The Difference Between SBA Loans and Other Funding Options

Whether your business needs short- or long-term financing, the Small Business Administration loans are a great option for business owners. There are other financing options that can be considered too other than the SBA loans.

You can seek financing from banks and online lenders to maintain operations. It is important that you weigh all of your options, so you find the right one for you. Knowing how the SBA loan works and how the are different than the other funding options will help you decide which option to choose.

How Do SBA Loans Work?

SBA loans have an approval process that is similar to traditional commercial loans because when get an SBA loan, it is a bank that lends you the money.

The SBA does not lend money to small businesses. The SBA partners with banks and participating lenders who provide the funds. The SBA is guaranteeing the loan, it allows for businesses to qualify for loans that might not qualify for traditional financing options.

Before applying for a small business loan from an SBA lender, there are requirements that include:

  • Be a registered business
  • Conduct business in the United States
  • Have equity in your business
  • Exhaust other financing options

If you meet these requirements, you can begin the loan application process.

There is a lot of paperwork required to be filled out that you will need to submit when applying for SBA loans. Gather all your business and personal information along with tax documents.

Other Financing Options to Consider

Traditional Bank Loans

These types of loans are difficult for small businesses and startups to qualify for because of their strict prerequisites. Banks will want to work with someone who has a high credit score, good financial history, and has been in business for a couple years.

In comparison, because the SBA guarantees the loan, risks are removed from lenders and transferred to the SBA. This reduces the qualification standards and allows more businesses to qualify for an SBA loan.

Lines of Credit

A line of credit can be used at will and can draw up to the limit. Terms are not as strict with a line of credit as they are with an SBA loan. There is not an amortization period with fixed monthly payments.

Interest rates on lines of credit are usually variable. This can be good and bad. The interest rate might be lower than that of an SBA loan but can increase as FED rates rise.

An SBA loan requires a lengthy approval process and is meant for a specific purpose. Lines of credit are flexible in how you want to use it for, but can be hard to get approved for.

Credit Cards

Many businesses use personal credit cards because it is an easy source of financing. However, if you use a credit card you need to be responsible to avoid having interest get out of control. Credit cards have much higher interest rates.

You are more likely to qualify if you have a good personal credit score when you apply for a business credit card. In addition, you might benefit from submitting your business’s credit score so you can show that you can manage your finances.

If you choose a credit card, be sure to avoid overspending. Overspending can lead to significant debt. Once you have acquired debt, it will be hard to pay off since you will have other bills and expenses to deal with at the same time.

The Bottom Line

SBA loans can be hard to qualify for and have a lengthy approval process. They can be beneficial to small business owners seeking financing. Review the other options featured in this post to determine if one of them will be a more suitable fit for your business.