SBA loan vs. conventional loan for small businesses
Discover whether an SBA loan or a conventional business loan is best for you. Presented by Chase for Business.
- Small Business Administration (SBA) loans are government-backed loans typically offering lower down payments and extended repayment terms than conventional loans.
- Conventional loans are provided by banks or lenders and usually have stricter credit and business history requirements than SBA loans.
- Determining which loan type is best depends on factors like your credit score, the loan amount and how quickly you need the funds.
Whether you are launching a new venture, acquiring a practice or purchasing heavy machinery to fulfill a major contract, securing business financing can be an important part of your strategy. As a business owner, you may need capital that supports your timeline and cash flow.
Understanding business loan options can be helpful when making a financial decision. Read on to learn distinctions between SBA and conventional loans, their eligibility criteria and how to apply for each.
What is an SBA loan?
An SBA loan is a loan that is partially guaranteed by the Small Business Administration and issued by private lenders. This government backing lowers the lender's risk, which may enable them to offer more favorable terms to small business borrowers.
SBA loans are designed to provide capital to small businesses that may not qualify for traditional loans due to a shorter business history or a lack of substantial collateral.
SBA loan requirements and considerations
To qualify for an SBA loan, you generally need to meet several conditions:
- Business size: Your business typically needs to meet SBA size standards, which are often defined as small within its industry.
- Operating status: The business generally needs to be for-profit and legally operating in the U.S.
- Time in business: Most SBA loans require a minimum of 2 years in operation, although some programs offer exceptions for newer businesses opening a second location.
- Creditworthiness: A reasonable personal and business credit score is often an SBA loan requirement.
- Collateral and guarantees: Depending on the loan type and amount, collateral may be required. You may also be expected to provide a personal guarantee, meaning you are personally responsible for the debt.
- Ability to repay: Lenders typically evaluate your cash flow and financial status to help confirm your capability to repay the loan.
SBA loan types
There are several types of SBA loans that address different business needs. A few common SBA loan types include:
- 7(a) loan program: This is the most common SBA loan, providing funds for working capital, equipment, expansion and refinancing.
- CDC/504 loan program: This loan is intended for purchasing fixed assets like real estate or heavy manufacturing machinery and typically offers long-term, fixed-rate financing.
- Microloan program: This program provides smaller loans up to $50,000, targeting startups or businesses requiring less capital.
- Disaster loans: These loans are designed to assist businesses with recovery and rebuilding when they have been affected by declared disasters.
What is a conventional loan?
Conventional business loans are issued directly by banks, credit unions or lenders. These loans do not have government guarantees, so they depend solely on the lender's evaluation of your creditworthiness, business history and the business credit you've built over time.
Conventional loans can offer speed and flexibility but generally have stricter qualification criteria than SBA loans.
Conventional loan requirements
Conventional loans typically have more stringent requirements than SBA loans. Common loan requirements include:
- Credit score: A higher tier personal credit score might be necessary for conventional loan approval. Existing personal debt, such as student loans, may be factored into this evaluation.
- Time in business: Lenders typically require at least 2 years of business history. Lenders may ask you to provide financial statements to support your history.
- Revenue: Businesses generally need to demonstrate steady revenue and cash flow because lenders want to evaluate if you have the funds to support repayments.
- Collateral: Collateral is often required for conventional loans, but collateral specifics vary by lender and the asset being purchased.
- Down payment: A down payment between 10% and 30% of the loan amount is typically required with a conventional loan.
- Debt-to-income (DTI) ratio: A favorable ratio of your current debt compared to your income may improve your approval chances of getting a conventional loan.
Conventional loan types
Conventional loans are provided by various types of financial institutions, so there is a greater variety of loan types and terms than SBA loans. Some common conventional loan options include:
- Term loans: These lump-sum loans typically offer fixed repayment terms and interest rates. They can be used for various needs like a partner buyout or practice acquisition.
- Business lines of credit: A line of credit provides flexible borrowing up to the credit limit you’re approved for. Interest is charged only on the loan’s utilized amount. It differs from a term loan as it allows you to withdraw money over time.
- Equipment loans: Equipment loans provide financing for purchasing business equipment. Terms and rates vary by lender.
- Commercial real estate loans: These loans are used for purchasing or refinancing property and may require a substantial down payment.
Differences between SBA and conventional loans
Knowing how SBA and conventional loans differ can help you select a suitable option for your situation. The time it takes to get the loan, the amount you want to borrow, interest rates and repayment terms vary based on the loan type and lender.
Some key differences in SBA vs. conventional loans include:
- Time to funding: Conventional loans may disburse faster. SBA approval involves government processing that could extend the timeline by weeks or months.
- Time in business: SBA loans may accept newer businesses under certain programs, while conventional loans generally require longer, proven business histories.
- Interest rates: SBA loans usually offer lower rates because they are government-backed. Conventional loan rates vary and are based in part on your company’s financials and credit score.
- Repayment terms: SBA loans typically allow longer repayment periods—sometimes up to 25 years—while conventional loans are often shorter.
- Down payments: SBA loans usually require lower down payments than conventional loans.
Which type of loan may be a good fit?
The best loan choice depends on your business's unique profile and needs. SBA loans may suit businesses seeking longer repayment terms, lower down payments or those with less established credit. They offer competitive interest rates but often require a lengthier approval process.
Conventional loans often appeal to established businesses with strong credit, steady cash flow and a more urgent need for capital. If you need to move quickly on a contract or acquisition, these loans might provide adaptable terms set by the lender, though they often demand stronger financials and collateral as part of the approval process and loan requirements.
Checking your business credit score and personal credit score could be helpful steps before determining which type of loan is suitable for your business.
How to apply for SBA and conventional loans
You will be required to provide certain documentation when applying for either type of loan. While loan application documentation requirements may vary, they generally include financial and business documents such as:
- Tax returns
- Business plans
- Financial statements
- Credit reports
Finding a lender is another key step in the business loan application process. If you’re interested in an SBA loan, you may choose to begin with the SBA websiteOpens overlay to learn more about the types of loans available to you.
For conventional loans, you may want to approach banks, credit unions or lenders directly. If you have already opened a business checking account, you can reach out to your bank to discuss options. Since they already have access to financial information, banks may offer lower rates or an easier approval process for their existing customers.
Frequently asked questions
What is the main difference between an SBA loan and a conventional loan?
An SBA loan is partially government-backed, which may enable more favorable terms and lower credit requirements compared to conventional loans.
Can a new business qualify for an SBA loan?
Some SBA programs permit newer businesses to qualify, but many lenders prefer to see at least two years of business history.
How long does it take to get an SBA loan compared to a conventional loan?
SBA loans tend to take longer (potentially weeks to months) due to government approval, while conventional loans may receive approval within a few weeks.
Are interest rates higher on conventional loans or SBA loans?
Conventional loan rates tend to be higher or more variable based on risk, whereas SBA loans may offer competitive, fixed rates due to the SBA backing.
Is collateral typically required for these loans?
Collateral requirements vary by loan and lender. While you may not need collateral for smaller SBA loans, you may be required to pledge business or personal assets to secure larger loan amounts. Conventional loans generally require collateral regardless of the loan amount.
