If you’re a small business owner, then odds are you have heard of the SBA. Of course, the SBA isn’t the only option. There are traditional loan options and other financing alternatives available to small business owners that need the extra help. Before you decide to look into different financing options, it helps to know the difference between SBA loans and traditional loans.
The SBA Does Not Lend Money
One misconception is that the SBA lends money. The truth is that the SBA does not lend the money or handle the loan. The loan comes from a private lender or financial institution. What makes it different from traditional loans is that the SBA backs the loan. It guarantees a portion of the loan to the lender, in case the company defaults. Now, the major difference between traditional funding for the borrower is that you have to follow the SBA’s terms and conditions. There are different rules and usually the company has to go through a longer application process to be approved. However, when it comes to small businesses, they may qualify easier for SBA loans.
The SBA Loan Includes Fees
If you don’t know a lot about SBA financing, then you might be initially attracted to the rate. This is fair, given that this type of financing does tend to come at a lower rate than other types of financing. However, this isn’t necessarily all that you should look at. While traditional loans have higher rates, they also have fewer fees. Sometimes, an SBA loan might be significantly higher than a traditional loan.
Likewise, you need to take into consideration the time it takes to be approved for a loan. Traditional financing might not take as long as an SBA loan. An SBA loan has a stringent process that you have to abide by in order to receive funding. While there are fewer risks involved, you may have to wait up to six months to receive financing. Not all businesses have time to wait for that.
When it comes to financing, there are a lot of pros and cons to traditional and SBA loans. What makes the difference tends to be the risk profile of the company. For younger businesses, an SBA loan tends to be one of the best options available. If you can’t qualify for traditional financing, then lenders might not be willing to look at you. However, with a backing from the SBA, lenders are more interested.