When it comes to pursuing capital for short-term needs or long-term growth, business owners have a number of options to consider.

Both SBA and conventional loans are primarily offered through local financial institutions.

If you’ve started exploring the possibilities, you might be wondering about the differences between SBA and conventional loans. In this article, we’ll define these two basic loan types, explain their key attributes, and offer some tips for making the best decision for your specific needs and objectives.

What Is an SBA Loan?

The United States Small Business Administration is an independent agency of the federal government that assists small businesses and entrepreneurs. The SBA partners with local lenders (banks and credit unions) to provide affordable loans for a range of business purposes, including startup costs, working capital, real estate and equipment purchases, and debt refinancing.

The SBA guarantees a portion of each loan to mitigate lender risk and enable more small business owners – including those in historically underserved communities – to access the capital they need.

What Is a Conventional Loan?

A conventional loan is any lending product that’s not part of a government program. In the business world, that usually means a non-SBA loan. Conventional loans are most commonly provided by banks and credit unions, although they can also be obtained from online lenders, venture capital firms, angel investors, crowdfunding platforms, vendors, and even friends and family.

Without government backing, loans to small businesses are considered relatively high-risk. Thus, conventional loans often come with higher costs and barriers to entry. However, they can offer some key advantages over SBA loans, and in many cases can be a business’s best – or only – option.

SBA vs. Conventional

Both SBA and conventional loans are primarily offered through local financial institutions, who have at least some degree of latitude in determining product features and policies. Generally speaking, though, the differences between these loan types fall into four main areas:

1. Eligibility and Qualification: Probably the biggest difference between SBA and conventional loans is that prospective borrowers must meet several hard-and-fast eligibility requirements to apply for SBA funding. For most SBA loan programs, your business needs to:
   • Physically operate as a for-profit company in the U.S. or its territories
   • Pursue a sound business plan in an eligible industry (e.g., excluding lending and gambling)
   • Meet SBA size standards (which vary by industry and depend on your annual receipts or number of employees)
   • Show owner equity (time and money you’ve invested in the business)
   • Be in good standing on all existing government debts
   • Demonstrate a need for funds and the ability to repay them from projected business cashflow

   If your business can clear those initial hurdles, you may then have an easier time securing an SBA loan for the amount and term you need. For either type of loan, individual lenders are likely to evaluate your personal and/or business credit history, length of time in business, financial statements, amount of available collateral, and various other factors in making a decision. But for conventional loans, approval standards tend to be higher.

   If your business doesn’t meet SBA guidelines and you’ve struggled to qualify for a conventional loan, you can take steps to boost your creditworthiness. Start by mastering the six C’s of business lending.

2. Buying Power and Uses: In addition to the basic eligibility requirements listed above, SBA loans have some limitations. For the two largest loan programs – 7(a) and 504 – the typical maximum loan amount is $5 million. If that figure falls short of your financing needs, you’ll have to look elsewhere. On the other end of the scale, SBA microloans are available in amounts as a low as $500, but there are often more efficient ways to access quick cash.There are also restrictions on how you use SBA funds. The 7(a) loan program is the most flexible, because it can be used for short-term working capital as well as long-term fixed assets, but special conditions may apply. For example, you can’t use 7(a) funds to acquire investment properties, trade in commodity futures, or refinance certain types of debt. Farms, fisheries, franchises, recreational facilities, nursing homes, firms undergoing a change in ownership, and firms owned by noncitizen legal aliens may face additional constraints or scrutiny. With conventional loans, lenders are free to set their own rules.
3. Rates and Terms: In this area, SBA loans almost always come out ahead. For 7(a) loans, interest rates may be fixed or variable, but they’re always capped by the SBA, keeping them affordable for borrowers. Because 504 loans come with additional requirements and are largely self-secured, those rates can be even lower. In most cases, SBA loans are structured as fully amortizing term loans, so you don’t have to worry about balloon payments.The SBA also limits the types of fees that partnering lenders can charge. You won’t pay any processing, origination, application, or brokerage fees. However, you may need to pay an upfront guaranty fee and an annual service fee. Borrowers may also be subject to a prepayment penalty depending on the loan’s maturity date and the amount of time that’s elapsed since disbursement.Compared to conventional loans, SBA loans usually come with longer terms, with maximum maturities ranging from 10 years (for working capital, inventory, and equipment) to 25 years (for real estate). Longer loans accumulate more interest charges, but they allow for lower monthly payments and freer cashflow.Most SBA loans require an owner equity contribution of at least 10%, outside collateral including equity in personal real estate, and/or a personal guarantee. These terms may be more or less stringent than those of similar conventional loans. Your lender can help you compare and contrast.
4. Process and Continued Support: SBA loans are notorious for being heavy on paperwork and slow to get funded. That’s because, for most programs, the SBA has its own forms and review process on top of the usual due diligence and administrative tasks that local lenders must perform. For 7(a) and 504 loans, it generally takes 60 to 90 days from application to disbursement. SBA Express loans feature an expedited turnaround time for SBA review, but with a typical timeline of 45 to 60 days, it’s hardly fast money. If you can’t afford to wait, talk to your lender about accelerated financing options.If you do end up opting for an SBA loan, your patience will be rewarded with ongoing support. The agency and its local partners offer free and low-cost training, counseling, and other resources that can help your business continue to grow and thrive.

Making the Right Choice

In business as in life, one-size-fits-all solutions are very few. In determining the right funding strategy for your business’s unique growth goals, it may be helpful to ask yourself:

• What do I need funding for – and are those needs likely to change?
• How much do I need – and how much can I afford to repay?
• How much personal risk am I willing to assume?
• What are my existing assets and liabilities?
• How’s my personal and business credit?
• How fast do I need the funds?

You can use these prompts to begin a productive dialogue with your lender.

Take the First Step Today

To explore all your small business financing options, consult your financial institution.