SBA Loans vs Conventional Loans: Which is Best for Your Small Business?

Getting financing can be one of the biggest hurdles for small business owners. With so many options out there, it can be tricky to determine which type of loan is the right fit for your company. Two of the most popular small business loan types are SBA loans and conventional bank loans. While both offer competitive interest rates, there are key differences between these financing options.

Key Differences Between SBA Loans and Conventional Loans

Loan Amounts

One major difference is the maximum loan amount available. SBA loans go up to $5.5 million, while conventional small business loans often top out at $2-3 million.

If you need more than a few million dollars in financing, an SBA 504 or 7(a) loan may be your only option.

Eligibility Requirements

SBA loans are more lenient when it comes to eligibility. They mainly require:

• Time in business: At least 2 years for most loans.
• Credit score: Typically 640 and above.
• Revenue: Varies by industry, but most require at least $100K annually.

Conventional loans often have stricter requirements, such as 5+ years in business, 680+ credit score, and higher annual revenue.

Interest Rates

SBA loans come with interest rate caps set by the government. For example, the maximum rate for a 7(a) loan is currently prime + 6.5% for variable and prime + 8% for fixed. Rates for conventional loans are set by the lender and are often higher.

However, it’s possible to find low rates around 5-7% for both loan types if you have great credit and meet the lender’s requirements. Shop around for the best deals.

Collateral Requirements

SBA loans are more flexible when it comes to collateral. They’ll work with you to find available assets to secure the loan but won’t deny you solely due to lack of collateral.

Conventional lenders typically require collateral and will expect you to put up business or personal assets. This ensures they can recoup losses if your business defaults.

Repayment Terms

A major benefit of SBA loans is they offer longer repayment terms up to 25 years for real estate and equipment. Conventional loans max out around 10 years. The longer term means lower monthly payments.

Guarantees

With an SBA loan, the government guarantees 50-90% of the loan amount. This reduces the lender’s risk. Conventional loans do not come with a guarantee, so the lender assumes full risk.

Prepayment Penalties

SBA loans can be prepaid at any time without penalty. Many conventional loans charge prepayment penalties if you pay off the balance early.

Pros and Cons of SBA Loans

Pros

• Low down payments, often 10-15%
• More lenient eligibility requirements
• Lower interest rates
• Long repayment terms up to 25 years
• No prepayment penalties
• Government backing reduces lender risk

Cons

• Lengthy application process
• High amount of documentation required
• Slower approval and funding times
• Loan amounts capped at $5.5 million
• Guarantee fees add to upfront costs

Pros and Cons of Conventional Loans

Pros

• Faster application and funding times
• Lower rates possible for borrowers with great credit
• No government bureaucracy
• Loan amounts often higher than SBA cap
• May be easier for larger, established businesses

Cons

• Stricter eligibility requirements
• Higher interest rates on average
• Shorter repayment terms
• Prepayment penalties common
• Collateral often required
• Higher risk for lenders means more chance of denial

Which Type of Loan is Right for You?

There’s no one-size-fits-all answer to whether an SBA or conventional loan is better. You need to weigh the pros and cons for your specific situation.

Here are a few key questions to help you decide:

• How quickly do you need funding? Conventional loans are often faster.
• How much money do you need to borrow? SBA if over $2-3 million.
• Does your business meet conventional loan requirements? If not, SBA may be better.
• How long have you been in business? Lenders prefer 2+ years.
• What is your personal and business credit score? 640+ minimum for SBA.
• Do you have collateral to put up? More likely needed for conventional loans.
• Are lower monthly payments a priority? SBA offers longer repayment terms.

Where to Find the Best SBA and Conventional Loan Rates

Whether you go the SBA or conventional route, make sure to shop around with multiple lenders to get the best possible deal. Compare interest rates, fees, and terms before committing.

Good places to start your search include:

• Online lenders like LendingClub and Kabbage. They offer quick approvals and competitive rates.
• Local community banks and credit unions. Establishing relationships can help your chances.
• National banks like Chase and Bank of America. Look for SBA Preferred Lenders.
• Non-profit lenders like Accion and CDFIs that focus on underserved markets.
• Peer-to-peer lending marketplaces like Lending Tree.
• Financial tech lenders like PayPal and Square.
• Government resources like the SBA Lender Match tool and local SBA district offices.