Conventional Business Loans vs. SBA Loans

You will need cash flow at some point when you are a small business owner. Two options that you can choose from is conventional business loans and Small Business Administration loans. So, how do you know which type of business loan is best for your business’s financial situation? To help you decide, we’ll review the differences between conventional loans and SBA loans.

What are Conventional Business Loans?

Conventional loans are loans you get from banks, credit unions, and online lenders. These loans vary significantly and come with different interest rates, fees, and repayment terms.

In most cases, you’ll need to provide documents such as business bank statements and a business plan to get approved. Depending on the business financing lender, you may also need a strong credit score to qualify.

There is no shortage of conventional business financing available. Just about every lender offers some type of loan for businesses. Therefore, it’s essential to do your research and compare each lender’s rates, terms, and fees.

What are SBA Loans?

SBA loans promise that the SBA will buy back part of your loan from the lender if you default on it. The SBA guarantees from 50% to 90% of the loan amount, up to $5 million. An SBA loan will make sense for you if you can’t qualify for a conventional loan.

An SBA financing option includes the 7(a) loan which can help you cover expenses such as:

Main Differences Between Conventional Business Loans and SBA Loans

Conventional and SBA loans can help you pay for a variety of business-related expenses. This is because they’re based on the lender’s underwriting criteria rather than the rigorous requirements of a government agency.

  • Approval times: Conventional business loans typically come with much faster approval times than SBA loans.
  • Documentation: SBA loans require more paperwork and you will need more information to provide about your business so the SBA can guarantee your loan.
  • Interest rates: Unless you have good or excellent credit, you will get a higher interest rate with a conventional loan.
  • Repayment terms: For conventional business financing, repayment terms vary from several months to several years. Before signing for a loan, make sure that you can afford the monthly payments. SBA loans offer longer repayment terms, which usually range from 10 years to 25 years.
  • Flexibility: SBA loans tend to be more flexible and have more pitons to help you with your financing needs.
  • Qualifications: It is easier to get approved for an SBA loan than a conventional loan. It is a great option if you are a new business or a startup.

Applying for a Conventional or SBA Loan

To apply for conventional business financing, find a bank, credit union, or online lender that offers it. The application can be filled out in person, over the phone, or online. It may take time to review the loan and approval time can take weeks or months.

To apply for an SBA loan, visit the SBA website and complete the short SBA Lender Match form. It will ask you a few questions about your business and particular needs. Within a few days, you’ll receive an email with a list of SBA approved lenders you’ve been matched with. You may contact these lenders individually to compare rates and terms before you sign on the dotted line.

As you can see, they both have their pros and cons. Weigh them each carefully before deciding to pursue one.