July 14, 2021

Conventional Business Loans vs. SBA Loans: How to Decide

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 business loans are loans that you receive 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 in order 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?

Backed by the Small Business Administration, a government agency that supports small businesses and entrepreneurs, SBA loans promise that the SBA will buy back part of your loan from the lender if you default on it. Generally speaking, the SBA guarantees anywhere from 50% to 90% of the loan amount, up to $5 million. If you can’t qualify for a conventional business loan or are displeased with the offers you receive from conventional lenders, an SBA loan may make sense. The most popular SBA financing option is the 7(a) loan. It’s versatile as you can use it to cover expenses such as:
  • Startup costs
  • Inventory
  • Equipment
  • Working capital
  • Expansion projects
While the SBA 7(a) loan offers business loans of up to $350,000, the Standard 7(a) Loan provides up to $5 million in funding.

Key Differences Between Conventional Business Loans and SBA Loans

Both conventional business financing and SBA loans can help you pay for a variety of business-related expenses. However, there are several major differences between these options including:
  • Approval Times: Conventional business loans typically come with much faster approval times than SBA loans. This is because they’re based on the lender’s underwriting criteria rather than the rigorous requirements of a government agency.
  • Documentation: Compared to conventional financing, SBA loans require more paperwork. You’ll need to provide far more information about your business so that the SBA can guarantee your loan.
  • Interest Rates: Unless you have good or excellent credit, you may be stuck with a higher interest rate if you go with a conventional loan. SBA loans have an interest rate cap so you’re less likely to overpay for them, even if you don’t have the best credit profile.
  • 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: If you face financial hardship and take out a conventional loan, you may be out of luck. SBA loans tend to be more flexible and have options to help you navigate your financial roadblock.
  • Qualifications: You’ll find that it’s easier to get approved for an SBA loan than a conventional loan. That’s why an SBA loan can be a smart choice if you’re a startup or newer business with limited to no credit or collateral.
  • Resources: Some conventional business loan lenders offer resources for small business owners. The SBA, however, is known for its extensive support to small businesses that includes mentorship programs, entrepreneurial development services, and startup cost calculators.

Applying for a Conventional Business Loan or SBA Loan

To apply for conventional business financing, find a bank, credit union, or online lender that offers it. You may be able to fill out the application form in-person, over the phone, or online, depending on the lender you choose. Note that loan review and approval time vary and can take weeks or even 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. New call-to-action

Should I Choose a Conventional Business Loan or SBA Loan?

Conventional business financing and SBA loans have their own pros and cons. Before you decide on an option, weigh them carefully. If you’re a fairly established business with stellar credit and don’t want to wait long for funding, a conventional loan may be a solid choice. On the contrary, if you’re a newer, higher-risk business, SBA financing can cater to your needs.