SBA Loans vs. Traditional Loans
Do you want to launch a business or expand your company but you don’t have the funds to do so? There’s no need to panic. Fortunately, there are numerous financing options for business owners, such as Michigan SBA loans.
When in need of working capital, most business owners often turn to conventional bank loans for funding. However, smaller and younger businesses with less credit history (and poor credit scores) don’t usually qualify for traditional loans. When you find yourself in this situation, Small Business Administration (SBA) backed-up loans may be a better option for entrepreneurs.
Here’s what you need to know about SBA loans and traditional loans. We’ll also talk about which type is suitable for your business:
SBA Loans vs. Traditional Loans
Banks can issue both SBA and conventional loans, but you can only access SBA loans from SBA-approved banks and lenders. If you default on the loan, the SBA will pay the financial lender a portion of your loan. This SBA loan guarantee is an incentive for lenders to approve loan applications from small businesses since the SBA guarantees from 50% up to 85% of the entire loan.
While the government does not guarantee conventional loans, the approval process is typically faster than SBA loans. This may be owed to the fact that the federal government guarantees the latter. In conventional loans, there’s also no limit as to how much you can request from lenders when borrowing money. Additionally, the loans can be structured differently with varying term lengths and interest rates (floating or fixed). They are also lenient when it comes to payment schedules. You can choose between monthly and annual payments, depending on the agreement of both parties.
However, conventional loans generally require almost-perfect personal and business credit scores as well as an established business. According to the Federal Reserve Bank of New York, 58% of new businesses have trouble obtaining conventional loans. Because of this, they usually turn to other types of loans and bear the less than favorable terms and higher-interest rates compared to SBA loans.
How to Apply for Conventional Loans
Applying for conventional loans usually takes a few weeks to a few months. The process is lengthy, which for many businesses is a con. Entrepreneurs also has to provide the right documentations, including identification, business permits, tax documents, business license, and other important documents. You also have to present a stellar credit score to qualify.
The Small Business Administration (SBA) is part of the federal agency that provides assistance to small business owners to help them succeed in their ventures. They usually provide entrepreneurs with entrepreneurial education, business resources, contracting opportunities, and financing. However, the SBA doesn’t provide the loan per se. Rather, they partner up with different lenders and serves as the partial guarantor for the loans.
With SBA loans, small business owners can borrow up to $5 million. By offering an incentive to lenders, the SBA lowers the amount of risk banks and other financial institutions take when funding startups. While SBA loans require more paperwork and take longer to approve, there is a variety of loans specifically designed for small businesses.
There are many types of SBA loans, however, here are the top three for small business owners:
1. SBA 7(a) Loan
The 7(a) loan is the most popular SBA loan because of its flexibility of use. You can use a 7(a) loan to finance daily business expenses, buy equipment and inventory, and even purchase real estate. But as a business owner, you must personally invest in your business to qualify.
Related: A Beginner’s Guide to SBA 7(a) Loans
2. 504 Loan Program
While the 504 loan isn’t as flexible as the 7(a), it does provide small business owners with long-term, fixed-rate loans to purchase machinery and equipment, as well as real estate. 504 loans are issued through SBA-regulated nonprofits called Community Development Companies. If you want to apply and qualify for a 504 loan, you will need to invest 10% of the total project cost.
3. SBA Microloans
Microloans are for small businesses looking to loan $50,000 or less. You can use microloans for working capital, purchase inventory, furniture, equipment – or just about anything that can improve your business. However, you won’t be able to use it to refinance debt or too purchase real estate.
How to Apply for SBA Loans
Much like conventional loans, lenders will require you to submit several documents related to your business. This includes but is not limited to business permits, tax returns, financial statements, business plans, and the likes. However, unlike conventional loans, the process is much longer and lengthy. Approval for an SBA loan could take months. This is because the government has to perform several checks to potential borrowers to make sure that the applicants are responsible enough to pay the loan back.
Michigan SBA Loans: Which is Best for You?
Conventional or SBA loans, you’ll be sure to get the cash you need to fund your business operations. Michigan SBA loans provide a comprehensive loan term for lenders and the benefits are endless. Since it’s backed-up by the government, you’ll enjoy flexible terms and low-interest rates compared to conventional loans. Applying for either of the financing options can be daunting and lengthy, but once approved, it will make the wait worth it for your business.