Conventional Business Loans vs. SBA Loans

Susan Guillory

Updated June 8, 2021

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Getting your business the funds it needs to grow (or even just to get through a slow period) can be essential for its success. But when it comes to choosing the right financing product to get those funds, you can feel overwhelmed by the potential options you see out there. You may encounter everything from bank loans to short term business loans to business credit cards--and more.In the end, if your credit is decent and your business is well-established, you may well find you’re trying to choose between a conventional business loan or a Small Business Administration (SBA) loan.

What Is a Conventional Business Loan?

A conventional business loan (also known as a conventional bank loan) is offered by, you guessed it, a bank (or credit union) to businesses. Among all of the many types of business loans, this one often has the most demanding qualification requirements, which may include how long your business has been in operation and what your personal or business credit score is.

How Does Conventional Lending Work?

Like many other types of financing, a conventional business loan provides a fixed sum based on an applicant’s qualifications. The exact offer a lender will make may depend on how well a business meets those standards. A business that has been operating for 10 years or more and has an excellent credit score may be eligible to borrow more than a business that’s been in existence just two years and has an average score.Once a loan has been funded, the lender gives the borrower a payment plan. Because these are generally long-term business loans, typically the repayment period is several years (one to five years is common). Each payment includes portions of both the principal of the loan and interest.The interest rate charged is also based upon the applicants qualifications. The better your credit history, the lower the rates you may qualify for. And the interest rate that you’re offered may also depend on whether or not you put down collateral for the loan. Speaking of collateral, it’s also important to note that some conventional bank loans are secured, while others are unsecured. Secured loans often require an applicant to have collateral such as equipment, real estate, or another asset. Collateral like this helps lenders offset the risk of a borrower defaulting.. Secured loans tend to charge lower interest rates than unsecured loans because there’s less risk for the lender. If your business isn’t able to pay back the loan, the bank may seize the asset to cover what you owe.By way of contrast, unsecured loans don’t require collateral. They may, however, require a personal guarantee. This is a written promise that, if your business isn’t able to pay back the loan, you personally will pay it.

How SBA Loans Work

SBA loans are another option for business financing. SBA loans are backed by the Small Business Administration (SBA , but are offered through many banks (which may also offer conventional loans) and online lenders. The SBA issues guidelines for SBA loans and helps lower risk for the lenders, which can make it easier for small business owners to get loans. SBA loans work similarly to bank loans, but since they’re backed by the Small Business Administration, they tend to have lower interest rates than traditional loans from a bank.SBA loans may require collateral but don’t always. Even if a particular SBA loan doesn’t ask for collateral, however, it will likely require at least a personal guarantee that you personally will pay the money back even if your business can't.The most common SBA loan program is the 7(a) loan program. Like any loan, the SBA 7(a) loans have certain requirements.

Your business must qualify as a small business, as the SBA defines it.
Your business must be for-profit.
You must do business in the U.S.
You personally must have invested equity into your business.
You must have used other sources of financing including personal asset.
You must be able to demonstrate a need for the funds.
You must use the funds for business purposes.

Just as with a conventional business loan, if your application is approved for an SBA loan, you’ll receive a fixed amount and a repayment schedule. Typically, SBA loans have a repayment period of five to 25 years.

Differences Between Conventional Business Loans and SBA Loans

Both conventional business loans and SBA loans are worth considering if you’re seeking financing for your small business. But there are a few key differences to keep in mind.

Loan Rates

While both SBA and non SBA business loans through a bank offer competitive rates compared to other options (like invoice financing or merchant cash advances), there are still differences between the two.Conventional business loan rates tend to be slightly higher than those offered by SBA loans. While you may be able to find banks that offer rates as low as 2.5% to 3.5%, the more common range is 6.25% to 12.99%.SBA loan rates are set at Prime + a given percent that depends on how much you’re borrowing and your repayment term.For SBA loans with repayment term of less than seven years:

$0-$25,000: Prime + 4.25%
$25,001-$50,000: Prime + 3.25%
Over $50,000: Prime + 2.25%

For SBA loans with a repayment term of seven years or longer:

$0-$25,000: Prime + 4.75%
$25,001-$50,000: Prime + 3.75%
Over $50,000: Prime + 2.75%

Loan Requirements

While both conventional business loans and SBA loans have stricter requirements than alternative lenders, nonetheless there are differences between the two in this area, too.Banks tend to have high minimum credit score requirements for business loans, and often look for personal credit scores of 650 or higher. Banks may also require that you’ve been in business for at least two years and meet a certain threshold of revenues. Bank of America, for example, requires annual revenues of $250,000 or more.The SBA, however, will not automatically disqualify you from taking out financing just because you have a lower credit score. But though the credit score requirement may vary by lender, generally, you should expect to be asked for a score of at least 620-640.The SBA also requires you to have been in business at least one year. However, that requirement may be waived if you can demonstrate expertise and previous business experience.

How Much You Can Borrow

Another important difference between an SBA loan and a traditional bank loan is the amount you can borrow.Conventional bank loans typically range from $10,000 to $500,000. SBA loans, however, can be much higher. The maximum you can borrow with the 7(a) program is $5 million.

How to Choose Between Conventional Business Loans and SBA Loans

Both conventional business loans and the options offered through the SBA can provide specific benefits to small business owners in search of funding. What’s most appealing to you may come down to your specific needs and qualifications.For example, if your business needs a large amount of capital--beyond what your bank can offer--an SBA loan might be a better match. That’s because the SBA loan cap is typically much higher than a bank’s cap. But if you don’t need as much and you already have a relationship with a bank that can offer you a competitive rate, you might prefer to keep all your business financing products with the same lender.If you’re looking for a loan you plan to pay back quickly, a conventional business loan may be ideal. However, if you prefer to pay less per month but over a longer period of time, you may want to consider an SBA loan.Your decision will also depend upon which type of financing you qualify for. Some small business owners who don’t qualify for a conventional bank loan may be eligible for an SBA loan.

Considerations for Both Conventional Business Loans and SBA Loans

Whether you decide on a conventional business loan or a Small Business Administration loan, be sure that you’re getting financing at an affordable rate for you. It’s a good idea to have a plan for how exactly you'll use the funds. But it also makes sense to plan out how you'll repay the loan. See what small business financing and rates you qualify for today.

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About the Author

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.

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