Wondering about the differences between SBA vs. conventional loans? SBA loans and conventional loans have some big differences that borrowers should know about. SBA loans are government-guaranteed, ranging from 50 to 90% of the loan amount. The majority of conventional loans have lower interest rates and often better terms for people with good credit, stable jobs, and low debt-to-income ratios. Those tend to be the first pick for many borrowers.
You should also keep SBA vs. conventional loan rates in mind! Though SBA loan rates may be a bit higher than conventional loan rates, they make financing possible for more high-risk borrowers. The government backing gives lenders reassurance.
Are conventional loans better? So while conventional loans are often better for those who qualify, SBA loans help more folks with challenges get approved. Let’s dive deep into SBA loans vs. conventional loans.
Top Differences BetweenConventional Loan vs. SBA Loan
If you’re looking to finance a business, you’ve probably come across SBA loans and conventional loans. Both offer access to capital, but they’ve got some big differences borrowers should understand.
Let’s walk through thedifference between SBA and conventional loans.
Government Backing
The main distinction is that SBA loans come with a guarantee from the government. The Small Business Administration guarantees 50-90% of the loan amount. Conventional loans don’t get any government guarantee or protection. They’re fully funded by the lending institution, which takes on all the risk.
Available Funding
SBA loans can provide small business owners with bigger maximum loan amounts than conventional options. SBA loans go up to $5.5 million. Conventional loans don’t have set limits, but the average is around $663k. SBA loans give more access to substantial financing. Both SBA and conventional loans are offered by various lenders – banks, credit unions, online lenders, etc. Shop around for your best fit.
Also Read: 10 ways to secure startup funding for your business
Flexibility
Thanks to the SBA guarantee, their loans tend to have more flexible limits, rates, and repayment choices – accommodating more situations. Conventional loans have eligibility criteria that differ widely between lenders. But they can generally be used for a wide range of business purposes once approved. Both offer flexible repayment schedules like monthly, quarterly, or annual payments to fit cash flow.
Interest Rates
SBA loans typically have lower maximum rates capped by the SBA to ensure affordability. Rates vary based on loan specifics. Conventional loan rates fluctuate case by case depending on the lender and terms. They’re often set competitively to attract borrowers. In some cases, conventional loans may offer slightly lower rates. But both have competitive options.
Time to Fund
SBA loans typically take 30-90 days to fund since they involve more steps for review and approval by the SBA. Conventional loans can often be funded more quickly in just a few days up to a few weeks since they are approved directly by the lender. So conventional loans have an advantage for businesses needing financing faster.
However, the SBA works to streamline its loan guarantee process so decision times keep improving. And some conventional loans still take weeks to fund, so timelines can be similar across both options.
Credit Score Requirements
SBA loans are more flexible when it comes to minimum credit score requirements, thanks to government backing. Specific minimum scores vary among different SBA loan programs.
Conventional business loans typically require a higher minimum credit score of 580 or greater. They have less flexibility than SBA loans when looking at creditworthiness.
However, both SBA and conventional lenders do closely consider the applicant’s credit score as part of the approval decision. Having a higher score increases the chances of getting approved and receiving better terms for either loan type.
Conclusion
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