The Difference Between SBA Loans and Traditional Loans
When it comes to finding a bank loan to fund your small business needs, not all loans are created equal. Both Small Business Administration, or SBA, loans and traditional loans are funded by banks, but an SBA loan comes with government backing while a traditional loan does not. When comparing these loans, it’s important to consider the needs of your business such as how large of a payment you can afford, and if you have and are willing to put up personal collateral to secure a loan, as these are just some of the differences between an SBA loan and a traditional loan.
Terms and Rates
In general, an SBA loan comes with low-interest rates and longer terms. The government puts a cap on the amount of interest that can be charged on an SBA backed loan. Lenders of traditional loans have no such limit and are free to charge as high of a rate as they see fit. The longer term of an SBA loan, as compared to a traditional loan, can mean lower payments for a business because they can pay over a greater period of time. If your business can afford larger payments for a short period, a conventional loan might be a good option, but if you are a new business with less working capital, an SBA loan could help you stretch the payments, making the loan easier to afford.
Qualification and Flexibly
The government backing accompanying SBA loans makes them generally easier to qualify for. This is because banks have less risk to assume, making them more willing to lend to newer or smaller businesses with less collateral or smaller profit margins. An SBA loan may also come with built-in protection should your business struggle to make payments. Rather than immediate foreclosure, some loan options include the possibility of deferred or interest-only payments. Keep in mind to qualify for these loans, an SBA loan may require putting up more of the owner’s personal assets or a larger stake of the company than a traditional loan might require.
When it comes to deciding between SBA loans and traditional loans, there are many factors to consider. The SBA comes with government backing, the potential for lower interest and smaller payments and the possibility of a built-in safety net. It also may require more personal collateral to secure. Conventional loans can be harder to qualify for but might not require as much personal collateral and because of the shorter terms are often repaid more quickly.