Small Business Administration Loans Vs. Alternative Business Loans
Know the different ways you can receive financing for your business
Know the different ways you can receive financing for your business
Finding the right financing solution for your business is just as important as any business decision you’ll make. You want a trusted partner and reliable funds quickly. You want flexible terms that are suited to your business. Finding all that can feel like searching for a needle in a haystack and you’re already short on time as a business owner. Here at SmallBusinessLoans, we know it can be challenging to find exactly what you’re looking for – or even knowing where to begin when you need extra capital for your business. There are a range of lending options to consider for your business before you decide on what type of loan you may need. Our guide outlines the differences between common lending institutions like the Small Business Administration (SBA) and alternative lenders. We break down what exactly the SBA offers and how it’s different from an alternative lender so you can determine what option would work best for your business goals.
The SBA was established in 1953 to support small business owners at the federal level. It is the only cabinet-level federal agency dedicated to small businesses and provides resources such as capital, counseling, and expertise for American small businesses. The SBA partners with traditional banks to offer government-backed loans to small businesses, often guaranteeing up to 85% of the loan value. This helps reduce risk for the lender if the borrower were to default and subsequently give small business owners greater access to financing. These loans are often competitive with conventional or alternative loans and typically offer continued counseling and education for small business owners for the duration of the loan. These factors make SBA loans a great resource for small business owners who need additional capital and extra support for their business.
SBA loans can be used for most business expenses. The SBA offers a variety of loan types to suit a variety of small business needs, from the popular 7(a) loan program designed for general business expenses or the 504 loan program which is designed to help entrepreneurs purchase major assets like commercial property. Additionally, the SBA gives special consideration to women and minority business owners to support underserved business owners.
While the SBA strives to make small business financing accessible for all entrepreneurs, due to its federal requirements, it can often be difficult for many small business owners to get approved. SBA loans typically require lengthy applications with much paperwork and long wait times to get approved. Business owners could be waiting for months to receive financing while their need grows.
Conventional business loans, or traditional business loans, are loans offered by banks and not backed by the SBA. Conventional loans work just like your typical term loan, where the business owner borrows a sum of money for a business purpose and repays the loan over a fixed term with a fixed interest rate. Without the assurance from the SBA, conventional business loans typically have strict requirements for small businesses. Banks typically see small business lending as very risky, making it difficult for most small business owners to get approved for financing. In fact, conventional lenders have approved small business loans at a decreasing rate as inflation rises and the economy faces uncertainty. In 2022, less than 15% of loan applications were approved by big banks, according to the Small Business Lending Index.
Alternative business loans are exactly what the name implies: an alternative lending option to SBA loans and conventional business loans. Alternative lenders are typically digital-first financing solutions that offer more flexible terms and acceptance rates. Alternative loans work just like traditional or SBA loans, where the borrower agrees to a set of terms laid out by the lender in exchange for an amount of capital to use for business purposes. But, because most alternative lenders are funded privately, they can be much more flexible for business owners who may not meet the stringent qualifications elsewhere and need a financing solution for their business. Many small businesses often lack the cash flow, business history, or credit score to get approved for a loan from a conventional bank or the SBA. Alternative lenders fill the gap left by these traditional avenues to help more small businesses achieve their goals and get much-needed funding to continue their operations.
Alternative lenders remove traditional barriers to lending. Our trusted partners at SmallBusinessLoans typically offer streamlined applications, flexible terms and requirements, and a quick-to-fund process that gives business owners funds quickly and efficiently.
While the end result of an SBA loan or alternative loan may be the same, the means of acquiring financing and the processes are not. Each loan has factors that may work better for some businesses over others, depending on the business’s goals and circumstances.
The biggest difference between SBA and alternative loans is that an SBA loan is partially guaranteed by the government. That backing allows SBA loans to offer high loan amounts, lower interest rates, and longer repayment terms. On the other hand, alternative lenders offer smaller loan amounts with shorter repayment terms and much quicker processing times – which is ideally suited for businesses who need funding fast. SBA loans are a complicated process with lots of paperwork and hurdles involved. Alternative lenders typically offer short applications and can deposit funds within 24 hours1 of approval. Alternative lenders typically have requirements that are easier to meet than an SBA loan, where government-supported banks need a lot more paperwork and criteria in order to approve a loan.
Below is a snapshot of common loan terms you’ll find for the SBA or with an alternative lender.
|SBA Loans||Alternative Loans|
|Loan Amounts||$5k-$5M||Up to $400k|
|Repayment terms||5-25 years||6-18 months|
|Turnaround time||1-6 months||As little as 24 hours|
|Credit criteria||Good to excellent credit||Fair to excellent credit|
|Application requirements||Bank statements, business history, and more required with long application||Bank statements + short online application|
SBA loans and alternative loans have their pros and cons. But how do you choose which is right for your business?
If you need funds quickly to fulfill an order, capitalize on a growth opportunity, or cover cash shortages, consider applying with one of our partners for an alternative business loan. If you are a newer business or don’t meet the stringent requirements for SBA, then you’re much more likely to get approved by an alternative lender. On the other hand, businesses who are long-term planning and can wait months to receive funds, may benefit from applying for an SBA loan. If your business needs a larger amount of funds and has established cash flow, then an SBA loan could be a good fit for your business. However, when businesses realize they need extra cash, they often need it sooner than later and can’t afford to wait out the lengthy SBA process. Even if your business meets all SBA criteria, if you need capital fast, consider partnering with an alternative lender to access funds quickly.
We believe small business financing should be part of the solution, not a complicated problem. If you think an alternative loan would work well for your business needs, let SmallBusinessLoans help you. We have already done the research to find highly rated lenders for you. With our quick matching process, you can find a trusted partner for your business in a matter of minutes.
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