SBA VS Conventional Business Loans – What is The Difference?

What is an SBA Loan?

Types of SBA Loans

There are several types of SBA loans as discussed below:

SBA 7(a) Loans

It is the most common type of SBA loan which offers financial assistance to small businesses that majorly operate on profit. The lender assesses one’s activities in the business, credit history, and business location. SBA 7(a) loans have a maximum limit of $5 million.

Best Business Loans

SBA CDC/504 Loans

This loan is applicable to commercial real estate owners. During the application, one is required to hand out a 10% down payment. Eligible participants may receive amounts ranging between $125,000 to $20 million. 

SBA CAPlines

Business owners who are up to SBA loans or line of credit can utilize CAPLines. They are programs that offer small business owners short-term and cyclical working capital financial assistance of up to $5 million. 

SBA Export Loans

It majors in helping small businesses maneuver in foreign markets such as export activities and international transactions. SBA export loans have a maximum of $5 million and are effective for growing international business for American residents.

SBA Microloan 

These programs offer financial aids to non-profit lenders, which may be used for direct loans to small businesses. It has a maximum term of 72 months, and the average loan amount is $13,000.

SBA Disaster Loans

They are viable in case of a declared physical or economic disaster. Small businesses can use them as recovery, and they can be applied several times to meet contemporary demands.

Pros and Cons of SBA Loans

It would be best for one to familiarize themselves with the pros and cons when evaluating SBA loans as discussed below:


  • Businesses without conventional loan qualifications can qualify

The loans are backed up by guarantees which means the lender has mitigated the risk of losing their funds. This is because they can get a percentage of the balance once the borrower defaults. As such, businesses that do not qualify for traditional loans, such as new businesses, can find solace in SBA loans.

  • Capped interest rates

SBA loans are prominent for their low-interest rates. The rates are inclusive of the base rate and additional rate percentage by the lender. Base rates depend on the prime rates, which are prone to fluctuations. SBA loans interests depend on the maximum limits, which enables them to be affordable. 

  • Disseminate crucial information to enlighten borrowers

These loans have resource centers that offer business owners relevant financial assistance prior to applying for the loan. This includes information on SBA loans and extra support, especially to underserved communities. They may also play an imperative role in processing the required paperwork when one is applying for a loan.


  • A down payment is required

In most instances, borrowers are required to make a down payment of about 10% to 20%. Most lenders prefer collaborating with business owners who are willing to match up equity in their businesses. 

  • Collateral is a necessity

Despite making a down payment, most lenders ask borrowers to avail collateral for insurance. Some lenders will go the extra mile and ask for a personal guarantee from the borrower. For instance, SBA 7(a) loans require collateral for loans above $350,000, while 504 loans require assets as collateral. 

  • Slow processing

Sometimes the approval process may take up to two months. This is because, after the lender approves the application, they must then consult the SBA for a second approval. Thus, it lengthens the processing period. 

Is a Conventional Business Loan Better than an SBA?

Though SBA loans have reliable benefits, numerous merits come along with acquiring a conventional business loan. Let’s start by taking a look at how each loan works, as well as their rates and terms:

Product Loan Amount Loan Term Interest Rate
SBA Loan $5,000- $5,000,000 5- 25 Years 3.63%- 13%
Conventional term Loan $25,000- $250,000 1- 5 Years 7%- 30%

Advantages of a Conventional Business Loan

  • Fast Turnaround

Conventional business loans are easier to access, particularly for business owners with an excellent credit scores and strong cash flow. The lenders scrutinize these metrics, and business owners with a higher notch might receive the loans quickly. Thus, it may cover one’s business in times of urgent need.

  • Easier Approval Process

Traditional business loan lenders use a straightforward mechanism when issuing loans. They gauge the historical business stands, current cash flow, and future financial projections. Hence, the approval is fast, depending on your loan status.

  • No Government Maximums

As opposed to SBA loans, where the government gets involved, conventional loans are based on an agreement between the borrower and lender. Hence, business owners can qualify for a loan with no government maximum restrictions.

  • Variety of Possible uses

Banks and other potential lenders are also in business; hence there is minimal restriction on the purpose of the business loan. SBA loans have various forms of loan applications that cover for specific needs of a particular business. 

Disadvantages of Conventional Business Loans

  • High Credit Score Requirements

Conventional business loans have high requirements, like a high credit score. This may not be applicable to most businesses, such as new and small businesses. 

Higher Interest Rates

In comparison with SBA loans, traditional business loans have a higher interest rate. This could be quite hauling to small businesses that do not have high-profit margins. 

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