purchase a portion of the loan from the lender in the event of default, provided the lender has followed all the program requirements. The SBA guarantee provides a backup plan for the lender, lowering their risk and allowing them to extend credit to more businesses.

Pros of SBA loans

1. Broad eligibility requirements

SBA loans are intended for businesses that cannot qualify for other types of financing. Because the SBA guarantees a portion of loans issued by its partner lenders, lenders assume less risk and can afford to have more lenient credit requirements while charging affordable interest rates. 

Still, approval rates are actually lower for SBA loans than traditional business loans and lines of credit, so the broad eligibility criteria doesn’t mean anyone can qualify. According to a LendingTree study, SBA loan or line of credit applicants were denied nearly half the time. These applicants saw a 45% denial rate in 2024 — more than double the 21% rate across all business loan types. Some of those denials could be related to the types of businesses that are likely to apply for SBA loans — specifically, businesses that haven’t been able to qualify for a traditional loan.

2. Capped interest rates

Interest rates on SBA loans are comprised of a base rate plus an additional percentage charged by the lender. The base rate is typically based on the prime rate or the optional peg rate, and it can change over time. Interest rates are subject to SBA maximums, which helps to keep SBA loans affordable for borrowers.

Maximum interest rates vary by program, and it’s important to compare each program against alternatives in the traditional lending space. For example, the median interest rate for business term loans issued in the third quarter of 2025 was around 7.2%, which is lower than the interest rate cap for SBA 7(a) loans, which ranges from 9.75% to 13.25% for variable-rate loans, depending on how much you borrow. That said, online business loans can have interest rates as high as 60%. With this in mind, SBA loans may be helpful for businesses with lower credit scores that might otherwise only qualify for high rates.

3. Wide range of loan amounts

With loan amounts from $500 to $5.5 million, borrowers can secure funding for both minor and major expenses. As you learn about each loan program, be mindful of their respective restrictions. For example, CDC/504 loans offer up to $5.5 million, but this money can only be used to finance fixed assets. 

4. Long repayment terms

SBA loans come with terms up to 25 years, though the maximum term depends on your loan type and how you use the funds. Traditional business term loans typically go up to 10 years, and many online lenders offer even shorter terms. A longer loan term means a lower monthly payment, which lessens the strain on cash flow. Just keep in mind that you’ll pay more interest over time with a long-term loan.

5. Flexible use of funds

You can use an SBA loan to cover almost any business expense, though permitted uses vary by program. SBA 7(a) loans are particularly flexible; you can use them to pay for:

6. Access to resource centers

The SBA also offers Small Business Development Centers (SBDCs) that can provide business owners with general business assistance, SBA loan information and additional support for underserved communities. These resource centers can also assist you with preparing the necessary paperwork when applying for an SBA loan.

Cons of SBA loans

1. Personal liability

SBA loans require a personal guarantee, which means you’ll be legally responsible for repaying the debt in full — even if your business closes. A personal guarantee makes you personally liable for your business debt. If you don’t repay the outstanding balance, the SBA can send the debt to collections and you could lose any personal collateral you pledged.

It’s worth noting that many traditional lenders require at least a partial personal guarantee as well, but established businesses with a strong credit score may be eligible for a loan without putting their personal assets at risk.

2. Slow approval process

The SBA loan process can take 30 to 90 days. You can find SBA-approved lenders quickly through the Lender Match tool, but the application process requires detailed paperwork. And even after lenders approve a loan application, non-preferred lenders must then submit it to the SBA for a second approval, lengthening the wait.

Working with an SBA Preferred Lender can save you time, as these lenders have the authority to approve SBA loans without the secondary approval process. Still, if you need faster funding, you may prefer working with an online lender. Some online lenders offer short-term business funding with funds available as soon as the same day you apply.

3. Prepayment penalties

Some types of SBA loans come with prepayment penalties, which can cut into your savings if you’re able to repay the loan ahead of schedule.

SBA 7(a) loans are subject to a prepayment penalty on loans with terms of 15 years or longer. If you prepay more than a quarter of your outstanding balance within the first three years, you’ll be charged a penalty. This penalty is equal to 5% of the prepayment amount if it is paid within the first year, 3% of the amount if paid in the second year and 1% of the amount in the third year.

504 loans have varying prepayment penalties during the initial years of the term, though penalties typically decline over time. Microloans generally don’t have prepayment penalties.

If you expect your business to earn enough revenue to repay the loan early, this is an important consideration, as some lenders don’t charge prepayment penalties.

4. May require collateral

Many SBA lenders require borrowers to pledge assets as collateral, though specific requirements vary between loan programs. Both 504 loans and microloans generally require collateral in addition to a personal guarantee. While this guarantee is required across all SBA loans, most SBA 7(a) loans up to $50,000 don’t require collateral. 

For 7(a) loans between $50,001 and $500,000, the SBA doesn’t set specific requirements, but lenders are allowed to align their collateral policies with the requirements they enforce for similarly sized, non-SBA loans. This means it could be worth checking with multiple SBA lenders to compare your options.

Generally speaking, 7(a) loans over $500,000 will require collateral. 

5. May require a down payment

Down payment requirements also vary between SBA loan programs. Microloans generally don’t require a down payment, while 504 loans require a minimum down payment of 10%. 

For an SBA 7(a) loan, down payments can range from 0% to 30% or higher, depending on the lender. The SBA only requires 10% down on loans over $500,000 — and only if the loan funds are being used to pay for a change of ownership. In all other cases, the SBA doesn’t set a minimum down payment on 7(a) loans. However, SBA lenders are allowed to enforce the same down payment requirements as they would with non-SBA loans of a similar size. 

6. May be difficult for startups and borrowers with poor credit to qualify

Based on data from the SBA, the majority of SBA funding in fiscal year 2025 went to businesses that had been in operation for two years or more. While the 7(a) and 504 loan programs don’t set specific time-in-business requirements, lenders often require businesses to operate for a set period of time before they can get an SBA loan, which means it could be challenging for newer businesses to qualify.

Business owners with poor credit could face similar challenges. Though the SBA guarantee minimizes risk, lenders still want to feel confident in your ability to repay a loan. For this reason, a personal credit score of 650 or higher generally gives you the best approval odds, though some lenders may approve businesses with lower credit scores.

Additionally, the SBA microloan program offers more flexibility than other loan programs, and some intermediaries may offer microloans for startups and businesses with challenged credit.

Types of SBA loans

7(a) loan program

The SBA 7(a) loan is the SBA’s flagship product. The SBA guarantees up to 90% of the principal for 7(a) loans, which can be used for a range of business expenses, such as working capital, fixed assets and purchasing real estate. Here are the need-to-know details:

The SBA also offers an Express program with a shorter timeline and loan amounts up to $500,000.

CDC/504 loan program

Under the 504 loan program, the SBA partners with Certified Development Companies (CDCs) to finance fixed assets, such as machinery, buildings or land. Funding for the loan comes from three entities: up to 40% from an approved lender, 50% from the CDC (100% SBA-guaranteed)  and, typically, a 10% to 20% down payment from the borrower. Here are the need-to-know details:

Microloan program

SBA microloans offer smaller loan amounts administered by nonprofit community-based organizations. Microloans can cover a wide range of purposes, including working capital and machinery. Here are the need-to-know details:

Disaster loan program

The SBA offers disaster loans for businesses during emergencies, such as a declared federal disaster or economic injury. Unlike other SBA loans that partner with lending institutions, certain disaster loan programs are funded directly through the SBA.

Alternatives to SBA financing

If you decide that getting a small business loan from the SBA doesn’t make sense for you, consider these alternative financing options.

Traditional bank loans

Many traditional banks offer business term loans, lines of credit and other types of business financing. Repayment terms and loan limits vary by loan product. You may find low interest rates when working with a traditional bank, but eligibility requirements can be more stringent than SBA loans.

Alternative lenders

Alternative lenders may offer faster funding with more lenient requirements, but they may also charge higher rates. Many online lenders also offer shorter terms. However, you shouldn’t rule out these lenders — some businesses can qualify for low-cost funding and other benefits from online lenders, and startups or businesses with poor credit may find an alternative loan to be their only option.

Business credit cards

Business credit cards could help you build business credit while covering everyday business expenses. In addition, business credit cards frequently offer various incentives, such as rewards on travel, dining and gas purchases. 

Some cards also come with a 0% APR introductory period, so you may be able to avoid interest while you’re getting your business up and running. But if you’re not able to pay off your credit card at the end of each month, interest can accrue quickly.

Crowdfunding

Small business owners can use crowdfunding campaigns to raise funds from friends, family and the general public. 

While crowdfunding sites typically don’t require you to repay the funds you raise, some crowdfunding platforms may collect a fee that’s a percentage of the total funds raised. Since you’ll need to market your campaign, this option is best suited for businesses with a strong social media following.