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
Lead Writer | Small-business lending, payroll, marketing

Lisa A. Anthony is a former lead writer on NerdWallet’s small-business team, primarily covering small-business lending. She has over 20 years of diverse experience in finance, lending and taxes. Prior to joining NerdWallet, Lisa worked as a writer for Intuit Turbo Tax, loan officer for Bank of America and a business analyst for Wells Fargo Home Mortgage. Over the years, she has had the opportunity to interact directly with consumers on lending products and tax preparation software. Her work has appeared in The Associated Press, Washington Post and Entrepreneur, among other publications.

Sally Lauckner
Assigning Editor | Small business

Sally Lauckner is an editor on NerdWallet's small-business team. She has over 15 years of experience in print and online journalism. Before joining NerdWallet in 2020, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content and specializing in business financing. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She is based in New York City.

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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:

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:

Uses of conventional bank loans

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

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:

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.

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Min. credit score

Min. credit score

Min. credit score

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:

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.

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:

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:

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

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.

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.

programs is targeted to startups.

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Lisa Anthony is a former NerdWallet writer covering small-business. Before Nerdwallet, she had more than 20 years of experience in banking and finance. See full bio.

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