SBA loans vs. alternative loans: What’s best for you?

As a business owner ready to expand, you’ll find a plethora of small business funding options available to you. If you tried to qualify for a traditional loan through your bank and got turned down, you might consider an SBA loan or an “alternative loan.” Here’s some information you should know to help you make an informed decision about small business funding options.

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What are SBA Loans?

An SBA loan is a government-guaranteed small business loan that has a long repayment term and lower interest rates. The Small Business Administration (SBA) is the government agency that partially guarantees SBA loans and was founded in 1953 to support small business owners across the United States access capital to grow their businesses.

SBA loans have some of the most attractive terms among small business loans. SBA loans have a 10-year term, meaning payments are more spread out and typically lower. SBA loan rates differ somewhat, depending on the lender you work with, however, the SBA establishes the maximum amount that can be charged for these loans. SBA loan interest rates are variable and depend on the loan amount. There are some fees associated with SBA loans, but, even so, SBA loans are generally much less expensive than the vast majority of alternative financing options.

Applying for SBA loans can also be  time-intensive. SmartBiz has helped solve this problem with an online platform that streamlines the application process, making it fast and easy to upload documents. After the required documentation has been submitted, SmartBiz matches borrowers with the institution most likely to fund them.

For more in-depth information about acquiring an SBA loan from SmartBiz, visit our website.

What are some examples of alternative loans?

Alternative lending is a broad term used to describe the wide range of loan options available outside of a traditional bank loan.

The process for an alternative loan can be very different from the application for an SBA loan. In general, it can be faster. Less documentation is required and the process may be swifter than other options.

Alternative lenders will often consider borrowers who don’t qualify for an SBA loan because they haven’t been in business long enough, they have poor credit, no collateral, or other reasons.

However, there’s a downside – and it’s important. Many alternative loans have high interest rates and short loan terms that can hurt a small business rather than help it. In general, business owners should strive to get low-cost funds with long terms that won’t crunch cash flow.

Types of alternative loans

  1. Merchant Cash Advances

Merchant cash advances for small businesses are typically more expensive compared to traditional business loans. Their APRs can reach as high as a whopping 200 percent, making them unaffordable. Sure, they may be convenient as the lender automatically keeps a portion of your daily credit card transactions to cover your repayments. But the convenience comes with a cost.

  1. Business Credit Cards

Business credit cards have much higher interest rates than SBA loans, but are easy to obtain. It’s usually not a good idea to use credit cards to finance large purchases because they’ll eat up available credit. Credit cards can be useful when making short-term financial outlays that will be recovered quickly.

  1. Line of Credit

A business line of credit gives you access to a set amount of money you can tap into when needed. This type of funding can be used for businesses that need short-term financing to help make up for gaps in cash flow.

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  1. Invoice Factoring

Invoice factoring is also known as accounts receivable financing. This is an option for small businesses with unpaid invoices. Instead of waiting for payment, you get an advance, which you pay back with a fee when customers settle their accounts.

Key differences between SBA loans and alternative loans

While SBA and alternative loans can both help you obtain extra working capital, several differences between them make each useful, depending on the situation. Here are some of those key differences to help you make a more informed decision:

Rates and terms

SBA loan interest rates and 10-year terms tend to be more favorable than alternative loans, allowing small business owners to repay their loans in smaller, more manageable monthly installments. For up-to-date information about SBA loan rates from banks in the SmartBiz network, visit the SmartBiz website.

By contrast, alternative loans have shorter terms, lasting around 6 to 18 months. They also have higher interest rates. The result is higher monthly payments that can make what initially seemed like an appealing loan something you likely can’t actually afford.

Risk that the lender is assuming

The Small Business Administration (SBA) doesn’t lend out money by itself, but instead uses government funding to guarantee participating banks’ loan products. The SBA will repay banks 50 to 85 percent of the loan amount if the borrower defaults. With the government as a safeguard, banks are typically more willing to approve borrower applications.

Alternative lenders provide extra funds to businesses without government backing, meaning they’re taking the risks associated with each borrower. Typically, alternative lenders mitigate that risk through collateral, or assets that could be seized and later sold  if you default on your loan. These assets must be greater than or equal to your loan amount so that the lender can recoup their losses if you default.

Paperwork

Although SBA loans are a borrower-friendly choice, SBA lenders require a lot of documentation to verify your eligibility. These documents help show  that you can repay your loan within a reasonable timeframe.

Alternative loan document requirements are often less strict. You can typically complete applications quickly online, though that fast process comes at the expense of favorable loan terms.

Approval times

Just as completing the application itself is often time-consuming, waiting for the SBA to process your loan application also takes time. Generally, you’ll wait 60 to 90 days to hear whether you’re approved. If you work with SmartBiz, funds can be deposited into your bank account in as fast as 7 days once the SBA loan application is approved.*

Alternative loans, on the other hand, are short-term loans, which typically have fewer eligibility requirements. That means processing them can take less time. Time to funding varies from lender to lender so be sure to ask about funding times.

Qualification criteria

SBA loans have strict qualification requirements. You must have a credit score of at least 680 and a recent financial history free of bankruptcies or foreclosures. You must also have at least two years in business, along with several other requirements. Learn more about the requirements to qualify for an SBA loan here.

The lending criteria for an alternative loan depend on the loan type for which you apply. However, their prerequisites usually aren’t as strict as with SBA loans. Generally, the lender will check your credit history for black marks such as foreclosures or bankruptcy. Then they’ll ask for basic personal information along with information on your business.

Flexibility

SBA loans facilitated by SmartBiz can be used for working capital (operational expenses, marketing, hiring, etc.), new equipment purchases, and refinancing existing business debt not secured by real estate.

On the other hand, many alternative loans lend smaller amounts of capital that work best for minor purchases. These include buying inventory, repairing equipment, paying employees, etc. Some alternative financing options, though, do limit how you can use their funds.

Is an SBA loan or an alternative loan better for me?

Whether an SBA loan or an alternative loan is best for you depends on your financial situation. Each loan has unique benefits, but picking the wrong one for a particular circumstance can do more harm than good.

Refinance your debts, and more depending on which SBA loan you obtain. There are very few circumstances in which they’re a bad fit for you if you qualify for them.

Alternative loans typically have lower loan amounts, higher interest rates, and short repayment periods. Given these unfavorable terms, their main draw is that they’re processed more quickly than SBA loans. As a result, they’re better for smaller, short-term purchases that help bolster your business or keep it operating during tough economic times. Examples could include funding payroll, equipment repair or replacement, or other growth initiatives.

In Conclusion

Evan Singer, president and CEO of SmartBiz Loans, has advice for small business owners. “If [you] can get an SBA loan, take it,” he says. That’s because these loans offer the “best interest rate, lowest monthly payment, and longest term.”

Before considering alternative loans, visit  SmartBiz website for more information about SBA loans. If you’re ready to apply, enter a few details about your business and  you’ll know in about 5 minutes if you’re qualified for a borrower-friendly SBA loan.*

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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