SBA Preferred Lenders vs. Alternative Financing Lenders

Most small business borrowers focus on interest rates, fees, and loan structures, but do not consider the type of lender. Each lender is different behind each loan type so the type of lender you choose matters. For example, online lenders and traditional banks offer loans but their funding application processes are different. It can be more challenging to qualify for traditional bank loans.

There are two poplar types of lenders that are worth considering which are SBA Preferred Lenders and alternative financing lenders. Both can help you grow your business. Each has its benefits and drawbacks. To help you determine which lender might be a better fit for you, we’ll compare SBA Preferred Lenders vs. alternative financing lenders.

What is an SBA Preferred Lender?

To offer SBA loans, a bank or credit union needs to get certified with the SBA. Once certified, an SBA lender can earn Preferred Lender status. To do so, you need to establish a successful track record of processing and servicing many SBA loans.

Once the SBA lender has a track record, they can be granted Preferred Lender status. That upgraded status enables the lender to conduct loan approvals in-house and streamline SBA approval. The Preferred Lender allows the lender to process and approve loans much quicker than a standard SBA lender.

What is Alternative Financing Lender?

Sometimes called small business lenders, alternative financing lenders are financial institutions that provide small businesses with financing options such as:

  • Accounts receivable financing
  • Microloans
  • Online term loans
  • Equipment loans
  • Bridge financing
  • Invoice factoring

SBA Preferred Lenders vs. Alternative Financing Lenders

Application and Funding Processes

In terms of funding time, SBA Preferred Lenders hold a significant advantage over non-preferred SBA lenders. Preferred lenders rarely come close to the speed of funding you will experience with an alternative lender.

The SBA approves and closes loans in about 45 days while alternative financing lenders can approve and close loans in days.

Of course, how fast an alternative lender approves and funds your loan also depends on the type of financing. Working capital options such as merchant cash advances can be funded in 24 hours while term loans can take several days or weeks to fund.

Customer Service

SBA preferred Lenders earn their preferred status only after they have serviced many loans. This vetting process should increase the chance that you’ll experience satisfactory customer service with a preferred lender.

Alternative lenders aren’t vetted by a central authority. That doesn’t mean alternative lenders provide worse service, but they do have a wider range of customer service competencies. The customer service advantage alternative lenders do have is greater flexibility in their offerings.

Loan Options

SBA Preferred Lenders can only offer SBA loans. There is a decent variety of SBA loan programs, you will find more options from alternative lenders. SBA programs offer two financing structures: term loans and lines of credit.

Alternative lenders offer term loans and credit lines plus other financing options not offered by preferred lenders.

Cost and Repayment Terms

SBA Preferred Lenders can offer very favorable terms. In most cases, a preferred lender will provide more competitive rates than an alternative lender. Of course, the gross cost of financing isn’t everything; timing also matters. Unlike preferred lenders, alternative lenders offer financing options with more flexible payment terms.

The Bottom Line

Assuming you want a credit line or a term loan, you should consider an SBA Preferred Lender if you meet all the criteria:

  • Have good credit
  • Own significant equity in your business
  • Can wait 90 days to assemble your application and wait for approval
  • Have less than 500 employees
  • Generate less than $7.5 million revenue on average year

An alternative lender is an option worth considering if you don’t meet the criteria or not. Depending on what you choose, the next step is to get familiar with SBA programs or alternative loan types.