SBA Loan vs. Conventional Loan: Which Is Best for Your Business?

Businesses typically need funding in order to grow, and they frequently turn to conventional business loans or SBA loans to accomplish these goals. There are pros and cons with both types of loans, but for the most part, loans from the Small Business Administration (SBA) tend to be the better option due to their lower interest rates and longer repayment terms.

What Is an SBA Loan?

SBA loans are backed by the government, so they can provide better rates and terms to eligible borrowers. These loans are offered in amounts ranging from $500 to $5.5 million, and they can be used for a variety of business purposes, including working capital and long-term business investment.

Eligibility Requirements

Eligibility criteria for most SBA loans includes:

Additional requirements will vary depending on the specific type of SBA loan applied for.

Types of SBA Loans

The main types of SBA loans include:

• 7(a) loans: 7(a) loans are offered in amounts up to $5 million for businesses that fall within SBA size requirements. These loans typically come with fixed interest rates and fixed monthly payments for the duration of repayment, and funding can be used for a variety of purposes.
• 504 loans: SBA 504 loans offer long-term, fixed-rate financing in amounts up to $5 million for eligible borrowers. These loans are available to companies with a tangible net worth of less than $15 million dollars and an average net income of less than $5 million after federal taxes for the two years prior to applying. Funding can be used for a variety of purposes, including job creation and business growth.
• Microloans: These SBA loans are offered in amounts up to $50,000, and they’re available for small businesses who need working capital, inventory, equipment updates, supplies, etc. Microloans are backed by the government and offered through SBA funding intermediaries.

Pros and Cons of SBA Loans

Pros Explained

• SBA loans often have lower interest rates and better loan terms than conventional loans.
• Longer repayment terms can also be available.
• Some small businesses can qualify for SBA loans easier than they could with conventional loans.

Cons Explained

• Closing an SBA loan tends to take longer than conventional loans, from up to 30 days to several months.
• SBA loans can have strict eligibility requirements depending on the loan type, including income and net worth limits.

What Is a Conventional Loan?

Conventional loans for small businesses are offered through private lenders, so they don’t come with government backing. Terms for conventional loans also vary widely based on the type of loan, the lender, and other factors.

Eligibility Criteria

As with the loan terms, eligibility requirements vary widely based on the loan type and lender, in addition to the amount being borrowed. However, small business lenders typically want to see the following from their applicants:

• Minimum time in business (i.e., one year or longer)
• Fair or good personal credit score for the primary applicant
• Annual business revenue requirements
• Business checking account

Types of Conventional Loans

While many companies offer several different types of business loans, the most common are term loans for business and business lines of credit. 

There are also some unconventional types of funding that small businesses can utilize, including invoice factoring and a merchant cash advance.

Pros and Cons of Conventional Loans

Pros Explained

• Some business lenders promise fast funding within a few business days.
• Certain small businesses may qualify for higher loan amounts with a private lender versus the SBA.
• Terms offered through private lenders may be more flexible.

Cons Explained

• Conventional loans tend to have higher maximum interest rates than SBA loans.
• Credit requirements can be stricter for conventional loans.
• Some conventional loans require collateral.

Which Loan Is Right for Your Business?

Before you decide between an SBA loan and a conventional loan, you should consider the advantages and disadvantages of both options. You can also utilize the SBA’s lender match tool to see if any of the available SBA loan options might suit your needs. 

Additionally, don’t forget to consider the following additional factors:

Business Age and Credit History

Your business age and credit history will matter to both private lenders and lenders that offer government-backed loans through the SBA. However, private lenders may put more emphasis on your personal credit history when you apply.

Loan Purpose

Some SBA loans can only be used for specific purposes, although this can also be the case for conventional business loans. Either way, understanding why you need to borrow money could help guide you toward the correct lender.

Financial Health

Financial health is another major consideration to keep in mind, as is annual business revenue and net worth. Both SBA loans and conventional loans for business can have minimum or maximum annual revenue requirements in place, in addition to other potential requirements.

The Bottom Line

Small businesses that need funding can turn to government-backed loans to get the cash they need, or they can opt for a private lender instead. The best option for a business depends on its financial health, how much funding it needs, and how quickly it needs the money.

Overall, SBA loans tend to have lower rates and better terms, with the caveat that funding won’t happen quickly. Private lenders can offer the funding you need on a speedy timeline, at a higher overall cost.