If you’re a small business owner looking for some additional cash to grow your operation, you have several options – the most common of which are SBA loans and conventional bank loans.
You can use these loans to fund any number of upgrades to your small business, whether that is purchasing new equipment or retail space, upgrading production facilities, or perhaps even buying another existing business.
Let’s take a look at SBA vs conventional loans.
Types of small business loans
If you’re looking to start or expand a small business, there are several options available to you.
Two of the most common ones are SBA loans and traditional bank loans.
There are fairly similar in operation although there are some distinct differences.
Let’s start with an SBA loan.
What is an SBA loan?
The Small Business Administration (SBA) provides assistance to small businesses in the U.S. and one of the primary ways it does that is through the SBA loan program. The SBA doesn’t loan money directly but will guarantee 85 percent of a loan from a traditional lender.
This is an incredibly helpful tool for starting or expanding your small business as well as purchasing an existing business.
The loans range from $500 to $5.5 million depending on what you’re looking for.
SBA loans are generally a cheap way to access capital for your small business. They offer generous repayment terms relative to traditional lenders and relatively good interest rates.
You can get up to 25 years for real estate and 10 years for fixed assets and working capital, for example.
However, the process can be fairly arduous and take longer than working with a traditional lender.
There are several types of SBA loans but the main ones are:
- 7(a) – The most popular type of SBA loan that can be used for a variety of purposes, including purchasing land, repairing existing capital, and purchasing or expanding an existing business.
- CDC/504 – the Certified Development Company is aimed at companies that want to invest and grow a business. It can be used for purchasing land, improving the existing property, or building new facilities.
- MicroLoan – This can be used to start or expand a business and can be put towards working capital, inventory/supplies, furniture, fixtures, etc.
Qualifying for an SBA loan
There are several eligibility requirements based on what a business does, the character of its ownership, and where the business operates. It must also qualify as a small business under the SBA’s Size Standards Tool.
You’ll need to be able to show that you need the funds, that you’ll use them for a sound business purpose and you are able to repay the loan.
You will need to have good credit and the SBA lenders will check your FICO SBSS score.
You should also be prepared with a number of personal and business financial documents, including tax returns, business plans, etc.
What is a traditional bank loan?
A traditional bank loan is when you go directly to a lender and ask for a loan. That may be a bank or a credit union, for example.
The lender will provide the approved business with a lump sum of money and the business must repay the loan based on agreed terms and timeframe.
Because there is no SBA to guarantee the majority of the loan, the bank is on the hook for the whole amount if you default. Accordingly, they will generally expect you to have excellent credit.
The terms can vary widely in terms of interest and repayment length – much of which is predicated on your business type, credit standing, and other factors.
Qualifying for a traditional bank loan
You’re going to want to have an excellent credit score because the bank will want to be sure that you will be able to repay the loan. Strong cash flow is certainly an asset when applying for a traditional bank loan.
Much like the SBA loan, you should also gather a variety of documents including an updated business plan, business, and personal credit report, tax returns for you and your business, all relevant licenses and permits, and any relevant financial documents like bank statements, credit card sales, etc.
How to choose the right loan for your small business
Choosing which type of loan works best for you and your business is ultimately up to a whole host of factors, including your credit history, how large your business is, and the overall financial health of you personally and your business.
The SBA loan can often work for smaller businesses and those just starting out as there is a wide range of funding available.
Traditional lenders would generally prefer to offer larger loan amounts to single clients. They are in the business of making money so they’d rather process one loan for $100,000 than 10 loans for $10,000.
The SBA loan is generally ideal for those who are just starting out or for small business owners who have less than stellar credit – at least relative to traditional bank loan requirements. Because the SBA guarantees 85% of the loan, collateral requirements are generally less strict.
Be sure to carefully assess all of your options and know what you want before seeking out a loan, whether that is from the SBA or from traditional lenders.
Gather all of your documentation to make the application process as easy as possible.
If you’ve been responsible and diligent in your business’s finances, you will likely be in a good position to secure a loan so you can take your business to the next step.