If you’re ready to start a small business, or already have one you want to grow, you have three main loan options: government-backed SBA loan, conventional bank loan, or a loan from an alternative lender. Which kind of loan is the best for you depends on factors such as loan purpose, amount, collateral and payback period, your business history, and the current financial shape of your business.
Small Business Administration (SBA) Loans: With SBA loans, the government isn’t directly lending small businesses money. Instead, the SBA sets guidelines for loans made by its partners, which include banks, community development organizations, and micro-lending institutions. Businesses have a variety of SBA loan types to choose from (CDC/504, 7(a), Microloan, and Disaster loan) depending on the parameters and stipulations on how the money can be used and when it must be repaid. The amount of loan secured by the government guaranty can vary depending on the loan type. For small business borrowers, compared to the conventional bank loans, the advantages of SBA loans include more favorable loan terms, lower interest rate on the loan portion guaranteed by the government, and typically less stringent lending standards, while the disadvantages include additional paperwork, extra loan fees, and a slower loan approval process.
Conventional Bank Loans: While banks are often the sources of SBA loans, in addition to the SBA loans, they also offer some other similar loans including working capital loans, equipment loans, merchant cash advance, lines of credit, professional practice loans, and franchise startup loans. Unlike SBA loans, non-SBA conventional bank loans are not insured by the government. For small business borrowers, compared to SBA loans, the advantages of conventional loans include a faster loan approval process and more flexible loan use terms, while the disadvantages include more stringent loan standards, higher interest rates, and shorter repayment periods.
Alternative Lenders: Lenders other than SBA and conventional banks are typically considered as alternative lenders. Some of the examples of alternative lenders include Kabbage, OnDeck, Dealstruck, BlueVine, and Accion. In addition to offering conventional loans similar to the ones offered by the banks (working capital loans, equipment loans, merchant cash advance, lines of credit, professional practice loans, and franchise startup loans), alternative lenders also offer loans such as unsecured loans, disaster loans, asset-based loans, and bad credit business loans. Alternative lenders are becoming a popular choice, particularly for startups and small businesses with less than a stellar financial history. For small business borrowers, compared to conventional bank loans, the advantages of alternative lending include faster loan approval process and more flexible loan standards, while the disadvantages include a significantly higher interest rate and shorter repayment period.
There are no hard-and-fast rules or formulas for figuring out what loan option and type are the best for any given business. It depends on the details of your situation. Consider your business needs and financial circumstances before you determine what loan option and type might work best for you.