United States
Updated: August 3rd, 2023
If you’re a business owner looking for a loan, you’ve got no shortage of options. The rise of fintech companies during the financial crisis of 2008 has paved the way for alternative lenders, also known as online lenders. These dynamic companies have bridged a gap between business owners and banks. Meanwhile, the Small Business Administration (SBA) similarly has business owners in its sights. Either way you slice it, small businesses are no longer being left out in the cold when it comes to financing. The real question instead comes down to comparing an SBA loan vs. business loan.
As a business owner, how do you know which road to take when it comes to choosing between an SBA loan vs. business loan? The answer could be in the time in which you need access to capital. For most business owners, the answer to that question is yesterday. As we know, cash flow can be tight even before the need for a loan arises. Whether it’s for a remodel, to pay suppliers, an inventory replenish, or something else, cash flow constraints feel very real. And there are nuances involved that could help determine which way to go. We’ve done some of the heavy lifting for you and provide a comparison of the SBA loan vs. business loan.
The 7(a) happens to be the SBA’s most widely used loan program, so there must be some reason. This could be due to the size of the loans. An SBA 7(a) loan can fetch up to $5 million (although the average loan size is closer to $400,000). Or, perhaps it’s the reasonable monthly payments or a lack of penalties for business owners who wait three years from the start of the loan for prepayment.
The government agency backs a large percentage of the loan amount, which removes some of the risk for the lender in the event of a default. Plus, this SBA loan has its abbreviated timeline for approvals, the lenders process notwithstanding. Nonetheless, the government can be skittish about risk. As a result, business owners are likely to have an easier time qualifying for a loan from an alternative lender.
It’s no secret that the bureaucratic wheels of the government tend to turn slowly, much unlike the well-oiled machine that is financial technology. But don’t let that reputation fool you. When comparing the timeline for an SBA loan vs. conventional loan, an SBA 7(a) loan has a great deal to do with the lender that provides the financing. The more familiar they are with the SBA loan process, the better. You can also accelerate the process by being prepared with your paperwork.
On the conservative side, the SBA loan timeline could take anywhere from two to three months. That does not mean you will spend all of that time waiting. There are multiple steps to the SBA loan process that transpire over several weeks to keep you busy.
To start the SBA loan process, you’ll need to gather your documents. These include the following:
The required documents needed isn’t an exhaustive list, but it will get you headed on the right track. The lender can’t submit the loan application to the SBA until it has all of the necessary documentation. The documentation layer is kind of like the wildcard of the process. Considering that SBA 7(a) loans may require collateral, appraisals or other reports might be necessary. While it will increase the SBA loan timeline, it could also bolster your chances of getting approved.
If you’re working with a standard lender, say a bank that spends much of its time processing mortgage loans, there will likely be more of a learning curve. Once the application is in the SBA’s hands, that is when the smooth sailing could begin. The agency will then review the package and decide if it agrees with the lender’s call on the application. The SBA promises a turnaround time of five to 10 business days.
If you work with an SBA Preferred Lender, the process could go much faster. Preferred lenders have more experience processing SBA 7(a) loans and already know what the agency needs. As a result, they have the authority to make credit decisions, unlike non-preferred lenders. The SBA must still sign off on the loan, but the turnaround time for preferred lenders is closer to 24 hours. At Funding Circle, we work with the pre-approved Preferred Lenders, so you get fast answers and rapid funding.
If learning about the SBA loan process was exhausting, you’ll be relieved that alternative lenders can be much easier – not to mention faster. Fintech companies, including alternative lenders, are built on speed and agility thanks to the high-tech nature of these platforms. The utilization of current technology is something that traditional banks are often lacking.
A comparison of an SBA loan vs. business loan wouldn’t be complete without mentioning term loans. If you’re looking to make a significant, long-term investment in your business, a term loan provided by an alternative lender is another way to go. Whether you need the capital to invest in property or equipment, hire more talent, or build a new e-commerce website, you can access term loans from $20,000 to $500,000 in financing. You receive a lump-sum amount of money upfront that you then repay over the term of the loan in either weekly, bi-weekly or monthly installments. Most of the time, it’s at a fixed interest rate.
Even though the loan process is faster with an alternative lender, you should still spend some time preparing for the application process. Prep-work means doing your homework and comparing the various options available from multiple online lenders.
Features that you’ll want to look for include qualifying criteria, loan amounts, annual percentage rate, and fees in addition to repayment terms. Next, know your credit, including both your personal and business scores, so there are no surprises. Finally, comparing the paperwork required for an SBA loan vs. a conventional loan reveals that a business loan’s paperwork is less exhaustive than that of the SBA. However, you’ll still want to gather your recent financial statements.
When you are ready, hold onto your hat because you could have the capital in your account sooner rather than later. Once again, the lender you choose will determine the timeline for the loan. In some cases, you can complete the application in as little as 10 minutes. At Funding Circle, you can expect to complete the application and receive a decision in as quickly as 24 hours, after which the money can be in your account in as soon as ten days.
If you still can’t decide between an SBA loan vs. business loan, don’t fret. You can apply for an SBA 7(a) loan through an online lender like Funding Circle. We offer you the best of both worlds — the backing of the SBA and a speedy application process of less than 10 minutes. Not to mention, you can receive a decision in as little as 24 hours.
Jessica Holcomb is the Content Marketing Manager at Funding Circle, specializing in small business marketing and social media. She has a degree from the Fashion Institute of Design and Merchandising. Prior to Funding Circle, Jessica was a Marketing Manager at a successful social games company and a freelancer for many small businesses in the Bay Area. Her work can be seen in top retail, gaming, and financial small business resource sites.
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