SBA Loan vs. Commercial Loan: A Guide

Securing financing is a pivotal moment for any business. A constant question our Amerant advisors get is, “Should I apply for an SBA or commercial loan”? Business owners should weigh the differences between these two options. This article will compare SBA and commercial loans to make an informed, strategic choice. 

Let’s start by reviewing key details on SBA loans. 

SBA Loans: Support for Small Business 

SBA loans are government-guaranteed loans designed to support small businesses. The U.S. Small Business Administration (SBA) provides guarantees to reduce lenders’ risk. This results in more favorable loan terms like lower interest rates and smaller down payments. 

Several types of SBA loans cater to different needs: 

• 7(a) loans offer up to $5 million for various business purposes. This includes working capital, equipment, machinery, furniture, fixtures, inventory, and acquisition of land, buildings, or leasehold improvements. 7(a) loans are the most flexible type of SBA financing. 
• 504 loans provide up to $5 million in financing for major fixed assets such as real estate or heavy equipment. The funds are helpful for purchase, construction, or expansion. Loan terms vary based on business type, credit, and loan provider but are typically between 10-20 years for real estate and equipment loans. 
• Microloans of up to $50,000 help brand-new startups and early-stage businesses get off the ground. These smaller loans apply to working capital, inventory, supplies, furniture, fixtures, machinery, and equipment. 

To qualify for any SBA loan, applicants must meet the SBA’s small business size standards for their industry. They must also be a for-profit business that operates in the United States. In addition, applicants need to demonstrate sound finances and a feasible business plan, which may require collateral.

The SBA loan application process involves considerable paperwork, financial documentation, and certifications to prove eligibility. It takes approximately 8-12 weeks for the SBA to review and approve the loan once the application submission occurs. 

SBA loans do offer attractive interest rates and repayment terms of up to 25 years. However, the extended application process and strict eligibility requirements make them less suitable for some business situations. 

Commercial Loans: Flexibility and Speed 

Unlike SBA loans, commercial loans come directly from private lenders like banks, credit unions, and online alternative lenders. The government does not back them. This gives business owners much more flexibility in qualifying and typically faster access to financing. 

Several types of commercial loans meet different business needs: 

• Term loans provide a lump sum cash infusion that is repayable over 3-10 years through regular monthly installments. Term loans allow businesses to fund significant investments like new equipment, real estate, renovations, or other fixed assets. 
• Lines of credit give businesses revolving access to capital up to a pre-approved limit. You draw funds as you need and only pay interest on money used. This makes lines of credit suitable for fluctuating needs like inventory, payroll, and operating expenses rather than fixed assets. 
• Equipment financing loans are explicitly valuable for purchasing necessary equipment and machinery. A bank structures payments to match the expected equipment use timeline, often 3-10 years. These loans make costly equipment purchases more affordable. 

Exact eligibility criteria and required documentation vary considerably by lender. However, the application process for commercial loans is generally much faster and simpler than SBA loans. This often takes just 2-4 weeks for approval. 

Commercial loans offer the advantage of quicker financing. They also feature stricter terms like variable interest rates, large down payments of 10-25%, and collateral requirements. The shorter repayment terms also mean higher monthly payments, creating more cash flow risk. 

Remember, as with any set of terms, these vary based on the provider and the prospective client’s needs, means, and credit. 

Consolidation Options 

Some businesses seek to consolidate existing commercial debts into a single SBA loan to access more favorable rates and terms. However, borrowers cannot use SBA debt consolidation loans to repay commercial loans from the same lender.

Carefully review restrictions before pursuing debt consolidation. Some consolidation loans require contributing a certain percentage of new capital. Make sure to understand origination fees and prepayment penalties as well. 

Choosing the Right Loan  

When deciding between an SBA loan and a commercial loan, one should first consider their situation, financial requirements, and business goals. Key factors include: 

• Loan amount needed: SBA has higher maximum amounts on certain loans. 
• Use of funds: SBA loans require using proceeds for qualified business purposes. Some commercial loans are more flexible. 
• Cash flow: Commercial loans require the ability to handle higher monthly payments. SBA offers longer terms. 
• Credit history: Startups/weaker credit may benefit from SBA’s guarantees but can still qualify for some commercial loans. 

Carefully compare the total cost of borrowing, including interest rates, origination/guarantee fees, prepayment penalties, and collateral requirements. Calculate the annual percentage rate (APR) and total repayment costs to determine the most affordable funding option. 

Applicants should assess if they meet SBA’s eligibility criteria, especially their small business size standards. Also, they should consider if they have the cash flow to manage higher commercial loan payments. Lenders base their relationships and approval likelihood on their credentials, which deserve consideration. 

How To Pick a Loan

Whether an SBA or commercial loan is the right choice isn’t always a straightforward answer. 

SBA loans and commercial loans both play essential roles in supporting American businesses. Seeking guidance from financial advisors and SBA lenders is wise if you are unsure which route is best. An objective expert can ensure you make a well-aligned, strategic financing decision. 

With your goals in mind, weigh the tradeoffs of each to chart the optimal path forward. 

For help securing business financing or other financial needs, contact Amerant Bank today. Our advisors have decades of experience guiding entrepreneurs on strategic growth.