SBA Loans and Commercial Loans: What's the Difference?

SBA Loans and Commercial Loans: What’s the Difference?

Need money to bridge the gap between your business idea and entrepreneurial reality? A business loan might be the next stop if you’ve got a solid plan and some, but not all, the funds you need to get up and running. Business loans from banks generally break down into two categories: Commercial or conventional, which are backed by the bank; and SBA, which are insured by the U.S. Small Business Administration.

A “small business” is one defined as an enterprise with fewer than 500 employees that makes less than $5 million in taxable net income, with a net worth of less than $15 million. In order to get a loan, businesses need “skin in the game”— some kind of funding source that is typically from personal savings, other business profits or assets, credit cards, or a personal asset, such as a savings account or property. Loans can be used, for example, to buy equipment or real estate, make payroll and purchase inventory.

Loan amounts can range from less than $5,000 to more than $1 million, but most generally fall in the $10,000 to $250,000 range for firms with employees. And 39.5 percent of one-person businesses take out less than $5,000.

How do the loans compare?

Commercial and SBA loans both originate at a bank. Usually, when you apply for a loan, your lender will let you know if you’re qualified based on your credit and business history, the amount requested, and the viability of the business.

Some banks may be able to offer more flexible and favorable terms on SBA loans for qualified buyers. For example, at BBVA Compass, veterans who own 51 percent or more of a business can have loan fees waived, which can add up to tens of thousands of dollars.

The bank also offers programs that can bundle different aspects of the business into one SBA loan, says Rosaline Aguirre Fletcher, SBA sales manager for BBVA Compass.

“For example, on real estate, instead of putting 20 percent cash down, we would only be asking for 10 percent cash down. So an SBA loan is an advantage to a small business owner for them to be able to preserve cash, either to have it available for their business needs, or for their personal needs, and be able to build up a coffer to help build their business wealth, and not put all their business wealth into an asset like real estate or equipment,” says Aguirre Fletcher.

The loan terms might also be different. “Our [SBA] terms are longer than conventional terms that the other side of the bank would be offering, so instead of doing a real estate loan on 15 or 20 years, we’re able to do it at 25 years, so the actual monthly payment is smaller,” she says. “Then of course that contributes to their monthly cash flow and enables them to save more money.”

According to the SBA, the interest rate of a loan can vary widely. Short-term commercial loans can have higher interest rates (up to 45 percent over four months), as do credit cards (around 13 percent). But usually, interest rates for SBA and commercial loans can be anywhere from 3.99 percent to 6 percent, depending on credit and the way the money will be used, Aguirre Fletcher says.

The one advantage a commercial loan might have over an SBA loan is fewer fees, Aguirre Fletcher says. As with any other kind of major financial transaction, it pays to shop around for the best interest rate that suits your needs. She says if there’s ever a question, ask your lender to sit down and show you the math so you can make the best decision for yourself and your business.

Vanessa McGrady

About the Author


Vanessa McGrady is an award-winning communications expert skilled in creating content for national publications, Fortune 200 corporations and small businesses.

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