SBA loans are a financing option small-business owners both love and hate.

SBA loans are a financing option small-business owners both love and hate.

They’re definitely popular. Demand for SBA small-business loans is so strong the program ran out of money recently, spurring the federal agency to shut it down temporarily and prompting Congress to quickly approve more funds for the loan-guarantee program.

SBA loans come with low APR, but the application process can be rigorous and protracted.

“I went through the SBA process, and I swore never to do it again,” Donny Seyfer, owner of Seyfer Automotive in Wheat Ridge, Colorado, tells NerdWallet. “It was just pulling teeth.”

Online lender SmartBiz uses technology to provide SBA loans more quickly and easily, although small-business owners still have to meet the tough SBA requirements.

Deciding whether an SBA loan is right for you can be a difficult call. Below, NerdWallet breaks down the pros and cons to help you answer this question: Is the hassle worth it?

Yes, if:

  • It’s imperative that you get the least expensive small-business loan.

Remember that the SBA itself does not issue loans. Instead, it guarantees loans made by banks, which are then able to offer financing based on low interest rates. The agency could guarantee loans of up to $3.75 million, although the average loan amount was about $338,000 as of 2012, according to the agency.

An SBA loan is typically based on the current prime rate plus an additional markup rate, known as the spread, of 2.25% to 2.75%. At the current prime rate of 3.25%, an SBA loan would charge 5.5% to 6% interest.

SmartBiz, for instance, charges a 7% to 9% annual percentage rate, which includes fees such as closing costs.

That’s tough to beat, which is why if you’re looking for the most affordable financing for your business, SBA loans are your best bet.

SBA loans could even be a way out of a damaging financial situation. Terry Trumbull, owner and president of Trumbull Meats in Hamburg, Michigan, got an SBA loan through SmartBiz that allowed him to refinance a burdensome loan: It was “killing me,” he says. He did have to wait a couple of months and had to deal with many requirements, but he says of his SBA loan, “Thank God this loan came through.”

  • You have excellent credit and your small business is doing well.

If your personal and business finances are in good shape, it’s likely you’d be approved for an SBA small-business loan. SmartBiz focuses mainly on the state of your company when considering your application. Read our SmartBiz review to learn more about fees and terms.

“If a business has been in business for at least two years, is profitable and has cash flow to support loan payments, it’s likely a good candidate for an SBA loan like the ones SmartBiz offers,” SmartBiz General Manager Evan Singer tells NerdWallet.

  • You have the time and fortitude to go through the SBA process.

If you’re prepared to spend weeks, even months, going through the application, that effort can pay off with low-cost financing that could help you grow your business.

If your credit and small-business finances are in excellent shape, the wait may not be that long. If you apply for an SBA small-business loan through SmartBiz, which uses an online application system, for example, you could get funded within a week after getting approved.

If you’re applying through a traditional bank, it helps to work with a lender that has a track record of processing SBA loans. Patty Staples, chief credit officer at California Business Bank, suggests that you ask a potential lender “how many SBA loans they make, how often they fund loans, how experienced their staff is and what is the dollar range of the loans they make.”

“If you choose the right bank,” she tells NerdWallet, “the lending staff will facilitate that process and make it as easy as possible.”

No, if …

  • You need a small-business loan ASAP.

An SBA loan isn’t an ideal financing solution if you’re dealing with a small-business emergency or if you need quick access to capital to chase a business opportunity. If you need fast cash, online small-business lenders such as Funding Circle or OnDeck would offer you better options. Compare these options on the NerdWallet small-business loans page.

  • You have a spotty personal credit history or your business is in bad shape (or both).

You don’t have to have stellar credit to get an SBA loan. For example, SmartBiz’s minimum FICO score requirement is 600, but your small business and your personal finances must be in excellent shape for you to be approved.

Expect the SBA to scrutinize your personal finance history when you apply. For example, you’d need to fill out a personal financial statement and a statement of personal history. If your small business is struggling, an SBA loan is probably out of the question.

“If a business doesn’t generate or project to generate enough cash flow to support loan payments, an SBA loan likely isn’t going to work,” Singer of SmartBiz says.

Also, the SBA has a long list of small businesses that shouldn’t even bother applying. They include casinos, lending services, life insurance issuers and certain types of mining companies. Among other requirements is that you must not have filed for bankruptcy in the previous three years, and there are strict requirements on legal residency.

  • You just don’t have (or don’t want to spend) the time dealing with SBA requirements.

Applying for an SBA loan is a time-consuming process that might take your focus away from running your company. For some small businesses, especially those just starting out, that’s tough to do and applying for an SBA loan may not be worth it.

Lenders would typically let you know as quickly as possible about your chances of being approved.

At SmartBiz, a business can be pre-qualified in about five minutes and get pre-approved in half an hour, according to Singer. “If we can’t help the business, we’ll let them know quickly,” he says.

Staples of California Business Bank says a traditional bank should also be able to give you a quick sense of whether you’d be approved for an SBA loan.

“A good lender can help you understand whether or not you are ready,” she says. “If you are not quite ready, the bank can tell you what you may need to do to correct any issues or potential problems and prepare you to come back at a later date for the loan.”

Find and compare small-business loans

NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business:

Compare business loans

Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @benpimentel

To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.

This article originally appeared on NerdWallet.


Yamarie Grullon

Yamarie Grullon has years of experience creating helpful & engaging content for small business owners. As Director of Content Strategy at ShopKeep, a leading iPad Point of Sale System, Yamarie provides merchants with practical advice on all things related to business or point of sale.