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NGExpert financial copywriter
Many small businesses turn to loans for financing, and may choose a loan through the U.S. Small Business Administration (SBA) or conventional business loans.
Each type of loan has its own advantages, depending on why a business needs the loan, how much they need and how much they can afford to borrow.
Read on to find out more about SBA loans vs conventional loans and how to pick which one is right for your business.
Page written by Kat Cox. Last reviewed on March 12, 2024. Next review due October 1, 2025.
Loans are a popular and common way for small businesses to finance their endeavors. Whether you need money to start a business or to grow your existing business, you may consider a loan to get you the money you need. The two most common types of loans for small businesses are conventional business loans and loans through the SBA.
Both types of loans tend to offer attractive repayment terms and interest rates, but there are several key differences between the two types of loans:
| Conventional business loans | SBA loans |
|---|---|
| Guaranteed solely by the financial institution | Guaranteed by the U.S. federal government and financial institution |
| Can set its own requirements, including time in business | Intended for companies that have exhausted other funding options or can’t access other funding options (including conventional loans) |
| Administered by traditional financial institutions, credit unions, banks and online lenders | Administered by financial institutions, including banks, credit unions, online lenders and community partners |
| Has varied interest rates and repayment terms depending on qualifications | Tends to have even lower interest rates and longer repayment terms |
| Does not have any set limits to how much you can borrow | Limited to $5.5 million or less based on SBA guidelines |
| Can require a minimum credit score of 580 | Usually requires a minimum credit score of 680 or more |
| Can fund as quickly as a few business days | Can take 30-90 days to fund |
In both cases, the lender will set the terms of the loan depending on the company that’s borrowing and why they’re borrowing the money. However, SBA loans must follow guidelines set forth by the SBA, including maximum interest rates and repayment terms.
An SBA loan is a loan program headed by the SBA, which is a U.S. government agency. The SBA partners with approved financial institutions and lenders to offer loans to small businesses that may have difficulty getting other sources of funding.
The SBA sets requirements on who can borrow through their SBA programs. Each loan program has different requirements, but in general, the SBA requires that the small business:
There are a few different types of SBA loans available that serve different purposes. The SBA 7 (a) program, for instance, helps small businesses that need to get working capital, buy equipment or purchase commercial real estate. The SBA 504/CDC program helps small businesses buy equipment or commercial real estate for the purpose of creating jobs in their community.
You can get anywhere from $50,000 to $5.5 million through an SBA loan, depending on the loan type and what you plan to use the money for. The terms will also vary but range from 10 years to 25 years, depending on what program you choose. There is a maximum interest rate set by the U.S. government for SBA loans, and it’s usually tied to a prime rate or percentage.
Because their rates and terms are so attractive, SBA loans are very competitive. You may need a higher credit score to qualify for an SBA loan. Also, they may take a longer time to process or be approved.
While SBA loans are guaranteed by the SBA, they’re managed by the individual lenders who administer them. The first step in applying for an SBA loan is to find an SBA-approved lender in the program you wish you apply for. The SBA provides a list of lenders in your geographic area if you contact them through their website.
You’ll need to contact the lender on your own to compare the details of the loan and your eligibility requirements. Once you’ve decided which lender you want to go with, you’ll apply directly with them for the SBA loan.
A conventional business loan is like a personal business loan and is offered by banks, credit unions or online lenders. The loan is managed by the financial institution, which also takes on any risk. The lender may work exclusively with businesses or you may find that your personal bank offers business loans, which may help you make a decision on which lender to choose. Many online lenders offer loans to companies with lower credit scores or less time in business, although these loans tend to come with higher interest rates and shorter repayment terms.
Typically conventional lenders will have fewer restrictions on what you can use the loan for compared with SBA loans. You may be able to use the loan for working capital, to buy new equipment, expand your business or even consolidate your debts.
As with any business loan, you’ll need to be proven “creditworthy” to get a conventional loan. This is usually demonstrated by your personal or business credit scores and credit history. A conventional lender may also look at how much debt your business has compared with your revenue, equity and assets to determine how likely you are to make regular payments against the loan.
Each lender will set their own requirements depending on your business’s creditworthiness and the amount of the loan. Unlike with SBA loans, they may not have limits on how much interest they can charge or their terms.
One of the biggest considerations when applying for a conventional loan is your creditworthiness. You may need a higher credit score and a business credit score in order to qualify. Some lenders will work with startups or businesses that have poor credit, but again, these loans tend to be more expensive (higher interest rates and shorter repayment terms).
Another consideration is the wide variety of options you have for using the money, as well as a wider variety of loan amounts, interest rates and repayment terms than SBA loans. Also, conventional loans tend to have faster approval times than SBA loans.
You can apply for a conventional business loan with any lender you choose, often online or over the phone. You may want to consider applying with a financial institution that you already have a relationship with, such as a bank or credit union where you have a checking or savings account. Online lenders are also a good place to look if you have a new business or have less-than-stellar credit.
Before applying for a conventional business loan, you’ll probably want to make sure your credit score is as good as you can get it. This may take some time. You’ll also want to check with the lender to determine what documentation you’ll need, such as business licenses, business plans, tax returns and financial statements.
Determining which loan is right for you between an SBA loan and a conventional loan means taking a good look at what you need the money for, how much you need and what your qualifications are. You should also determine how much loan you can afford and what your business prospects are.
Find the right loan for your business with Swoop. Simply sign up, answer a few questions and start seeing offers that meet your business financing needs today.
Written by
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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