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SBA Loans vs. Conventional Loans: What's the Difference?
When it comes to getting financing for your small business, one of the biggest choices you’ll have to make is whether to go with an SBA loan or a conventional loan. Conventional, non-SBA loans may provide larger loan amounts, and can sometimes have lower interest rates than their SBA counterparts. H
When it comes to getting financing for your small business, one of the biggest choices you’ll have to make is whether to go with an SBA loan or a conventional loan. Conventional, non-SBA loans may provide larger loan amounts, and can sometimes have lower interest rates than their SBA counterparts. However, conventional loans can be much more difficult to qualify for than SBA loans, often requiring very high personal and business credit scores.
When Does It Make Sense to Apply for an SBA Loan?
SBA loans are often a great choice for businesses that:
Need a loan of anywhere between $500 (SBA microloans) and $5.5 million (SBA 504 loans)
Are somewhat established, but may not have many years of experience
Have very good, but not great credit (640+ typically is required for the SBA’s flagship 7(a) loan program)
Are in an industry that’s approved by the SBA, and are under the SBA’s size limits for businesses in their particular industry
Can afford to wait a bit longer for loan approval and disbursement, especially for standard SBA 7(a) loans and SBA microloans
Don’t have quite as much in the way of collateral to put up
You need a loan of more than $5.5 million
Your business has great credit (and you do, too)
Your business is not in an SBA approved industry (i.e. real estate investing, lending)
Your company is larger than the SBA’s size standards
You need to get approved for a large loan extremely quickly
What are the key differences between SBA loans and conventional loans?
The key differences between SBA loans and conventional loans are:
- SBA loans are typically available for loan amounts between $500 (SBA microloans) and $5.5 million (SBA 504 loans), while conventional loans can offer up to $10 million or more in some cases.
- SBA loans may have longer approval and disbursement times, especially for standard SBA 7(a) loans and SBA microloans, while conventional loans can be approved somewhat faster.
- SBA loans may have lower interest rates, though this can vary on case-by-case basis, while conventional loans may have lower interest rates.
- SBA loans are often a great choice for businesses that have very good, but not great credit (640+ typically is required for the SBA’s flagship 7(a) loan program), while conventional loans may be best for businesses with great credit and the business owner.
- SBA loans are available for businesses in an industry that’s approved by the SBA, and are under the SBA’s size limits for businesses in their particular industry, while conventional loans may be best for businesses that are not in an SBA approved industry (i.e. real estate investing, lending).
What are the advantages of SBA loans over conventional loans?
SBA loans offer several advantages over conventional loans, including:
- Lower down payments: SBA loans typically require a down payment of 10-20%, while conventional loans may require up to 25%.
- Longer repayment terms: SBA loans can have repayment terms of up to 25 years, while conventional loans typically have repayment terms of up to 10 years.
- Lower interest rates: SBA loans typically have lower interest rates than conventional loans.
- More flexible credit requirements: SBA loans may be available to businesses with less-than-perfect credit, while conventional loans may require a higher credit score.
- More flexible collateral requirements: SBA loans may require less collateral than conventional loans.
What are the disadvantages of SBA loans compared to conventional loans?
The disadvantages of SBA loans compared to conventional loans include:
- Lengthy approval times (for standard SBA 7(a) loans)
- Lots of documentation
- Collateral is often required
- Certain businesses, including real estate investing, lending, gambling, and speculation are prohibited
- High credit scores are typically required (typically 680+)
- May be restrictions on supplemental/additional financing
Conventional loans may have lower interest rates, though this can vary on case-by-case basis, so it’s always important do a careful comparison when looking at your small business loan options. Source
What types of businesses are eligible for SBA loans?
The Small Business Administration (SBA) offers a variety of loan products to help small businesses get the financing they need. The SBA 7(a) loan program is the most popular and is available to businesses in a wide range of industries. Eligible businesses include those in the business services and office-based companies sector, such as accounting, consulting, legal services, and more. Other eligible industries include retail, manufacturing, hospitality, and healthcare. You can find a full list of eligible and ineligible industries here.
If your current industry isn’t kicked out of the running due to the ineligible small businesses list, you’ve still got a shot at an SBA 7(a) loan. You’ll need to gather your documentation, follow the full application process and show your lender how you’ll repay the loan. We at SBA7a.loans aim to help you with that.
What are the requirements for obtaining an SBA loan?
The requirements for obtaining an SBA loan vary slightly between lenders, but in general, you must meet the following criteria:
- A good credit score - preferably above 680.
- A history free from recent bankruptcies, foreclosures, or tax liens.
- Having been in business for at least two years.
- The ability to provide collateral for loan requests over $25,000.
- The ability to make a down payment of 10% if your intended use of funds is to purchase a business, commercial real estate, or business-related equipment.
- Sufficient cash flow to meet your debt obligations.
- Sufficient working capital (once you subtract liabilities from assets).
- “Good character” according to the SBA (partially decided based on your track record of managing your resources and day-to-day business affairs).
In addition to the qualifications above, a business must also meet the general eligibility requirements for SBA loans, such as being in an approved industry (i.e. no gambling, lending, real estate investment, or speculation-based businesses allowed) and being a for-profit company based in the U.S.
For existing businesses over 2 years old, you must also have a decent credit score (minimum of 575 for many lenders, though a score of 620-640 is preferred), at least two years of experience in the industry, and sufficient collateral. For start-ups, owners must have put at least 25% of their own funds in the business, have a good/decent credit score, at least two years of industry experience, sufficient collateral, or a co-signer with collateral and good credit and the ability to potentially repay the loan, and a strong business plan, including financial projections and market analysis.
Conventional Loans May Actually Be Better for Certain Businesses
While SBA loans do have some incredible benefits, they aren’t the right choice for every business. A conventional loan might be best for your company if:
In general, conventional bank loans permit larger loan amounts (up to $10 million or more in some cases), and can be approved somewhat faster than a comparable SBA loan. Of course, the SBA does have faster approval options, like the SBA express loan, but these loans can only offer borrowers up to $350,000 in financing. However, working with an SBA preferred lender for a 7(a) loan could significantly speed up the loan approval process.
It’s also good to keep in mind that conventional loans may have lower interest rates, though this can vary on case-by-case basis, so it’s always important do a careful comparison when looking at your small business loan options.