Many banks and credit unions offer business loans to established businesses. Additionally, new businesses may not qualify for traditional term loans, but may be qualifying for alternative online loans.
For business owners who want to take advantage of low rates, loans from Small Business Management (SBA) are a good option. You must apply through a lender and the application process is very competitive, but the SBA funds companies that have exhausted other options.
When looking for funds, you should consider both an SBA loan and a traditional business loan. Here are what you need to know and how to determine which one is best for your business:
What is the difference between an SBA loan and a traditional business loan?
Traditional loans are fully funded by lenders. Most types of business loans are traditional loans. Interest rates, loan amounts and eligibility criteria vary widely between options. So are the types of lenders where banks, credit unions, finance companies and online lenders all offer small business loans.
Various lenders also fund SBA loans, which are supported by the federal government through guarantees. SBA guarantees typically range from 50-90% of the loan amount, depending on the loan program, in the $5 million range. They are more competitive, but tend to have lower fees than traditional business loans.
| SBA Loan | Traditional loans | |
|---|---|---|
| Publisher | Banks and Online Lenders | Banks and Online Lenders |
| Loan restrictions | Up to $5.5 million | There are no restrictions. The average loan amount is around $663,000 |
| Credit score requirements | The minimum score varies | Minimum score of 580 |
| Time to fund | 30-90 days | A few days to a few weeks |
| Available loan types | SBA 7(a), SBA Micro Loan, SBA 504/CDC Loan | Period loans, equipment loans, micro loans, credit lines, etc. |
| Business Requirements Time | A startup may be eligible | 6 months to 4 years |
What is SBA? loan?
SBA (Small and Medium Enterprises) management) A government agency that partners with approved lenders to provide a variety of loans to businesses. With an SBA loan, the SBA guarantees some of the funds to reduce the risk of lenders, and on average, the fees are lower.
There are several types of SBA loans. In many companies, 7(a) loans have access to working capital to cover various business expenses. The 504 program is similar, but the funds can only be used for equipment or commercial real estate. Both are difficult to qualify and extremely competitive. And almost 60% of the 7(a) loans funded in 2024 go to businesses that have been in business for more than two years.
While some loan options are available to startups, SBA loans are directed towards established businesses with strong revenues that have exhausted other funding options.
However, startups and young businesses can benefit from the SBA microloan program. In 2024, the program funded $94 million in microloans for more than 5,800 small businesses, particularly small businesses owned by members of underserved communities.
The maximum eligible amount for your business is set at $50,000, while the average microloan is only $13,000, which is extremely useful for companies in the early stages of growth.
SBA also offers Community Advantage Loan. This is another option for business owners who have historically lacked access to capital. This includes minorities, women and veterans. The SBA also prioritizes minority groups in other loan programs. According to SBA’s 2024 microloan data, a third of microloans went to black-owned businesses, with 14% going to Latinx-owned businesses.
SBA Loan Requirements
There are four main requirements for an SBA loan:
1. Your business must be for commercial purposes
2. Must be active in the US
3. Each business owner must be investing personal fairness in the business
4. You need to run out of other traditional loan options
Each business owner must also meet the qualification criteria. The most common is the credit score requirements. The minimum value will vary depending on the lender you apply to, but a score of 670 is the usual minimum.
Small and medium-sized businesses must meet SBA size criteria, including being under certain annual revenue or employee numbers, depending on the industry. Other requirements also depend on the type of loan you apply for, such as SBA Form 413.
Important aspects of SBA loans
- Loan amount range: SBA’s small 7(a) loans offer business loans up to $350,000, while standard 7(a) loans offer funding up to $5 million.
- Long loan terms: SBA loans have up to 25 years of repayment terms on real estate and 10 years of other fixed assets and working capital, which could make monthly payments more manageable. Typically, traditional loans have a maximum of 10 years requirement.
- Interest rate limit: There is a cap on Maximum Interest Rate For SBA loans. It equals a percentage in addition to the base rate such as prime.
- Longer wait times: As traditional loans need to be reviewed only by the institution’s internal underwriting team, Approval time It is often faster than an SBA loan. An SBA loan requires more documents and SBA approval before lenders can fund the loan.
- You must meet the requirements of your SBA and lender. Application Process and Approval It may take some timeand the company must meet eligibility requirements from both lenders and SBAs.
How to apply for an SBA loan
The first step to applying for an SBA loan is to visit SBA.gov and fill out the SBA lender match form. This form takes about 5 minutes to complete and asks the applicant to explain their business and needs.
You must receive an email within two days with a list of matching lenders. You can then contact your personal lender individually, comparing interest rates, terms and other details before making a decision. Once you have decided on a lender, you will submit your application directly.
It can also be applied directly to lenders through the SBA’s Priority Lenders Program. This will speed up the approval process.
What is a traditional business loan?
Traditional loans are usually provided by banks, credit unions, and other financial institutions. Online lenders are likely to provide business loans more and more, and they may work with low credit score startups and businesses struggling to work with larger banks.
The lender will fund the approved company, which will repay the loan (interest and applicable fees) over the agreed period.
Depending on the loan agreement, business loans can be used to expand your business, purchase business-related equipment, and integrate business debt. The loan can also be used as working capital.
Unlike government-supported SBA loans, traditional loan bank lenders are at risk when it is the default for business. Because traditional business loans have a high interest in private lenders, banks often have good credit for borrowers and require personal guarantees or collateral to mitigate risk.
Traditional business loan requirements
Companies looking for traditional loans need to demonstrate their ability to pay off their loans. Lenders can use the debt-to-debt-2 asset ratio, or the debt service coverage rate, to assess the likelihood of repaying the loan on time. The latter is calculated by splitting EBITDA (earnings before interest, taxes, depreciation, and amortization) by the interest and principal required to pay the loan.
Also, lenders Business Plan It provides details and an overview of financial forecasts. Your business has been running for years and your industry is important too. If you operate in a stable and profitable industry, faster approvals or approvals may be higher.
Lenders also need a good business credit score and a strong personal credit score. Like any other fund, your business qualifies for a lower fee with a higher credit score, but lenders will consider more than your credit score. Unpaid liabilities, annual revenue and other financial information also affect lenders’ decisions.
Important aspects of traditional business loans
- Business and Personal Credit Score: Large banks usually require a strong credit score to qualify. However, many small banks, credit unions and online lenders work with a variety of credit scores.
- Diversity Fee: The fees received will depend on the type of loan and the financial health of the overall business. Some traditional loans from banks offer lower interest rates. However, there are bad credit business loans with higher fees, but there are fewer strict eligibility criteria.
- Various loans available: Lenders offer business loans in a variety of amounts, with different terms and payment schedules. For example, a line of credit is ideal for those who need revolving credits, while an equipment loan is good for purchasing new assets that will grow your business.
- Faster approval processS: Lender approval is based solely on lender’s underwriting criteria. This means there is less paperwork and less time required to make a decision than an SBA loan.
How to apply for a traditional business loan
you can Apply for a business loan Directly with your preferred lender. Many lenders accept applications directly via telephone, telephone, online, and via branch locations. Funds can take anywhere from hours to weeks.
To start, decide which one Types of business loans It is best suited to your needs. Then, get your credit score, revenue and cash flow in the best possible form, increasing your chances of approval.
The application process varies depending on the lender and the type of loan. You can collect processes and streamline your processes Required Documents in advance. Submitting accurate applications also helps avoid unnecessary delays.
SBA Loan vs. Traditional Loan: Which is best?
To determine if an SBA or traditional loan is the best option, consider your business’s age, credit history, and overall financial health. Additionally, you need to calculate the cost of your business loan to see which options are most affordable for your business.
The best types of loans depend on your particular situation.
When to choose an SBA loan:
- If your company is at least 2 years old and already experienced other funding options
- If there is an established relationship with an SBA-approved lender
- If you are unable to meet the requirements of a traditional loan, but you can qualify for the more relaxed terms of an SBA loan, including a microloan.
When to choose a traditional business loan:
- If you can get low interest rates with traditional business loans
- If you want to work with a lender that is not approved by the SBA
- If you need a loan immediately and you can’t wait up to 90 days for funding
Conclusion
Traditional business loans are a good option for businesses at any stage who want to expand their company or need cash flow assistance. Whether an SBA loan is suitable for your organization depends heavily on your specific business needs and whether you have exhausted other types of funding. Explore options, talk to your financial advisor and compare multiple lenders before making a final decision.
