Conventional Loans vs. SBA Loans: The Real Differences

Applying for a business loan soon? Considering your options but not sure? It’s important to understand all your options if you said yes to either of those questions. Entrepreneurs often wonder whether an SBA loan is the right option for their financing needs, and one of the reasons for the confusion is a misunderstanding of the SBA’s programs. Conventional loans are often touted as faster to access or capable of covering larger purchases with fewer restrictions, but the fact is that the restrictions on SBA loans are designed to help companies grow, so if your company qualifies for one, it’s often the best loan choice. Not always, but often.

What SBA Loans Cover

There are a variety of programs within the Small Business Administration, but the three most common purposes for loans backed by the Administration are equipment purchases, facilities purchases, and business acquisitions. That’s right, you can actually use an SBA loan to finance the purchase of an existing small business. The loan program encourages this for one simple reason. These loans are given out to help increase the economic health of communities across the country. That means encouraging successful businesses to change hands and stay open as much as it means encouraging new ones to open.

Cost Differences Between Conventional and SBA Loans

Typically, conventional loans are more expensive than the alternative from the SBA for the same value. The reason many businesses do not use one is simple, they don’t qualify. Either the companies have incomes that are too great for these loans, or else they’re looking for loan values outside the program. When that’s not the case, the programs loan restrictions are often the reason why conventional loans are sought. Those restrictions limit prepayment and require your company to use the majority of the floor space in any property purchased for its own facilities.

While those restrictions do place limitations on your business, they also keep speculators out of the SBA loan program, allowing it to better service small companies. It’s also worth remembering the SBA specifically looks to back loans for viable companies whose operating histories and cash reserves don’t qualify for most conventional loans. That means often when you qualify for an SBA program, the conventional alternative will be expensive if it is offered at all. The reason is simple, small businesses are considered high risk due to the very factors that make them small businesses. That’s why the SBA was created in the first place.


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