What is the difference between SBA and commercial loans, and which is better? Well, both are helpful when you don’t have the finances to grow your business. However, the two have some differences, with unique selling points in specific situations, as illustrated in this article.
SBA Loan
An SBA is a government agency that approves private lenders to provide SDA-backed loans to small businesses that can’t afford conventional loans. Depending on the loan you are applying for, the SBA will chop off some risks, making it less costly.
However, you will still need to meet the set criteria before you become eligible. For example, SBA requires that your business be operating in the United States, and you, the owner, must have reasonable invested equity before you qualify for a loan. You must also meet the program’s size requirements.
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These loans are the best option if you run a business with a bad or no credit history that would otherwise disqualify you from conventional loans.
The structure offers small and standard business loans of up to $250,000 and $5 million, respectively. In addition, the payment period spans up to 25 years, making the repayments more than accommodative.
Commercial Loans
A commercial loan is a financing arrangement between a borrower and a specific financial institution, usually a bank, online lender, or credit union. These loans allow a business to expand quickly and spread one-time costs over several years.
Commercial loans can be secured or unsecured. For secured commercial loans, the business can use its properties, plant, or equipment as collateral. A business can also use cash flows from its future accounts receivable to secure commercial loans in some instances.
Contrary to SBA loans, an applicant’s credit score plays a significant role in qualifying for a commercial loan. More often, when applying for a commercial loan, the lender will require your business to present documents to support its creditworthiness. These generally are balance sheets and similar documents that prove your entity has a consistent cash flow to repay the money as needed.
If approved for the loan, the lending entity will expect your business to repay the loan, plus the prevailing interest rates, within the specified time. Failure to do this can lead to court battles or liens against the business’s assets and properties.
SBA Vs. Commercial Loan: Which Is the Best Option?
Before deciding on which loan to go for, we advise you to consider the stage of your business. For example, are you a start-up or an established business? You may also need to consider your financial situation and business needs. SBA is a bit lenient but won’t give you enough money if you are an established entity looking for huge sums to boost your operations or buy some equipment.
On the other hand, commercial loan lenders are often a bit strict but will disburse any amount provided you meet their criteria. So, if your business has a positive credit score and good cash flow, going for a commercial loan may be the best option for you.
