Small Business Administration (SBA) and traditional loans offer businesses low-interest rates and fixed terms. There are some differences between SBA loans and traditional loans that may affect your borrowing decision. Approval times for SBA loans are longer and require more documentation. They are a great way to fund long-term purchases.
This article is for business owners who are considering an SBA loan or a traditional small business loan. Whether you need short-term financing or help pay for expensive equipment, Small Business Administration (SBA) and traditional loans are popular options, and for good reason. Both offer lower interest rates, but that’s where the similarity is. There are clear differences between the two types of loans that potential borrowers should be aware of them.
What is an SBA loan?
SBA 7A Loans are small business loans guaranteed by the federal government. SBA supports small business loans from approved lenders with a guarantee of up to 85% of the loan value. This greatly reduces the lender’s risk if the borrower defaults. “We provide this assurance so that [lenders] can be more generous with their terms,” said Dianna Seaborn, director of the Office of Financial Aid in SBA’s Office of Capital Access. Funding to help small businesses – it helps them get financing when they start a business.”
What is a regular loan?
Traditional small business loans are typically provided by banks, credit unions, and financial institutions. The lender gives you a sum of money that you have to pay back over a period of time. Interest and fees are included with the loan and depend on your credit score and lender.
Like SBA loans, they can be used to pay business expenses, purchase equipment, or use as working capital. Traditional small business loans are not guaranteed by the government like SBA loans. This means that if the borrower defaults, the bank will take 100% of the risk. Therefore, most traditional small business loans require you to have a good credit rating, a strong financial profile, and an established track record as a business owner.
SBA Loans vs Traditional Loans
SBA 504 Loans differ from traditional business loans in many ways. Interest rates and terms vary, as do the risks that lenders take. Here are some other differences between SBA loans and traditional business loans.
SBA loans need some more paperwork rather than traditional loans
Alex Espinosa has managed SBA loan departments at various banks and now works as an SBA loan advisor through his company BOLD Lender. Lenders and borrowers face certain hurdles when it comes to SBA loans, he said.
SBA loans differ from traditional loans in that borrowers typically have a “higher risk” financial situation than an individual applying for a traditional loan from a bank. That means one thing: paperwork. SBA needs more information from you and the lender to get a loan. However, by working with a bank or lender who is experienced in the SBA sector, Espinosa said, the loan can be easily provided.
SBA loans are more complicated
As with any government-backed process, lenders must follow a long list of regulatory rules and processes. This hinders some lenders and creates longer financing times, especially compared to traditional lenders or alternative online lenders.
Approval times for SBA loans are typically longer
The SBA approval process can take 60 to 120 days, Camberato and Espinosa said. Many alternative lenders may be able to offer lightning-quick turnarounds—sometimes funding in as little as a few days—but they are not subject to the same regulations and almost always charge higher rates.
SBA loans offer low-interest rates
In April 2021, the maximum interest rate on SBA loans is 8%. This is much better than the interest rate you pay other lenders, which can be quite high depending on your credit score.
SBA loans have longer repayment terms
Another benefit of SBA loans is that they have longer terms, which means lower monthly payments for business owners. 7(a) and 504 loans have terms ranging from 10 to 25 years. Depending on your transaction, you can set up a fully amortized loan. This means that you pay interest and principal for each repayment as the loan matures so that it will be repaid in full at the end of the agreed term. Some traditional loans have a one-time payment provision, which means you have to make a large payment when the loan is due. This can be fatal for some business owners.
SBA loans are more flexible
If your business is struggling financially or you are behind on payments for any reason, SBA loans offer flexible options to help you stay on your toes. Businesses may be eligible to defer payments or offer interest-only payments, Espinosa said.