Two very specific commercial lending options, SBA loans and conventional loans, are often the most popular to be weighed against each other in a business owners’ mind – and for good reason. For the most part, these two financing options tend to give the most leniency in repayment terms and the lowest interest rates. With that being said, business owners often have a hard time choosing which one is best for them.
Here’s a breakdown:
The Small Business Administration (SBA) guarantees loans that tend to have more yielding interest rates, limits, and payments than we typically find in conventional bank loans. The SBA does not give out loans themselves, but rather backs the lenders that offer lower interest rates to small businesses and guarantees that they will pay most of the loan back to the issuer if the business were to default (85% of the loan, anyway).
An SBA loan usually requires less collateral or down payment than a conventional loan and is repaid in a term around five to 25 years.
Traditional loans are provided by most banks and lenders. They are fairly straight forward and offer a set amount of money to a business that is to be paid back over a determined length of time. Conventional loans usually have a fixed interest rate and are used to cover a wide variety of business needs from stocking large inventories, to starting new businesses, to buying equipment.
Businesses provide a certain amount of collateral for conventional loans and the loan term is usually around one to five years.
What it Means to be an SBA Preferred Bank
While an “SBA preferred bank” can offer both SBA loans and regular loans, the SBA does not offer traditional bank loans. These banks are specifically chosen by the SBA to offer their loans through the bank in order to make approval processes faster (if you were to submit your loan to the SBA directly, it typically takes much longer to get approved than if you were to go through an SBA preferred bank). Conventional loans have fewer strict requirements and can be approved faster than an SBA loan, however.
Both of these loan options are most often used for long-term commercial financing solutions. For businesses with lower credit scores, less collateral, and in need of a fairly long repayment term, an SBA loan might be the perfect fit. On the other hand, businesses that are interested in a simpler approval process, are interested in low interest rates, and would like to pay back the entirety of the loan before five years is up, a conventional loan could be the best choice.