When deciding between a business bank loan or an SBA loan, which one is right for you will depend on how long your business has been in business, your annual revenue, your credit history, and several other factors.
Traditional bank loans generally offer business loans with the lowest interest rates and best terms, making them the first choice for many borrowers seeking financing. However, if a borrower doesn't qualify for a bank loan, a Small Business Administration loan with competitive interest rates and terms can be a great alternative. Take a closer look at bank loans and SBA loans to understand how each works.
To better understand the unique needs of your business, we'll begin by completing a short survey.
Once you find your perfect match, our team will be happy to guide you through the next steps of the process.
Overview of traditional bank loans
Banks, credit unions, and other financial institutions offer small business loans. The amount, interest rate, fees, eligibility requirements, and other terms of these loans vary by bank and its guidelines. Repayment terms for these loans can range from as short as 12 months to as long as 20 years.
General Eligibility Requirements
Traditional bank loans can be difficult for many small businesses to obtain because the lender assumes all of the risk of non-payment of the loan. Each bank sets its own eligibility criteria for the loans they offer. However, some common requirements include:
At least 2 years of business experience.
Minimum annual earnings.
Types of small business loans offered by banks
Although they may be branded under specific names, common types of small business bank loans include:
Business lines of credit.
Commercial real estate loans.
Traditional bank loan uses
Bank loans can be used for a variety of purposes, including (but not limited to):
Buying land or commercial property.
Expanding or remodeling an existing business.
Working capital to improve the cash flow of the business.
Purchase of equipment and machinery.
Funds for consolidating debt.
Bank business loan interest rates
Business loan interest rates vary from lender to lender, but typically range from 6% to 13% for bank small business loans. Lenders typically determine their interest rate based on factors such as:
Your creditworthiness, including your credit score.
Business Relationships with Lenders.
When a Traditional Bank Loan is Right for You
Some situations where a bank loan may be a good option for your business include:
Established Business: You have been in business for more than two years and have a proven track record.
High annual earnings: Annual earnings of more than $100,000 can help you qualify for some bank loans.
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Overview of SBA Loans
If you've been turned down by a bank's regular loan program, you may still be eligible for an SBA loan. These loans aren't offered directly by the SBA, but are processed by approved lending partners. Some of these lending partners may be the same lenders who considered you for a regular bank loan. It's easier for borrowers to qualify for an SBA loan because it's guaranteed by the Small Business Administration, which means there's less risk for the lender if you default on your loan repayments.
The SBA's Lender Match tool can help you find lenders in your area. After you answer a few questions about your business, you'll get a list of lenders interested in lending to you. This allows you to compare lenders' interest rates, fees, and terms before you submit your application.
SBA General Eligibility Requirements
Eligibility requirements are determined by the SBA loan program and lender. A complete list of requirements will be provided by your lender, but general eligibility requirements for SBA loans include:
The size of your business must meet SBA standards.
Your business must be commercial and officially registered.
Your company must be located and operated in the United States or its territories.
You need to have good credit to repay the loan.
You cannot obtain financing from other lenders.
Types of SBA Loans
SBA loans are available for starting or expanding a business. There are three main types of SBA loans available to borrowers.
SBA 7(a) loans include Standard 7(a) Loans, 7(a) Small Loans, SBA Express, Export Express, Export Working Capital, International Trade, Preferred Lenders, and CAPLines.
The SBA Veterans Preference Fee Reduction Initiative program is available to help eligible veterans reduce or waive the upfront guarantee fee required for many SBA loans.
SBA Loan Uses
How you use your SBA loan funds depends on the type of loan. For example, an SBA 7(a) loan can be used for working capital, but a 504 loan cannot. Common uses for SBA loans include:
Working capital or revolving funds.
Purchasing real estate, equipment, machinery, furniture, supplies and materials.
Construction or renovation of buildings.
Setting up a new business or acquiring or expanding an existing business.
In some cases, refinancing existing business debt.
Improvements to existing facilities, including land, roads, parking, landscaping and utilities.
SBA Loan Interest Rates
Depending on the type of loan you take out, SBA interest rates are tied to the prime rate, U.S. Treasury publications, or other interest rates. For example, the interest rate on a $60,000 fixed-rate 7(a) loan would be the prime rate plus 6%, but microloan interest rates vary by lender. The SBA sets the maximum interest rate, and you can negotiate with your lender about the interest rate you pay.
When is an SBA Loan Right for You?
Some situations where an SBA loan may be a good option for business financing include:
Start-up capital: SBA 7(a) loans can be used to set up a new business.
Credit flexibility: You may be able to qualify even if you have a lower credit rating.
Ongoing support: Some SBA loans offer counseling and education to help you get your business up and running.
FAQ
Are bank loans better than SBA loans?
Bank loans generally offer the most competitive interest rates and loan terms, but they can be difficult to qualify for because they require good credit and a multi-year business history. SBA loans are a good alternative because they are easier to qualify for and can also offer competitive interest rates.
Can I get a business loan if I have bad credit?
If your personal credit score is below 630 or you don't qualify for a bank or SBA loan for another reason, online lenders or nonprofits may be an option, though their interest rates are usually lower than bank or SBA loans.
What are the income requirements for a business loan?
Many banks set a minimum annual revenue or total sales amount to qualify for a loan. This varies by lender. If your revenue doesn't meet the bank loan minimum, your next step is to consider an SBA loan program.
Can I get a bank or SBA loan to start my business?
Obtaining a traditional bank loan when starting a business can be difficult. Banks often require that your business has been in operation for a minimum of two years before they will consider your application.
Are bank loans better than SBA loans?
Bank loans generally offer the most competitive interest rates and loan terms, but they can be difficult to qualify for because they require good credit and a multi-year business history. SBA loans are a good alternative because they are easier to qualify for and can also offer competitive interest rates.
Can I get a business loan if I have bad credit?
If your personal credit score is below 630 or you don't qualify for a bank or SBA loan for another reason, online lenders or nonprofits may be an option, though their interest rates are usually lower than bank or SBA loans.
What are the income requirements for a business loan?
Many banks set a minimum annual revenue or total sales amount to qualify for a loan. This varies by lender. If your revenue doesn't meet the bank loan minimum, your next step is to consider an SBA loan program.
Can I get a bank or SBA loan to start my business?
Obtaining a traditional bank loan when starting a business can be difficult. Banks often require that your business has been in operation for a minimum of two years before they will consider your application.
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SBA Microloans
The program is aimed at startups.