The Limitations of SBA LoansSmall Business Administration loans, known more popularly as SBA loans, are sometimes touted as the best loans you can get for small businesses. The SBA’s most popular loan, the 7(a), certainly has some great features like low interest rates, liberal conditions for use and, best of all, a guarantee from the United States government. However, those features come at the cost of strict qualifications, long funding times and somewhat inflexible conditions, meaning an SBA loan might not work for every business’ needs. Read on to learn more about the restrictions that come with SBA loans, as well as alternative loans that may be a better fit for some businesses.

SBA loans have strict qualifications

First, to clear up a common misconception, SBA loans are not funded by the government. They’re funded by private lenders, usually banks, and the SBA, a government agency, just guarantees the loan to reduce the lender’s risk in return for the lender providing the borrower with a lower interest rate. This means that, in addition to meeting the SBA’s qualifications, you have to meet the lender’s qualifications as well, which typically include having a personal credit score above 680, offering collateral and being in business for at least two years.

While the lender qualifications are often more stringent than the SBA’s, the SBA still has quite a few boxes your business needs to tick in order to be eligible for a loan in the first place. Businesses receiving SBA loans must be within the size restrictions for small businesses, they can’t have any other outstanding loans, they must have been turned down by a private lender already and they cannot be a part of certain industries like life insurance or religious education. Your business also has to be successful to some degree, turning a profit and experiencing growth, as the SBA won’t use taxpayer money to guarantee a loan for a faltering company with a high risk of failure.

SBA loans only fit certain conditions, and can take a long time to fund

Even if your business does meet the qualifications for an SBA loan, you may not be able to work with the conditions they tend to come with. Terms for SBA loans are typically between two and 10 years, or two and 25 years for real estate financing, and lenders generally won’t fund loans under $5,000. While the interest rates on SBA loans are low, that’s diminished somewhat by the 3% guarantee fee the SBA charges on loans above $150,000, and the ongoing 0.52% guarantee fee that lasts throughout the term of the loan. Loans with a term of 15 years or more also have prepayment penalties, starting at 5% and going down 2% each year.

Additionally, make sure you have plenty of time to spare, as SBA loans can take anywhere from two to four months to approve and fund, depending on if your lender is part of the SBA’s Preferred Lender Program. That isn’t counting the time you have to spend preparing the paperwork for your application, of which there is a lot, including business plans, repayment plans and financial projections that have to be reviewed by both the lender and the SBA. To expedite the process, you may be able to qualify for an SBA Express loan, but that comes with a new set of tighter conditions, a reduced 50% guarantee from the government and it only speeds up the SBA’s review of your application, so a slow lender can still hold the funding process up.

Alternatives to SBA loans

If SBA loans don’t make sense for your small business’ funding needs, luckily there’s a crop of online lenders that offer more flexibility. These small business lenders have looser application requirements, shorter loan terms and can provide funding quickly. Some of them even specialize in lending to certain groups of people, such as StreetShares’ commitment to serving the businesses of military veterans or Upstart helping recent college graduates by taking academic history into account when assessing borrowers. One company, Funding Circle, even has a loan program specifically designed to be an SBA loan alternative.

Different small businesses can have vastly different demands, so there’s no one tool that can fix every problem. Before you choose a loan for your small business, consider whether a term loan, line of credit or small business credit card is the best fit for your business’ needs. Check out our reviews of the best small business loans to see if it’s the right solution for your business. You can find more advice like this by following our small business loans blog.