The SBA has guaranteed almost $30 billion loan funds to small businesses that would not have had access to capital. The affordability of their interest rates is unmatched. SBA loans are far from the ideal funding option for all entrepreneurs.
To help you decide if government business financing is right for you, this post will weigh its pros and cons. If you find that government business loans are not the right fit, there are several alternatives to consider that will be mentioned as well.
The Pros and Cons of a Government Small Business Loan
Understanding the pros and cons of government financial assistance or program loans is important. Although the SBA offers numerous loan and grant programs, such as the Paycheck Protection Program and the Economic Injury Disaster Loan, they may not be the right fit for your business.
Pros of Government Business Loans
- Competitive interest rates: they are affordable and have low interest rates because they are less risky for lenders to originate.
- Large loan amounts are available for risky borrowers: to be eligible, you need to have exhausted all other business financing options. The SBA has this requirement because government business loans are meant for borrowers who couldn’t otherwise obtain financing.
- Low down payment requirements: large down payments not only reduce the size of the business loan, but they also put more skin in the game for borrowers.
Cons of Government Business Loans
- Can only be used for certain business expenses: the government has dozens of small business loan programs. Certain programs have specific requirements as to how the funds from the loans must be spent. Certain government business loans have less restrictive use of funds rules. However, even those can be restrictive compared to a private small business loan.
- Highly competitive loan application process: since it’s affordable and is extremely popular, the process is competitive and can be hard to get approved.
- Personal guarantees are required: when you sign a personal guarantee, that means you agree that you are personally responsible for repaying the small business loan. If you’re unable to pay back the loan, the business financing lender can come after your personal assets to recoup their losses.
Alternative Financing Options to Consider
After reading the list above and you think that it is not right for you, there are alternatives to consider.
- Invoice factoring
- Business line of credit
- Franchise startup loan
- Equipment loans
- Merchant cash advances
- Online loans
Is a Government Business Loan Right for You?
A government business loan may be a good fit if you:
- Meet the eligibility criteria
- Have the time to apply
- Can comply with the use of funds restrictions.
- Are prepared to have your loan application denied.
- Are willing to sign a personal guarantee.
If you meet the criteria above, your chances of qualifying for a government loan is good. If you’re approved, you’ll have an affordable loan available. If you’re rejected, all you have lost is the time you spent applying.