Nearly one-in-two small businesses (46%) surveyed by CNBC and Momentive say they expect revenues to grow next year. And to fund some of the growth or take advantage of conditions for increased profits, small business owners continue to borrow.
“Even seasoned business owners may seek loans to increase capital,” says Brogan Ptacin, Executive Vice President, Head of Commercial Banking at Byline Bank. “And while no loan is better than another, there are certain situations where one is a better fit for each specific business.”
Below, we outline the key differences between SBA loans, conventional loans and business lines of credit so you can make an informed decision as you seek to strengthen your company.
SBA (Small Business Administration) loans have become a popular way for growing businesses to facilitate funding. SBA loans are especially valuable when business owners cannot secure funding from other sources. They come with the benefit of interest rate caps, longer loan amortization and the ability to access capital with less equity than a conventional loan.
“SBA loans allow borrowers to receive necessary funding with less money down and a higher loan-to-value requirement, which are attractive benefits,” says Michael Adams, Senior Vice President, SBA Sales Manager at Byline Bank. “Whether they’re going through an acquisition or expanding their already established business, SBA loans bridge any financial gaps without restrictive financial covenants.”
There are a few types of SBA loans to consider, depending on the amount a business owner desires to borrow and how quickly they need cash.
One of the most common SBA loans is the SBA 7(a) loan, typically used for business acquisition, expansion or refinance. Under this loan, you can borrow up to $5 million, with the average term between 10 and 25 years, resulting in lower loan payments. Loans are based on cash flow analysis, rather than hard assets, and have variable- and fixed-rate options.
SBA 504 loans are geared toward small businesses looking to finance commercial real estate, large equipment or land acquisitions, or expand or improve existing buildings. With SBA 504 loans, the borrowing business’s net worth cannot exceed $15 million, and borrowers must meet other eligibility requirements.
SBA 504 loans are structured differently than other SBA loan programs by sharing costs with Certified Development Companies. This means that, for the average SBA 504 loan, the borrower contribution may only be 10% of the project cost.
Though the borrowing limit of an SBA Express Loan is $500,000, borrowers can expect a speedy process (often securing the loan in less than two days). The SBA protects 50% of an Express Loan, which can lead to a higher borrowing rate.
Conventional loans are typically issued by a bank or traditional financial institution based on the lender’s underwriting guidelines and criteria. Conventional loans can be used for larger loan amounts and typically have faster funding and a more streamlined application process than SBA loans.
The dynamic between a borrower and lender is individualized, ensuring that small business owners can expect a relationship-based lending experience, as they would with an SBA loan. With a conventional loan, if a borrower has a positive track record with their bank, they might be more likely to secure a loan with a reduced interest rate from that lender.
“It’s our job to holistically understand the business owner’s situation, value proposition and ability to repay the loan,” says Ptacin. “Though conventional loans are best fit for businesses with an established operating history, it’s our responsibility to ensure every borrower has an industry-specialized experience that offers long-term confidence.”
A line of credit may be a valuable means of obtaining capital for a small business that needs funding quickly. Whereas some borrowers look to SBA or conventional loans for singular purchases or investments, lines of credit allow businesses to cover common expenses or simply improve month-to-month cash flow.
“Lines of credit are unique in that they serve as a pool of money owners can pull from when they need it most,” notes Adams. “They can quickly access capital and repeatedly draw funds after repaying the amount borrowed from the credit line while only paying interest on the amount used.”
Like with any loan, interest rates, the amount of funding available and repayment terms all depend on the health and history of your small business.
Which loan is right for you depends on many different factors, such as the amount you need, the timeframe of the loan and whether you have an established track record of borrowing and paying back.
“Regardless of where owners are in their business journey, responsiveness and open communication from their lender is what makes or breaks a long-term lending relationship,” says Ptacin.
In the process of building up and expanding your business, you will need to identify a strategy that fuels your growth. To learn more about conventional loans, business lines of credit, or SBA loans with a top 5 Preferred Lending Partner, connect with a Byline conventional lender or Byline SBA lender today.
At Byline, we take the time to get to know your business. Whether you’d like to improve cash flow, expand operations or update equipment, our team can customize financing and treasury solutions to help. Learn more about our conventional loans and SBA loans today.