SBA Loans vs. Conventional Bank Loans: How to Choose

Conventional bank loans typically offer the lowest interest rates, while business owners may find it easier to qualify for SBA loans.
Lisa Anthony
By Lisa Anthony 
Edited by Sally Lauckner

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When deciding between a business bank loan and an SBA loan, the right fit will depend on the number of years your business has been in operation, your annual revenue, your credit history and a handful of other factors.

Generally, conventional bank loans offer the lowest interest rates and best terms on business loans, which make them the first stop 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 good alternative. Take a closer look at bank loans and SBA loans to understand how each works.

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Overview of conventional bank loans

Banks, credit unions and other financial institutions offer small-business loans. The amounts, interest rates, fees, eligibility requirements and other terms of these loans vary depending on the bank and its guidelines. The repayment period for these loans may be as short as 12 months or as long as 20 years.

General eligibility requirements

Conventional bank loans can be hard for many small businesses to qualify for because the lender takes on the full risk from nonpayment of the loan. Each bank sets its own qualification standards for the loans it offers. However, some general requirements include the following:

  • At least two years in business.

  • Minimum annual revenue amount.

  • Strong credit history.

Types of small-business loans offered by banks

While they may be branded with specific names, the following are some common types of small-business bank loans:

  • Business lines of credit.

  • Term loans.

  • Equipment loans.

  • Commercial real estate loans.

Uses of conventional bank loans

Bank loans can be used for a number of purposes including, but not limited to, the following:

  • Purchase of land or commercial property.

  • Expansion or remodel of an existing business.

  • Working capital to improve business cash flow.

  • Purchase of equipment and machines.

  • Funds to consolidate debt.

Interest rates for bank business loans

Business loan interest rates vary by lender, but a range from 6% to 13% is common for small-business loans from banks. Typically, your lender will base your interest rate on factors such as the following:

  • Loan amount.

  • Loan term.

  • Your creditworthiness including credit score.

  • Business relationship with the lender.

When a conventional bank loan may be a good fit

Some situations where a bank loan may be a good option for your business include:

  • Established business: You’ve been in business for more than two years and have a proven track record.

  • Strong annual revenue: An annual revenue amount of over $100,000 can meet the qualification requirements of some bank loans.

Bluevine - Line of credit
OnDeck - Online term loan
Funding Circle - Online term loan
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Overview of SBA loans

If you’ve been turned down by a bank for its conventional loan program, you may still qualify for an SBA loan. These loans are not offered directly through the SBA, but are instead handled by approved lending partners. Some of these lending partners may even be the same lenders that you looked at for a conventional bank loan. Qualification for an SBA loan can be easier for borrowers because SBA loans are guaranteed by the Small Business Administration, meaning there's less risk to the lender in the case of nonpayment of the loan.

The SBA’s Lender Match tool can help you find a lender in your area. After answering some questions about your business, you’ll receive a list of lenders that are interested in your loan. This gives you the opportunity to compare rates, fees and terms for lenders before submitting your application.

General SBA eligibility requirements

Eligibility requirements are determined by the SBA loan program and the lender. A complete list of requirements will be given to you by the lender, but some general eligibility requirements for SBA loans include:

  • The size of your business must meet SBA standards.

  • Your business needs to be for profit and officially registered.

  • Your business should be located and operating in the U.S. or its territories.

  • Your credit needs to be adequate for loan repayment.

  • You can’t get financing from other lenders.

Types of SBA loans

SBA loans can be used to start or expand your business. There are three main types of SBA loans available to borrowers:

  • SBA 7(a) loans including standard 7(a) loan, 7(a) Small Loan, SBA Express, Export Express, Export Working Capital, International Trade, Preferred Lenders, and CAPLines.

  • 504 loans.

  • Microloans.

The SBA Veterans Advantage Fee Relief Initiative program is available to help qualified veterans reduce or eliminate the upfront guarantee fee required for many SBA loans.

Uses of SBA loans

How you use the funds from your SBA loan can depend on the type of loan you get. For example, SBA 7(a) loans can be used for working capital, while 504 loans cannot. Here are some common uses of SBA loans:

  • Working capital or revolving funds.

  • Real estate, equipment, machinery, furniture, supplies and materials purchases.

  • Construction or renovation of buildings.

  • Establishing a new business; acquiring or expanding an existing business.

  • Refinancing existing business debt, in some cases.

  • Improvements to existing facilities including land, streets, parking lots, landscaping and utilities.

Interest rates for SBA loans

Depending on the type of loan you get, your SBA interest rate could be tied to the prime interest rate, U.S. Treasury issues or something else. For example, the interest rate for a $60,000 fixed-rate 7(a) loan would be the prime rate plus 6%, while the interest rate on a microloan depends on the lender. The SBA sets maximum interest rates and you can negotiate with your lender on the interest rate you pay.

When an SBA loan may be a good fit

Situations that make an SBA loan a good option for business financing include the following:

  • Startup financing: The SBA’s 7(a) loan can be used to establish a new business.

  • Credit flexibility: There’s the potential that you can qualify even with poor credit ratings.

  • Continued support: Some SBA loans offer counseling and education to help you get your business off the ground and continue to operate it.

Frequently asked questions

Bank loans generally offer the most competitive interest rates and loan terms, but they can be difficult to qualify for because they require excellent credit and multiple years in business. SBA loans can be a good alternative because they can be easier to qualify for and still offer competitive interest rates.

If your personal credit score is below 630 or you don’t qualify for a bank or SBA loan for another reason, an online lender or nonprofit organization may be an option. However, the interest rates will typically be less competitive than bank and SBA loans.

Many banks set a minimum amount for annual revenue or gross sales to qualify for a loan. This varies by lender. If your revenue doesn’t meet the minimum for a bank loan, the next step would be to look at SBA loan programs.

It can be challenging to get a conventional bank loan when you’re starting a business. Banks often require that your business be in operation for a minimum of two years before considering your application.

However, the SBA microloan programs is targeted to startups.

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