Conventional Loans vs. SBA Loans: The Real Differences

Financing an expansion of your small company can take several forms. You can reinvest profit from the enterprise, look for backers, fund it yourself, or take out a loan. If you decide to apply for a loan, you will want to be sure you understand the different types of loans available to you. The first significant choice to make will be if you’re going to apply for a conventional loan or a U.S. Small Business Administration loan.

Interest Rates and Repayment Terms

A conventional loan can be an attractive option if you want to do less paperwork, put up collateral, and access the loan money more quickly. An SBA loan is a better option because these loans come with lower interest rates and longer repayment terms, so you have more time to be sure the investment you are making pays off. The trade-off for these attractive terms is you are effectively applying to both the SBA and a financial institution to secure the loan, which is why there is more paperwork and time involved. Keep in mind that with both of these options, the institution makes the loan. The SBA does not loan money. It only supports applications to help business owners get better rates and terms.

Collateral Requirements

A loan through a local bank or credit union will require you to identify your own collateral. The SBA has three loan programs, the Standard 7(a), the 7(a) Small, and the SBA Express, with the financial institution will not require any collateral if the SBA backs these loan applications.

Credit Ratings

Having high business and personal credit ratings will help your application for both types of loans. Good ratings with a conventional loan may even result in better terms. But if your credit is not as good, or your credit history has not been established long enough, an SBA loan may be a better way to get lower interest rates. Your credit score for the SBA will need to be above 600 to qualify for one of their programs. If it’s not, but you have some time, you can get help from one of their partner mentoring programs to work with you on getting your score above 600.

The longer timeframe to qualify for an SBA loan might turn off some business owners, but for other entrepreneurs, the process of getting SBA backing would be well worth it. If you are struggling with low credit or lack collateral, the SBA may be your best option for getting lower interest rates.

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