When seeking funding for your small business, a key early step is determining the kind of financing you need. There are many types of loans, each with varying features, so it’s important to find one that works best for your business. Once a loan is closed, you cannot make changes to the terms or structure except for specific circumstances, so it’s important to choose the best option available from the beginning.
To start, depending on what you qualify for, you may need to choose between an SBA loan or a conventional business loan. There are several kinds of loans within each of these categories, but these are your high-level choices for business funding.
What Are SBA Loans?
SBA loans are backed by the Small Business Administration, which means they’re guaranteed by the federal government. The guarantee is for the lender, giving them support in case of default. This helps lenders approve businesses that might otherwise struggle to meet lending standards and receive funding. The borrower is still expected to repay the loan.
What Are Conventional Loans?
Conventional loans are loans that a lender offers on their own terms without guarantee from the SBA.
Differences Between an SBA and Conventional Loan
- Funding limits: SBA loans can provide funding of usually up to $5 million, though that varies and sometimes changes. Conventional loans don’t have an established limit for funding amounts. Different lenders have different ranges of loan amounts, even those who offer SBA loans.
- Application steps and documents: Closing an SBA loan requires more steps and documentation from the applicant than conventional loans typically require–depending on the loan amount and use of funds.
- Eligibility requirements: Conventional loans usually require that applicants have a higher credit score and greater annual income. With SBA loans, lenders can be more flexible and extend funding opportunities to businesses that are building their credit scores and working to increase their revenue. To apply for an SBA loan, a business also must fall under the SBA’s definition of a “small business”.
- Approval timing: SBA loans often take a bit longer to approve since they have to go through both the lender and the SBA. Working with an SBA preferred lender can help reduce the time it takes to get an SBA loan approved, because the SBA has given preferred lenders the authority to approve loans by themselves.
- Rates and terms: The SBA builds acceptable ranges of rates and terms into their agreements with approved lenders. Rates for SBA loans are typically lower than conventional small business loans, and longer terms are often available.
There are also important consequences if you miss payments on an SBA or conventional loan. Defaulting on any type of loan could impact your personal and business credit scores, making it harder to qualify for credit or better rates in the future. Defaulting on an SBA loan could also result in wage, tax and security garnishment or bank account levies.
There are several types of SBA loans, and different lenders are authorized to offer them in varying degrees. The SBA’s Lender Match program connects business owners with appropriate approved lenders.
When choosing the loan option that is best for you, be sure to ask potential lenders for all the information you need to make your decision. Knowing what to expect when exploring loan options can help you avoid predatory lenders and set your business on a successful path to funding.