SBA vs. Conventional loans to small businesses

  • The US Small Business Administration (SBA) and conventional loans offer businesses low interest rates and fixed terms.
  • There are several differences between SBA loans and conventional loans that could impact your borrowing decisions.
  • SBA loans have longer approval times and require more documentation. They are a great way to fund long term purchases.
  • This article is for business owners who are considering an SBA loan or a conventional small business loan.

Whether you need short-term financing or help paying for expensive equipment, the US Small Business Administration (SBA) and conventional loans are popular options, and for good reason. Both offer lower interest rates, but that’s where the similarities end. There are distinct differences between the two types of loans that potential borrowers should understand.

What is an SBA loan?

SBA loans are small business loans that are guaranteed by the federal government. The SBA supports small business loans issued by approved lenders, guaranteeing up to 85% of the loan value. This greatly mitigates the risk to the lender if the borrower defaults.

“We offer this guarantee which allows [lenders] to be more generous in their terms, ”said Dianna Seaborn, director of the financial aid office at the SBA’s Access to Capital Office. “This generosity helps small businesses with cash flow and repayment – it helps them get financing when they are start-ups.”

The interest rates on SBA loans range from around 3% to 7%. It is much less than credit cards and alternative small business loans. [In the market for a small business loan? Check out our reviews of the best financing options.]

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There are three main types of SBA loans:

  • 7 (a) ready: This is the main SBA loan product for small businesses. Interest rates vary depending on the credit rating of the borrower. With this loan, you can borrow up to $ 5 million.
  • SBA microcredits: These are SBA guaranteed loans ranging from $ 10,000 to $ 50,000. Designed for small startups and borrowers with collateral and / or limited sales, they can be used by businesses that need a little financial boost.
  • 504 loans: These are long term fixed rate loans used for expansion and / or modernization. These loans can be used to purchase large equipment or real estate. The terms of these loans can last 10, 20 or 25 years.

Did you know? SBA loans are guaranteed by the government. With the SBA taking on most of the risk, lenders are more willing to lend to small businesses that might not otherwise qualify for a loan.

What is a conventional loan?

Conventional small business loans are typically provided by banks, credit unions, and financial institutions. Lenders give you a lump sum of money that you have to pay back over a set period of time. Interest and fees are included in the loan and vary depending on your credit score and the lender.

Much like SBA loans, they can be used to cover business expenses, purchase equipment, or be used for working capital. Conventional small business loans are not guaranteed by the government like SBA loans are. This means that the bank assumes 100% of the risk in the event of default by the borrower. As a result, most conventional small business loans require that you have a good credit rating, strong finances, and an established track record as a business owner.

Key to take awayTo remember : Conventional loans are issued by banks, credit unions and financial institutions. The lender assumes the risk of these loans. To qualify for a conventional business loan, you must have a good credit rating (which usually starts at mid-600) and a favorable financial standing.

An SBA loan vs a conventional loan

SBA loans differ from conventional business loans in many ways. Rates and terms vary, as does the risk the lender assumes. Here are some other differences between an SBA loan and a conventional business loan.

SBA loans require more paperwork than conventional loans.

Alex Espinosa used to lead SBA loan departments at various banks and now works as an SBA loan consultant through his company, BOLD Lender. He said that there are certain obstacles that lenders and borrowers face with SBA loans.

“It’s very complicated for the average banker,” he said. “It’s not complicated once you’ve been mentored through the process and spent a few years in it.”

SBA loans differ from conventional loans in that the borrower generally has a “riskier” financial profile compared to individuals who apply for a conventional loan from a bank. That means one thing: paperwork. The SBA needs a lot more information from you and the lender to secure the loan. However, by partnering with a bank or lender with an experienced SBA department, Espinosa said loans can be done with minimal headaches.

SBA loans are more complicated.

As with any government-backed process, there is a long list of rules and regulatory processes that lenders must follow. This discourages some lenders and creates longer financing times, especially compared to conventional lenders or alternative online lenders.

“To get an SBA loan, the paperwork [requires providing] more documentation,… and the approval process… is going to be longer than some of the other small business loan products out there today, ”said Joe Camberato, co-founder and CEO of National Business Capital.

SBA loans generally have longer approval times.

Camberato and Espinosa said the SBA approval process can take between 60 and 120 days. Many alternative lenders may be able to provide super-fast turnaround time – sometimes providing financing in just days – but they aren’t subject to the same regulations and will almost always charge higher interest rates. .

SBA loans offer low interest rates.

The maximum interest rate on an SBA loan is 8% as of April 2021. This is much better than the rates you will pay with other lenders, which can be high depending on your credit score.

SBA loans have longer repayment terms.

Another advantage of SBA loans is that they come with longer terms, which means lower monthly payments for business owners. Loans 7 (a) and 504 have terms ranging from 10 to 25 years. Depending on your agreement, you could be set up with a fully amortized loan. This means that you pay both interest and principal with each payment as the loan matures, so that it is fully repaid at the end of the agreed term. Some conventional loans have a lump sum payment stipulation, which means that you have to make a large payment when the loan comes due. This can be crippling for some business owners.

SBA loans are more flexible.

If your business is struggling financially or if you are behind on payments for any reason, SBA loans offer flexible options to help you stay on your feet. Espinosa said companies may be eligible to defer payments or provide interest-only payments.

“The SBA has a certain flexibility that it gives to banks, which banks don’t always use as they should when someone is in trouble,” he said. “The last thing the SBA wants to do is get you banned.”

It is easier to qualify for an SBA loan than a conventional loan.

One of the biggest advantages of an SBA loan is that you can get a loan without meeting the strict qualifications that a conventional lender may require of their loan applicants. This makes the SBA program a great option for new businesses or businesses with limited warranties. Espinosa said that an SBA loan will never be turned down due to a lack of collateral.

“The rule is that the SBA will not turn down a loan for lack of collateral, but the rule is that they want all available collateral to secure the loan,” he said. This will likely include personal collateral and other assets.

Did you know?Did you know? SBA loans tend to have a more arduous application process. However, these loans offer longer terms, the terms are more flexible, and an SBA loan may be easier to obtain than a conventional loan issued by a bank.

Is an SBA loan or a conventional loan better for me?

The SBA loan program may be better suited for your business, but it depends on your situation. Camberato said SBA loans are a good option for businesses looking to extend or sustainably improve their existing building, for example. He also said that bigger loans for bigger projects make great SBA loans. Whether you’re in the finance market or not, Seaborn said the SBA has many resources to help business owners grow.

“We do a lot as an agency to help you understand what we are doing,” she said. There is “the ability to access free advice and support from small business development centers, writing business plans, feasibility of marketing and that sort of thing, up to the point. where you are in the financing market “.

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