Conventional business loans are popular because they are offered by various major financial organizations. However, newer enterprises typically have a shorter credit history, so they may not be eligible for conventional business loans. To those who may not qualify for or prefer not to take out a traditional business loan, the Small Business Administration (SBA) offers a variety of loans tailored to the needs of smaller, newer enterprises. Read on if you’re trying to decide between a traditional loan and a Small Business Administration loan.
What is an SBA Loan?
SBA loans are guaranteed by the federal government and made available to small businesses through the Small Business Administration. The Small Business Administration guarantees small business loans from SBA-sanctioned lenders for as much as 85 percent of the loan’s value. That decreases the lender’s exposure to default by the borrower.
The average interest rate on an SBA loan is between 3 and 7 percent. This rate is significantly lower than small business loans and credit cards.
What is a Conventional Loan?
Financial institutions like banks and credit unions are the primary sources of conventional loans. Lenders will loan you a quantity of money upfront, and you will have to pay it back over time. Fees and interest rates on loans are contingent on the borrower’s credit history and the lending institution.
Unlike SBA loans, conventional loans do not have government backing. If the borrower fails to make payments, the bank bears the loss. Consequently, a high credit score, solid financials, and a proven track record as a business owner are typically prerequisites for qualifying for a conventional loan.
Conventional vs. SBA Loan
Some differences between an SBA loan and a conventional loan include:
- An SBA loan requires less paperwork than a conventional loan
- An SBA loan is more complicated
- SBA loans usually take longer to get approved
- SBA loans offer lower interest rates
- An SBA loan has longer repayment terms
- SBA loans provide more flexibility
- It’s harder to qualify for a conventional loan than an SBA loan
It’s crucial to weigh the pros and cons of both SBA loans and conventional bank loans before committing to one. As you consider your options, keep in mind the status of your business (whether it’s just starting or has been around for a while), your credit, and your current financial situation.