Top 10 Advantages of SBA Loans vs. Conventional Loans

Are you a small business owner considering a loan to help grow your business?

If so, you may be wondering what type of loan is the best fit for your needs.

Two popular options are SBA loans and conventional commercial loans.

While both options have their pros and cons, SBA loans have several distinct advantages over conventional loans.

Here are the Top 10 Advantages of SBA Loans vs. Conventional Loans

1. Lower Down Payment Requirement SBA loans have a lower down payment requirement than conventional loans, which can help you conserve cash. Typically, conventional commercial loans require a minimum of 20% - 30% down. SBA loans typically only require 5% - 10% down, and can go as low as 0% down (see #5 below)

2. Longer Repayment Terms SBA loans typically have longer repayment terms, which can help lower your monthly payments and improve your cash flow. Conventional commercial loans usually come with a fixed period of between 3 – 10 years. SBA features fixed terms up to 25 years.

3. Lower Interest Rates Perhaps not as much since the recent rate hikes, but SBA loans (504 and certain 7a specials) often still have lower interest rates compared to conventional loans, which can save you money over the life of the loan. Typcially, SBA 504 loans are priced .25% - 50% less than conventional products. This varies by bank of course, but is often the case.

4. Closing Costs Rolled Into the Loan on Purchases SBA loans are unique in that they allow all the loan costs to be included in the loan rather than you having to come out of pocket to cover them. Not having to cover tens of thousands of dollars in closing costs speaks for itself.

5. 100% Business Acquisitions Loans SBA loans allow for business owners to acquire competitors with no money down and have all costs included in the loan. As long as your industry codes match, you are able to take advantage of this amazing program.

6. No Financial Covenants There are no reporting requirements for SBA insured loans. This is in stark contrast to conventional loans, which require annual, quarterly, or even monthly reporting of financials. This may not seem like a big deal now, but having to provide a synopsis of every ebb and flow of your company can cause stress and fatigue.

7. Easier Qualification Requirements SBA loans have easier qualification requirements compared to conventional loans, which can make it easier for you to get approved for a loan. The minimum DSCR (debt service coverage ratio) for SBA is 1.15%, which means for every dollar you spend, you must bring in $1.15. The standard conventional, commercial minimum DSCR is 1.25% or higher. That difference could be the deciding factor in your loan getting approved.

8. Qualify Based Solely on Gross Revenues One unique feature of certain SBA products is the allowance of business owners to qualify for financing based just on their top line revenue and not their net proceeds (after expenses). For example, if your company grossed $1 Million last year, but netted just $80,000, you would have difficulty getting a conventional approval. This is not the case with SBA, as there is a dedicated program for such situations.

9. Projection Based Loans / Start Up Financing The SBA allows start-ups to qualify based on their projected revenues. This pro forma approach is impactful for the business owner of course and unique to SBA insured loans.

10. Much More Lenient on Credit Related Matters Since conventional commercial loans are not insured, they feature much more restrictive policies when it comes to past credit problems. Prior bankruptcies, lower Ficos (less than 625-650), and recent lates are often death knells for conventional requests. SBA on the other hand is more forgiving in these matters.

BONUS ADVANTAGE - No Prepayment Penalties! On loans with maturities of 15 years or less, there are no prepayment penalties with SBA.

In closing, to be fair, although there are significant, indisputable advantages to SBA loans over conventional loans, there are certain areas where conventional is just better, like the following: - Less Paperwork & Document Execution - Often Shorter Process Time - Lower Loan Costs Essentially, SBA loans take longer, have more paperwork, and typically have higher loan costs. Despite that, it's hard to overlook the many advantages that make SBA financing a great option for small business owners. If you're considering a loan for your business, consider all of your options carefully. Often it will come down to each particular bank’s offering and their unique lending particulars. Consult a knowledgeable, experienced commercial loan brokerage, bank, or lender (especially one who offers both SBA and Conventional) to help guide you in making this important decision.