SBA vs. Conventional Loans: What’s the Difference?

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith Wood is the editor-in-chief at Fundera. She has specialized in financial advice for small business owners for almost a decade, and is sought out frequently for her expertise in small business lending. Meredith’s advice has appeared in the SBA, SCORE, Yahoo!, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, and more. Email: meredith@fundera.com.
Meredith Wood

When it comes to SBA loans vs. conventional loans, the first thing to understand is that both are terrific lending options for your small business. With both an SBA loan and a conventional business bank loan you are getting a low-cost option with flexible repayment terms.

But if you came here, you probably already know the benefits of SBA loans and conventional business loans. The more important question is, what’s the difference between the two, and which one is better? To find out, let’s compare SBA vs. conventional loans: How they work, how to apply, and which is right for your specific business needs.

We’ll also provide you with some alternatives so you understand your full range of lending options.

SBA vs. Conventional Loans: The Basics

Let’s start by taking a look at how each loan works, as well as their rates and terms.

PRODUCT LOAN AMOUNT LOAN TERM INTEREST RATE
SBA Loan
$5,000 – $5,000,000
5 – 25 Years
4.39% – 13%
Conventional Term Loan
$25,000 – $250,000
1 – 5 Years
7% – 30%

 

Conventional Business Loan: How It Works

A conventional business loan is typically a traditional term loan. Term loans are probably what you naturally think of when you think of a business loan. The terms are pretty simple—you borrow a fixed amount of money, usually for a specifically stated business purpose—and pay back the loan over a fixed term and typically at a fixed interest rate. (Learn more about the details of a term loan cost with a term loan calculator.)

If you’re looking for a loan with a fixed interest rate and predictable monthly payments that can be used for a wide range of business purposes, a traditional (or medium) term loan may be the right fit for your needs.

Another upside of a traditional term loan is that—as long as you consistently make your loan payments on time, it can help to improve your credit score—improving your candidacy for other types of business credit in the future.

Do keep in mind, though, that repayment periods aren’t the only longer term aspect of a traditional term loan. The application process can be much longer as well.

Depending on the institution, it can take several weeks or even months for a traditional term loan application to be satisfactorily completed, processed, approved, and funded. And once your loan is funded, it may include terms and interest rates that are less flexible than with other types of loans.

Prepayment penalties are another downside particular to traditional term loans. If your loan has a prepayment penalty clause, you’ll be charged a fee in the event that you decide to pay off your loan early. This can be frustrating for business owners once they’ve established themselves financially and have the cash on hand to get out of debt, only to realize that they’ll be penalized for doing so.

Traditional term loans may also require collateral depending on your credit and financial situation.

sba vs. conventional loan

Conventional Business Loan: Rates

Conventional business loan amounts range from $25,000 to $500,000 with fixed interest rates between 7% and 30%, depending on your qualifications.

Conventional Business Loan: Terms

Conventional business loans come with a repayment term between one and five years.

Conventional Business Loan: How to Apply

As previously mentioned, the application process for a conventional business loan from a bank is usually a lengthy process. Among the documents you must provide are your driver’s license, a voided business check, bank statements, a balance sheet, profit and loss statements, your credit score, business tax returns, and personal tax returns.

Once you submit your application to the bank, expect to wait several weeks or even months to find out if your application is approved.

Conventional Business Loan: Who Qualifies

Generally speaking, those who qualify for a conventional business loan from a bank have an annual business revenue over $300,000, have been in operation for at least four years, and have a credit score of 680 or higher.

SBA Loan: How It Works

The Small Business Administration is a federal agency that helps entrepreneurs grow their small businesses by offering business education, connecting business owners with contracting opportunities, and facilitating access to small business loans.

Don’t misunderstand—although the SBA helps to make loans available to small businesses, the agency itself does not directly lend funds. Rather, the SBA acts as a guarantor of certain bank loans, guaranteeing a certain percentage of the loan in an effort to incentivize banks and special SBA lenders to lend money to small businesses. Because of this guarantee, banks can afford to offer lower down payments, longer payment terms, and more reasonable interest rates than with other types of term loans.

The SBA has several loan programs available, tailored to particular small businesses which may not otherwise be easily served in the commercial lending marketplace. Their most popular program is the SBA 7(a) loan program, which can be used for a variety of general business purposes. The Certified Development Company (CDC) 504 Loan Program is tailored for entrepreneurs seeking to purchase major fixed assets such as manufacturing equipment or commercial property.

The SBA Microloan program is a great fit for businesses in need of a relatively small amount of capital—$50,000 or less, as the program makes available through intermediaries loans that would typically be considered too small to serve by most commercial lenders.

Through their various loan programs, the Small Business Administration often gives special consideration to women and minority business owners, helping these entrepreneurs finance a wide variety of business needs. SBA loans can be used for adding to working capital, refinancing other debts, buying real estate, or even financing the acquisition of other businesses.

SBA Loan: Rates

SBA loan amounts vary greatly, from as little as $5,000 to as much as $5,000,000, with interest rates currently starting at only 4.39%.

SBA Loan: Terms

SBA loan repayment terms range from five years to 25 years.

SBA Loan: How to Apply

Many large and local banks offer SBA loans. However, similar to conventional bank loans, the SBA loan application process is lengthy. In fact, SBA applications involve the most paperwork and longest approval times of any term loan—often taking months of processing time before entrepreneurs actually have cash in hand. So if you need quick access to cash, the SBA loan requirements are likely to make this not the best choice for your business.

Among the documents you’ll need when applying for an SBA loan are your driver’s license, a voided business check, bank statements, a balance sheet, profit and loss statements, business tax returns, personal tax returns, your business plan, and your business debt schedule.

SBA Loan: Who Qualifies

To qualify for an SBA loan, you should have an annual business revenue over $180,000 with a minimum credit score of 680, and your business should have been in operation for at least four years.

sba vs. conventional loan

SBA vs. Conventional Loan: SBA Advantages

Given the fundamentals regarding each type of loan, here is what we see as the advantages of an SBA loan over a conventional business loan:

Lower Interest Rates

Since SBA loans are guaranteed by the government, you’ll likely have a lower interest rate than you would with a conventional business loan. Currently, SBA loan rates range from 4.39% to no higher than 13%. SBA loan rates will depend on which SBA loan program you’re borrowing through, how much you end up borrowing, and the repayment term length you qualify for.

Longer Repayment Terms

Whereas conventional business loan repayment terms typically only last five years, SBA loans can last as long as 25 years.

Minimal Collateral

For SBA loans under $350,000, no personal collateral is required to secure the loan. This means you can secure an SBA loan without risking any of your personal assets.

Higher Loan Amounts

Because SBA loans are guaranteed by the government, banks tend to be more lenient with their underwriting standards. This means your business could get a higher loan amount than you might get with a conventional business loan.

Flexible

SBA loans can be used for nearly every single type of business operating expense, whereas conventional loans are typically only issued for a specific stated purpose. The one caveat is that SBA loans cannot be used to pay off taxes.

SBA vs. Conventional Loan: Conventional Loan Advantages

While there are numerous benefits of SBA loans over conventional business loans, there is one area where conventional business loans win out:

Easier Approval Process

Compared to the SBA loan application process, applying for a conventional business loan from a bank is considerably easier. While you will still need to provide a lot of paperwork, the process isn’t as cumbersome since you don’t have to deal with the government.

“There are fewer requirements with a non-SBA product,” says Matt Nicolosi, Fundera SBA Sales Manager. “With an SBA loan you have to meet bank and government’s requirements. With a conventional loan you only need to meet the bank’s requirements.”

Because of this, a conventional business loan from a bank could fund faster than an SBA loan would.

Short-Term Loans: An Alternative to SBA Loans and Conventional Loans

If neither an SBA loan or a conventional business loan fits your businesses needs, you might be interested in a short-term loan. This type of loan is designed for business owners looking for a little extra cash to meet a short-term financial need.

Short-term loans are an incredibly versatile financial tool, offering business owners the chance to better manage cash flow, deal with unexpected needs for extra cash, and take advantage of new business opportunities that may come along.

For example, maybe you have an option to purchase extra inventory at a discount, but don’t have the cash on hand to purchase ahead. A short-term loan can offer you the financing you need to take advantage of that business opportunity and reduce your inventory cost.

One major benefit of a short-term loan is timing. Since these loans require limited paperwork, you can gain access to funds quickly to meet your business needs—with many alternative lenders advertising cash in hand in as little as two days.

As opposed to conventional business loans, which may limit use of funds, short-term loans can be used for virtually any business purpose. And because the loan term is relatively shorter, you can limit how long the debt is on your books, impacting your bottom line of monthly profits.

There are some downsides to taking on a short-term loan: By tying up your credit with one of these smaller loans, you risk limiting your access to a larger or longer-term loan for another business need, such as purchasing property.

Typically, shorter term loans have higher annual percentage rates (APR), meaning you’ll be paying more in interest month to month than you would be with a longer-term loan. These loans also often require collateral in order to guarantee the loan.

sba vs. conventional loan

SBA vs. Conventional Loan: Verdict

The main difference between an SBA vs. conventional loan is that an SBA loan is guaranteed by the government. Because of this, SBA loans typically have higher amounts, lower interest rates, and longer repayment terms. Applying for both an SBA loan and a conventional business loan is a lengthy and cumbersome process, but the conventional business loan process is probably a little less involved.

If neither of these options work for your business, consider a short-term loan, or an alternative lender.

Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith Wood is the editor-in-chief at Fundera. She has specialized in financial advice for small business owners for almost a decade, and is sought out frequently for her expertise in small business lending. Meredith’s advice has appeared in the SBA, SCORE, Yahoo!, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, and more. Email: meredith@fundera.com.
Meredith Wood

Our Picks