What is the Difference Between a Small Business Association Loan and a Conventional Bank Loan?

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If you are starting your own business, it is important to know the difference between a small business administration loan and a conventional bank loan. One of the biggest challenges that business owners face when they are trying to grow a startup is with funding. Since money can go fast and one small mistake can cost you your company, it is important to have options when it comes to getting the funds that you need to operate comfortably until you start to profit. Here is what you need to know about these two loan options:

What is a Small Business Association Loan?

The Small Business Association is a federal agency that provides aide and counsel to small business owners. The main mission of the SBA is to preserve a competitive marketplace while strengthening the economy. One way the agency helps business owners start and build businesses is by offering small business loans.

A Small Business Association loan is a loan that the agency offers to entrepreneurs to help them grow their small businesses. The agency actually has 4 different loan programs that are around for very different purposes. The programs that you can choose from include: General Small Business Loans, Microloans, Real Estate & Equipment Loans and Disaster Loans.

Who is Eligible for an SBA Loan?

Much like students can get federal aid to attend school, business owners can get federal aid to start and grow their businesses. You must meet eligibility requirements before you can qualify for an SBA loan program. The agency will only offer loans to small businesses that operate for a profit in the United States. Some other requirements include:

  • Have a reasonable amount of invested equity in the business
  • Use the loan proceeds for business activities
  • Be able to show the financial need for the loan proceeds
  • Be able to show that you have used personal assets before seeking out financing
  • No delinquent debt with any federal agency

What is a Conventional Bank Loan?

A conventional bank loan is one that is funded by a bank with no government ties. There are two types of conventional loans that you can apply for which include a secured loan and an unsecured loan. A secured loan is one that is backed by collateral and an unsecured loan is one that is based on your creditworthiness and backed only by your signature.

What are the Major Differences Between an SBA Loan and a Bank Loan?

The primary difference between each type of loan, aside from the fact that one is funded by the government, is the type of paperwork that you must submit. Each loan is underwritten the same way, but the Small Business Association generally requires a lot more paperwork than a conventional bank. Pursuing an SBA loan may not be easy, but it is the best choice for businesses that are eligible.

Related Resource: Who Qualifies for the R&D Tax Credit

New startups have accounting ledgers that are low in revenues and high in expenses. Sometimes, applying for financing is the only way that you can cover the startup costs when you are not yet making a profit. Make sure that you borrow responsibly and that you have a detailed plan in order before you start the application process. Knowing the difference between a small business administration loan and a conventional bank loan will help you make an educated final decision.

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