When it comes to financing business growth, entrepreneurs have a growing number of options to consider, and determining which lender is right for you can be a bit of a headache.
Two lending options that consistently make the top of the “best business loans” list are bank loans and SBA loans. They are generally the lowest cost options available, and offer the most flexible repayment terms, but are also the hardest to qualify for.
SBA Loans vs. Bank Loans: What’s the Difference?
The SBA does not provide small business loans, rather they guarantee business loans provided through SBA preferred financial institutions such as banks, microlenders and online lenders. These SBA loans are government guaranteed, meaning preferred lenders can offer them to small businesses at low interest rates because the government has promised to pay back 85% of the loan in the event of default.
Some banks that are SBA preferred lenders will also have a small business program of their own where they originate “conventional” bank loans for low-risk businesses. These SBA-approved banks will look at the credit profile of a business, as well as the business attributes, and assess the risk profile of the business. If the business is higher risk, the bank may prefer to offer an SBA loan to the business because it is already guaranteed by the federal government.
Here’s a high-level overview of conventional bank loans and SBA loans.
|Loan Amounts||Interest Rates||Repayment Terms||Turnaround Time||Credit Criteria|
|SBA Loan||$50,000 – $5 million||6% – 13%||5 – 25 years||30 days – 6 months||Requires minimum FICO SBSS score of 140 (usually 160) out of 300|
|Traditional Bank Loans||Over $250,000||5% – 10%||1 – 20 years||2 – 4 months||Usually requires excellent business and personal credit scores|
The SBA actually has more than 12 different loan programs (learn about all of them here). The three main SBA loans are:
- Advantage Loans (formerly the 7(a) program), which is the SBA’s most popular loan program.
- Grow Loans (formerly the 504 program), which is generally for land, commercial real estate, and equipment purchases.
- Microloans, offered up to $50,000 and available through nonprofit community lenders to new and established businesses.
Depending on who you bank with, your bank may have a number of different options available to you as a small business borrower. Wells Fargo, for example, has a multitude of financing options for their small business customers, including loans, lines of credit, equipment financing, real estate financing, medical financing, and more.
Both bank and SBA loans offer a number of different benefits — here are four questions to help you decide which one is right for you, plus how to know if you’ll qualify.
1. How Much Do I Need?
Banks tend to focus more on customers who are looking for larger loan amounts. From the perspective of the bank, originating a loan for $5,000 costs about the same amount as originating a $10 million loan, but the $10 million loan is going to bring in more revenue. (Remember, banks are in the business of making money too!)
SBA loans offer a bit more flexibility when it comes to amount of funding. Many SBA-approved lenders will originate loans up to $5 million, the maximum amount allowed by the SBA. The average loan size for an SBA microloan, however, is only $13,000. Other lenders specialize in offering smaller SBA Advantage loans — SmartBiz is one such lender that offers SBA loans from $30,000 – $350,000.
2. How Much Time Do I Have?
Bank loans and SBA loans can take a long time to fund. If you’re working with a provider of SBA loans with the fastest turnaround times like SmartBiz, you’re still looking at 30 days or more until the money is in your account. For bank loans, the turnaround time can be months.
There are exceptions. Wells Fargo business accountholders, for example, have access to a loan called FastFlex that allows eligible business owners to access funds as soon as the next day. What you gain in speed of funding, however, you’ll give in cost — loans like FastFlex with faster turnaround times generally have slightly higher APRs. Be sure to ask your bank how long the process of securing financing would be with them and what the turnaround time on different loans they offer looks like.
3. How Much & What Kind of Collateral Can I Put Up?
When lending out money that they’ve guaranteed on their own, banks always demand the borrower to put up collateral, and the value of the collateral generally needs to be the same as the full amount of the loan. Ronald Blok, former CEO of RaboBank, notes that “the only exception to this rule is for clients who have a long-term relationship with banks and whose business has proven to be profitable over a multi-year period.” Banks also prefer to have collateral that is easily converted into cash, such as cars or real estate.
Because the SBA guarantees up to 85% of its loan amounts, the collateral requirements are generally less strict. For SBA loans, personal guarantees are required from any owner of 20% or more of the business. The collateral requirements, however, are sometimes negotiable, and if you are using the SBA loan to purchase assets like equipment or inventory, you may be able to use that as collateral for the loan. The SBA website says that “the SBA will generally not decline a loan when inadequacy of collateral is the only unfavorable factor.”
If you have a great personal and business credit profile, a few years in business under your belt, but don’t have the assets needed to put up collateral, many bank loans may be out of the question, but SBA loans could still be an option.
4. What’s My Credit Score?
As previously mentioned, bank and SBA loans have strict requirements to qualify. One of the first things a lender is going to evaluate is your personal and business credit scores. The SBA Advantage program requires businesses to have a minimum FICO SBSS score of 140 to pre-qualify, and in most cases you’ll need a 160 or higher. (You can check your FICO SBSS score with a Nav Premium Plus account.)
If your scores aren’t where you need them to be but you need financing now, Nav’s financing marketplace matches you to different financing options by showing you how likely you are to qualify for different financing options. Getting matched is free with a Nav account.
SBA and bank loans are the hardest types of loans to qualify for as a small business owner. One of the first things a lender is going to look at when you request a loan is your personal and business credit scores—so a great first step is to make sure you know your scores (check them now with a free Nav account).
Nav is the ONLY source for businesses to see the #1 business credit score used by the SBA—the FICO SBSS Score. Get your FICO SBSS score with a Nav account.