For many entrepreneurs, early growth of their business depends on access to capital. Two popular funding options are conventional bank loans and loans guaranteed by the U.S. Small Business Administration, a government agency that provides support to small business owners.
Because using the right lending option can impact your business in its formative years, there are a few key points that will help you determine which type of funding is right for your situation.
1. For startups and young businesses, it can be easier to meet the SBA loan qualifications.
For both conventional and SBA loans, a lender will evaluate a prospective borrower using the “5 Cs” of credit: character, capacity, capital, conditions and collateral. For conventional loans, qualifying businesses are usually well established with a strong business credit history and established revenues.
SBA loans are guaranteed by the U.S. Small Business Administration, which means the government will pay back a portion of the loan if the borrower defaults. The SBA guarantee helps lenders mitigate some of the risk and allows more early-stage businesses to qualify. If your business has only been in operation for a few years, an SBA loan might be a more viable option.
2. SBA loans often have longer terms and lower interest rates.
Conventional loans may have repayment terms of between 10 to 20 years for real estate and between three to five years for equipment and working capital. Interest rates will vary depending on your type of loan, but a typical range is between 5 to 10 percent.
SBA loans often have longer terms. For example, the popular SBA 7(a) loan can have terms up to 25 years for real estate, up to 10 years for equipment and up to seven years for working capital. Additionally, the SBA sets a reasonable maximum interest rate that is considered affordable for a business loan.
Rates vary by lender and are affected by the loan amount, prime rate, term and situational factors such as personal credit and the borrower’s industry. Thanks to competitive interest rates and longer terms, monthly payments on SBA loans may be more affordable and allow for greater cash flow for emerging businesses.
3. Conventional loans often have greater collateral requirements.
SBA loans are capped at $5 million, but at Zions Bank there are generally no caps on the amount a business can request through a conventional loan. With conventional loans, however, a lender may require your business to provide additional collateral or agree to additional loan covenants, which require the borrower to fulfill certain conditions or avoid actions viewed as risky by the lender.
Many early-stage businesses can have difficulty meeting collateral requirements for conventional loans. This makes SBA loans a particularly attractive option for businesses that are still building their assets and inventory.
4. Compared to conventional loans, applying for SBA loans requires more advance planning.
Because SBA loans are backed by the government, there are additional regulatory rules and processes that must be executed by lenders. It can take additional time to meet these requirements, but for many businesses, the favorable terms and rates more than outweigh the approval time.
This approval time can be reduced through working with an SBA-preferred lender such as Zions Bank. Preferred lenders are granted authority by the SBA to make credit decisions, which will help streamline your loan application process. If you think an SBA loan could be helpful for your business, it’s wise to start the process early by speaking with an experienced banker. A skilled banker can make a significant difference in helping evaluate your business needs, start the loan application process and put you on the path to achieving your dream.
Kyle Jensen is a Business Banking relationship manager for Zions Bank in Eastern Idaho and can be reached at 208-523-5585 or Kyle.Jensen@zionsbank.com. Zions Bank is an Equal Housing Lender.