Katey Wibbenmeyer
Small businesses often need funding to start or expand their operations, and there are different options available for financing. Two of the most popular types of loans are SBA loans and conventional loans. In this article, we'll explore the differences between these two types of loans and help you determine which one may be right for your business.
What is an SBA loan?
The Small Business Administration (SBA) is a government agency that helps entrepreneurs and small business owners obtain financing. The SBA works with banks and other financial institutions to provide loans to small businesses. SBA loans are partially guaranteed by the SBA, which reduces the lender's risk and makes it easier for small businesses to qualify for financing.
SBA loans are available in a variety of forms, including:
- 7(a) loans - These are the most common type of SBA loan and can be used for a variety of purposes, such as working capital, equipment purchases, or real estate acquisition.
- CDC/504 loans - These loans are designed for real estate and equipment purchases.
- Microloans - These are small loans of up to $50,000 that are designed for startups and other small businesses.
What is a conventional loan?
A conventional loan is a loan that is not guaranteed or insured by a government agency. Conventional loans are offered by banks, credit unions, and other financial institutions. These loans are typically more difficult to qualify for than SBA loans because they have stricter underwriting requirements.
The primary distinction between SBA loans and conventional loans.
The biggest difference between SBA loans and conventional loans is that SBA loans are partially guaranteed by the SBA, while conventional loans are not. This means these lenders carry less risk for the lender.
SBA loans have less stringent underwriting requirements than conventional loans. For example, cash flow from the business can be lower and the borrower's credit score does not have to be perfect. On the other hand, conventional loans typically require a strong borrower balance sheet and a good credit score to qualify.
Additionally, SBA loans typically require a lower down payment than conventional loans, however, the rate and fees may be less advantageous on SBA loans when compared to conventional loans. And while SBA loans are easier to qualify for, the underwriting process may take longer due to the involvement of a government agency.
Which one is right for your business?
The type of loan that is right for your business depends on your specific needs and circumstances. If you have a strong credit score and financial statement, a conventional loan may be the better option. However, if you are a startup or have less-than-perfect credit, an SBA loan may be the better option.
In addition, SBA loans are better suited for long-term financing needs, while conventional loans are better for short-term financing needs. If you need funding for a specific project or purchase, a conventional loan may be the better option. However, if you need funding to start your business, an SBA loan may be the better option.
Conclusion
Both SBA loans and conventional loans have their advantages and disadvantages. When deciding which loan is right for your business, it is important to consider your specific needs and circumstances and discuss all options with your commercial banker. If you are considering a loan for your business, I encourage you to reach out to one of our business banking experts - we are always happy to discuss your personal situation and help you find a solution that fits your needs.
