Financing is an essential part of any business, and the Small Business Administration offers various types of loans to help small businesses thrive. SBA loans, like conventional loans, generally boast low interest rates, but understanding the other differences between the two types of loans will help you decide which you should apply for.

What Is a Conventional Loan?

Small business loans are provided by financial institutions such as banks and credit unions to help start-up companies get off the ground or established businesses do renovations, acquire equipment, or handle other business expenses. A lender will provide a lump sum, and you will pay them back incrementally along with interest and associated fees. The cost of lending depends greatly on your financial health, and a bank will measure your risk via your credit score, which should typically be at least 650. The higher your credit score, the less risky you will seem.

What Is an SBA Loan?

SBA loans are backed by the federal government, which lowers the risk for the lender and allows them to provide you with more flexible terms. There are three main types: 7(a), 504, and microloans. Microloans are for small loans ranging between $10,000 and $50,000. 504 loans, which are typically used to purchase equipment, acquire property, or finance upgrades, are fixed-rate loans with terms going up to 25 years. 7(a) are the most popular SBA loan available. Like with conventional loans, the interest rate depends on your financial health.

How Are They Different?

SBA loans have low interest rates that generally cap at around 8%. Additionally, they offer longer, more flexible terms and have less stringent eligibility requirements. Because SBA loans are more accessible to borrowers with less-than-ideal financial health, the documentation required is far more extensive. Financial records, resumes, and business plans may all be necessary pieces of your application. Additionally, because these loans are federally regulated, the paperwork process is more complex, which leads to longer approval times than with conventional loans. In many cases, it can take up to 120 days before you receive funding.

If you need financing for your small business, make sure you understand the differences between an SBA and a conventional loan. A conventional loan may be suitable for a business that needs money quickly and is in good financial standing, but if you can manage to be patient, an SBA loan may be the best option for you.