Why SBA Loans Seem Hard to Get and Alternatives That Can Help You Access Funding Quickly
If you’re a small business owner in need of funding, you’ve probably heard of SBA loans. The Small Business Administration (SBA) is known for offering loans that provide lower interest rates and longer repayment terms than traditional loans, making them a popular choice for many entrepreneurs. However, you may have heard that SBA loans can be tough to secure. The process can seem overwhelming, and it often feels like only certain types of businesses or business owners qualify.
If you’ve ever faced a situation where you needed funding but were turned down for an SBA loan, don’t worry – you’re not alone. In this article, we’ll dive into why SBA loans can be so difficult to obtain, and we’ll introduce you to some alternative funding options that might be better suited to your business’s needs. Whether you’re a new startup or an established business, there are many other ways to get the financial support you need to grow your business, and we’ll explain how you can access those funds quickly.
What is an SBA Loan?
Before we talk about why SBA loans can be tough to get, let’s take a moment to understand what they are and how they work.
The Small Business Administration (SBA) is a U.S. government agency that helps small businesses get financing by providing loan guarantees to lenders. The SBA itself doesn’t directly lend money to businesses; instead, it partners with approved lenders (like banks) to back loans. This guarantees the lender that if the borrower defaults, the SBA will pay a portion of the loan.
Because of this backing, SBA loans often come with favorable terms, like lower interest rates and longer repayment periods. There are several types of SBA loans, including the SBA 7(a) loan, the SBA 504 loan, and the SBA microloan. These loans can be used for a variety of business needs, such as working capital, purchasing equipment, or buying real estate.
However, despite their benefits, getting approved for an SBA loan can be a challenge.
Why Do SBA Loans Seem Hard to Get?
SBA loans are not impossible to get, but the process can be lengthy and filled with obstacles. Let’s break down some of the reasons why it might feel like an SBA loan is out of reach:
1. Strict Eligibility Requirements
The SBA has specific eligibility criteria for borrowers, and they aren’t always easy to meet. Some of the requirements include:
- Good credit score: SBA loans typically require a credit score of at least 680, although some programs may accept scores as low as 640. If your credit score is below this threshold, getting approved becomes more difficult.
- Time in business: SBA loans are often available to businesses that have been in operation for at least two years. Newer businesses or startups may have trouble meeting this requirement.
- Financial stability: The SBA looks at the financial health of your business, including your cash flow, profitability, and overall financial records. If your business is struggling or not profitable, securing an SBA loan can be challenging.
- Collateral: Some SBA loans require collateral to secure the loan, meaning you must offer assets (like real estate or equipment) that the lender can claim if you default on the loan.
These strict requirements are designed to minimize risk for lenders, but they can make it difficult for many businesses – especially newer or smaller businesses – to qualify.
2. The Lengthy and Complex Application Process
The application process for an SBA loan can be a long and complex one. You’ll need to gather a variety of documents, including:
- Tax returns (personal and business)
- Financial statements
- A business plan
- Personal guarantees
- Collateral documentation
The sheer amount of paperwork can be overwhelming, especially for business owners who are already stretched thin with day-to-day operations. Furthermore, even after submitting all the necessary documents, the approval process can take several weeks or even months.
3. High Fees and Interest Rates
While SBA loans generally have lower interest rates than traditional loans, they can still come with high fees. These fees can include application fees, processing fees, and closing costs, which can add up quickly. For some businesses, especially smaller ones, these fees can be prohibitive.
Additionally, while the SBA guarantees the loan, the lender still takes on some risk. As a result, the interest rates on SBA loans can still be higher than those of other types of financing.
4. Strict Credit Requirements
While SBA loans are designed to be accessible to small businesses, they still require borrowers to have a strong credit history. Lenders want to ensure that borrowers can repay the loan, so a low credit score can make it difficult to get approved. This is especially true for newer businesses that may not have a long credit history.
Alternative Funding Options for Small Businesses
If you’re facing difficulty qualifying for an SBA loan, don’t worry – there are many alternative financing options that can help you get the funds you need. These alternatives are often quicker, more flexible, and easier to access, especially for businesses with bad credit or those that don’t meet SBA loan requirements.
Let’s look at some of these alternatives:
1. Merchant Cash Advances (MCA)
A Merchant Cash Advance (MCA) is a popular alternative financing option that provides businesses with a lump sum of cash in exchange for a percentage of future credit card sales or daily revenue. Unlike SBA loans, MCAs don’t require good credit scores, collateral, or a long business history. The approval process is faster, often taking just a few days, and you can receive the funds in as little as 24 hours.
How Does an MCA Work?
When you apply for an MCA, the lender looks at your business’s daily revenue and credit card sales to determine how much money you can borrow. Repayments are made by taking a fixed percentage of your daily sales. This means that during slow periods, your repayments are lower, while during busy seasons, your repayments are higher. This flexibility makes MCAs ideal for businesses with fluctuating revenue, such as those in retail, real estate, or restaurants.
Who Can Benefit from an MCA?
MCAs are great for business owners who need quick access to capital but have trouble qualifying for SBA loans. Since the repayment is based on your business’s daily sales, it’s easier to manage, and you don’t need to worry about fixed monthly payments.
Apply for a Merchant Cash Advance today!
2. Lines of Credit
A business line of credit is another great alternative to SBA loans. With a line of credit, you are approved for a specific credit limit, and you can borrow from it as needed. You only pay interest on the amount you borrow, and you can repay the balance at your own pace. This flexibility makes a business line of credit ideal for covering working capital needs or for emergencies.
The approval process for a line of credit is generally quicker than that of an SBA loan, and there are fewer eligibility requirements. You can use a line of credit for almost anything, including paying bills, buying inventory, or funding marketing campaigns.
3. Invoice Financing
If your business works with invoices and you’re waiting for customers to pay, invoice financing can help bridge the gap. With invoice financing, you can sell your outstanding invoices to a lender in exchange for immediate cash. The lender then collects payment from your customers. This option is great for businesses that are waiting on payments but need cash now to cover other expenses.
4. Crowdfunding
Crowdfunding has become an increasingly popular way for businesses to raise capital. There are various platforms, such as Kickstarter and Indiegogo, where you can present your business idea or project and ask people to contribute funds. Crowdfunding is often used for specific projects or new products, but it can also work for businesses that need capital to grow.
One of the benefits of crowdfunding is that it doesn’t require you to give up equity or take on debt. However, it does require effective marketing and outreach to attract potential backers.
5. Peer-to-Peer Lending
Peer-to-peer (P2P) lending allows businesses to borrow money directly from individual investors, bypassing traditional banks. P2P lending platforms, such as LendingClub or Funding Circle, match borrowers with investors who are willing to lend money at competitive interest rates. The process is usually faster than applying for an SBA loan, and the terms are more flexible.
Conclusion
While SBA loans can offer excellent terms for small businesses, the approval process can be difficult, especially if you don’t meet the strict requirements. However, as a small business owner, you have several alternative funding options available to you. Whether you choose a merchant cash advance, line of credit, or peer-to-peer lending, you can find flexible, quick, and reliable ways to access the funds you need to grow your business.
If you’ve struggled to secure an SBA loan or simply need funding quickly, consider applying for an alternative financing solution with SVP Funding Group. They offer fast, flexible funding options to help your business thrive.
Click here to apply for funding today!
Author by Vitas Changsao
