One of the most common ways to fund your small business is to access financing from external sources. These sources may include banks, credit unions, or even private investors. If your company has easy access to business loans, then you can plan to scale up your operations in a quick and effective manner.
However, when evaluating different financing possibilities, it is crucial to understand the key differences between Small Business Administration (SBA) loans and conventional business loans. Read on to see these two types of loans compared with respect to their borrower terms, affordability, protection mechanisms, eligibility, as well as processing time.
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Which Business Loan Type Has Better Borrower Terms?
The first difference between the two types of loans is that SBA loans are partially guaranteed by the US government. Since the government is acting as a guarantor, it enables borrowers to obtain higher amounts at comparatively lower interest rates. On the other hand, conventional loans enable borrowers to have predictable installments.
Another point of difference is the typical loan amount. In the case of the SBA guaranteed variety, the amount can vary between $5,000 and $5,000,000. Comparatively, typical conventional alternatives range between $25,000 and $250,000. The duration of the loan can also vary to a great extent, with certain SBA terms stretching up to 25 years. A longer-term also allows small businesses to plan well-ahead and reduce the accompanying financial burden.
Overall, it is evident that the SBA option is the winner here, allowing your business to avail higher amounts, while also enabling you to pay the financing back over a longer period.
Which Loan Type Is More Affordable?
When considering financing, a major factor that requires ample consideration is affordability. The typical interest rates for an SBA loan tend to be lower compared to conventional loans. Although such interest rates can depend on various factors such as the market situation, the general notion is that financing from the SBA is more affordable.
This is because these loans are backed up by the government’s guarantees. These guarantees enable banks and other lenders to offer interest rates that are much more reasonable. The guarantees also ensure that the term of the loan can be much longer compared to conventional options. From the point of view of the lender, accompanying guarantees also make the loan a more secure option.
Generally, SBA-guaranteed options can prove to be much more affordable. These loans are ideal for small businesses that are seeking to scale up their operations without having to pay high interest rates for the privilege.
Which Loan Type Has More Protections & Guarantees?
SBA loans also offer a higher degree of protection because the government is involved. These loans are overseen by the US Small Business Administration. This entity aims to protect the interests of small businesses and ensures that the borrowing risks are mitigated. SBA options offer much more protection compared to traditional loans because the government also helps you out in the case of a default.
The terms of such loans are typically designed in such a way that the government pays back a certain percentage of your loan in case you are not in a position to pay it back yourself. By comparison, conventional loans do not offer any such protections, as you are the only entity responsible for paying them back.
Thus, SBA financing offers a much greater degree of protection compared to conventional options, making these loans ideal for businesses that are still in the early stages.
Which Loan Has Easier Eligibility Requirements?
Eligibility is an additional aspect that must be compared thoroughly when seeking financing offers. In order to qualify for a conventional business loan, you must generally have annual revenue of more than $300,000. In addition to this, you should also have been in operation for more than four years.
Conventional business loans also require you to have a credit score that is in excess of 680. By comparison, SBA business loans require you to have an annual revenue of $180,000 and above. The other two eligibility criteria are similar though.
Overall, SBA-financing encompasses comparatively lower benchmarks when it comes to eligibility. This makes online SBA loans the preferred option for smaller businesses. Even if your annual revenue is less than $300,000 and your credit history is a bit spotty, you can still consider the best SBA loans for bad credit.
Which Loan Application Is Quickest?
This is one criterion in which a more traditional loan process is more suitable. A conventional loan requires a significantly lower degree of paperwork. This is because the government is not involved in the borrowing process.
On the other hand, applying for an SBA loan means that you need to do a lot of paperwork. The application process can also be a lot more stretched out. This also means that the actual time taken to receive the funds in your account can be much lesser in the case of a conventional option. Although SBA financing offers a greater degree of security, the process can be rather lengthy.
If you find your business requiring urgent funding, conventional financing may be the best choice. However, if you are in no hurry to receive the funds into your account, then SBA loans should be considered given their more generous terms and guarantees.
To sum up, SBA loans have the upper hand over conventional financing options in almost all respects. They tend to be spread over a longer-term, allowing the borrower to pay back in smaller installments. Moreover, these loans also offer lower interest rates and receive a partial guarantee from the government, making them highly secured loans that ensure your burden is minimized.
If you are a small business looking to raise funds, then SBA loans may be the best option for you. The only situation in which a conventional business loan is more useful is if you need the funds urgently.