Can you take out more than one small business loan?
As a small business owner, you know how challenging it can be to access sufficient capital to grow your business or take advantage of time-sensitive savings opportunities. Access to small business financing is essential when you are experiencing temporary gaps in cash flow.
When cash is tight, it can be tempting to take out multiple loans. This is especially true if you qualify for SBA small business loans. Yet, is this a good strategy? Consider thesesec factors first.
What Are SBA Loans
SBA loans are government-guaranteed loans that are disbursed through a network of SBA lending partners. Traditional banks are reluctant to lend to small businesses, especially startups, considering them to be high-risk borrowers. Government guarantees soften the risk, increasing the opportunities to access affordable small business loans.
The SBA sets the primary eligibility requirements:
- You must be a for-profit business
- Have 500 employees or less
- Have made a personal or financial investment in your business
- Have had no success securing financing from other lenders
SBA lending partners are free to determine your eligibility within these guidelines. You negotiate loan terms directly with SBA lenders, which include traditional banks, alternative lenders, micro-lending institutions, and community development organizations.
In general, a lower down payment is required, interest rates and fees are affordable, overhead requirements are flexible, and some loans require no collateral. In addition, the SBA offers management support to help you successfully launch or grow your small business.
Loans range in size from $500 to $5.5 million and can be used as working capital or to acquire fixed assets. SBA lending partners make the final decisions on how you can use the loan.
Types of SBA Loans
- 7(a) Standard: Maximum loans up to $5 million. No collateral is required for loans up to $25,000
- 7(a) Small: Maximum loans up to $350,00, no collateral if borrowing $25,000 or less
- SBA Express: Maximum loans up to $350,000, turnaround time on the application is within 36 hours. No collateral for loans up to $25,000. Credit decisions on these loans are made solely by the lender
- SBA 504 Loan program: Long-term, fixed-rate financing that can be used to upgrade or expand facilities. The SBA provides a percentage of the total project cost, the lender provides a percentage, and you, the borrower, must give a percentage
- SBA Microloans: Small business loans up to $50,000, accessed through nonprofit community-based organizations. Microloans can be used to purchase equipment, machinery, supplies, inventory, furniture, and for working capital
Limits On SBA Loans
You can take out more than one SBA loan if you meet the following guidelines.
- You cannot exceed the maximum borrowing limit set by the SBA
- Your business status must continue to meet the SBA definitions of a small business
- You have collateral for the new loans
- Your credit score is at least 680
- Your current SBA loans are in good standing
- You can demonstrate a healthy cash flow
Some lenders may ask you to wait a few months before applying for a second loan.
Pros And Cons
While there is no limit to the number of SBA loans you can carry at any one time, you should consider all the pros and cons before embarking on this strategy. The risks of taking out multiple loans might outweigh any benefits.
- You can combine different types of loans to meet your needs. The first loan may have been to get your business off the ground. A second loan can be used for working capital
- Your small business could still be considered too risky by traditional lenders
- The SBA is the best resource for small business financing
- The more loan payments you make, the less revenue you have available for other business objectives
- Too many loans can significantly impair your cash flow
- Paying late or missing payments will damage your credit score
- Taking on multiple loans could tip you over into business failure
Other Financing Options
Taking out multiple SBA small business loans is not your financing only option.
- Online lenders offer short term loans that can be quickly accessed for immediate borrowing needs, such as purchasing seasonal inventory or covering a temporary cash-flow gap
- A business line of credit provides immediate access to capital. You use it as you need it and pay interest only on the amount you withdraw
- Invoice financing or invoice factoring helps with short-term cash flow gaps
The short answer to whether you can take out more than one SBA small business loan is yes. There are times when it makes sense, especially when you have different financing objectives. Still, given the risks, you should consider other financing alternatives before pursuing multiple SBA small business loans.