Working capital is critical for survival because it can smooth gaps in cash flow to hiring new employees and expanding your product line or services. The good news is that if you lack the funds to sustain your business operation or recover from any setbacks, you have options.
Common solutions include lines of credit, credit cards, term loans, and outside investments. However, sometimes taking out one business loan is not enough to meet your objectives. Many entrepreneurs take out more than one SBA loan since the terms are more favorable than other financing options.
While SBA lenders allow you to apply for multiple SBA loans, doing so comes with limitations and adds risk to your company. There are some things to keep in mind before applying for multiple SBA loans.
SBA Loans and Their Types
SBA loans are flexible and can be used to cover working capital needs or fixed assets. The SBA guarantees a part of the loan, and the SBA approved lender covers the rest. Although they are harder to qualify for, lenders are more willing to underwrite loans backed by the SBA. This is because the loan application process reduces the risk that the borrowers won’t repay the debt.
SBA loans are offered through three main programs: 7(a), CDC/504, and microloans.
- SBA 7(a) loans: this provides broad funding solutions and specialized options for businesses.
- 504 loans: offer long-term fixed rate financing up to $5 million.
- Microloans: come in amounts up to $50,000.
The Pros and Cons of Taking out Multiple SBA Loans
The primary benefit of taking out more than one SBA loan is additional access to capital at favorable terms. SBA loans generally offer the following:
- Larger loan amounts
- Lower down payments
- Lower interest rates
- Longer repayment terms
The major drawback of having multiple SBA loans is the added risk to your balance sheet. If your business is seasonal or has sporadic cash flow, you might have trouble making monthly loan payments.
This not only threatens the sustainability of your business and your ability to obtain financing in the future, but it can also put your personal assets at risk. This is because lenders require collateral on additional loans.
In addition, you’re still subject to the SBA’s borrowing limits, even with multiple loans. That means if you want to borrow more than the limit — for example, $5 million for SBA 7(a) loans — you’ll need to apply for a different type of loan.
Other Financing Options
Do not be afraid to pursue other financing options including the following:
- Business loans from working capital lenders
- Merchant cash advances
- Business lines of credit
- Business credit cards
- Equipment financing
- Inventory loans
- Bridge loans
- Invoice financing
The Bottom Line
SBA loans are a great option for small business owners. If you have strong personal and business credit scores, you can consider taking out multiple SBA loans so you can reach your business goals.
Remember to not take on more debt if you can’t afford it. If you miss payments, you credit score will suffer and your collateral will be at risk.