Small businesses that want to receive funding have many loan options available to them. Two of the most common loan options are conventional and SBA loans. These two loans are similar, but their key differences could offer more reassurance and confidence that one loan is more suitable for your business endeavors.
Conventional and SBA loans can be used for any of the following purposes:
- Purchase or expand property
- Refinance current debt
- Buy equipment or materials
Get to know the differences between conventional and SBA loans before you start your application.
The money comes from different sources.
Small businesses can apply for a conventional or an SBA loan in the same place, but the money will come from different sources. Conventional and commercial loans are backed by the bank where the loan is taken out. SBA loans are backed by the U.S. Small Business Administration.
The SBA guarantees the bank or lender the money for the loan, so you do not have to apply for your funding in a separate location. This guarantee also allows banks to offer lenders lower interest rates. In case of a default, the SBA will pay the bank up to 85% of the original loan. Consequently, SBA loans are given out with interest rates that can dip below 5%. Talk to your bank or lender about what rates you may be able to get based on your credit score and current financial standing.
SBA loans offer longer repayment terms.
Loan terms vary, but most conventional loans require full repayment within 20 years at most. Small businesses can take out SBA loans that allow them to pay back the loan in 25 years. This extends the life of the loan farther than a conventional loan, requiring smaller monthly payments. Business owners who are paying back SBA loans will see a higher cash flow and take advantage of more opportunities that will grow their business.
SBA loans have no minimum loan amount.
The minimum loan amount for a conventional loan is $250,000. If you do not need this much funding to expand your business, you should consider an SBA loan. SBA loans have no minimum amount and the maximum amount is $5 million. The average size of an SBA loan in 2017 was just over $350,000. If your business only needs a small amount of funding, you may qualify for a microloan under $10,000. The SBA offers a dozen loan programs that fit the needs of every small business looking to expand in the upcoming years, including SBA 7(a) loans and SBA 504 loans.
Before you apply for any type of funding, conduct your research. Determine what you are trying to achieve with property or equipment acquisitions and how monthly payments will factor into your overall budget. There are funding opportunities available for small businesses at all points in their development, but it is crucial to do your homework before choosing the one that is best for you.
Ready to learn more about SBA loans?
Once you are ready to grow your business with the help of an SBA loan, reach out to one of our experts today!