Are you weighing a business loan vs a personal loan? Perhaps you’re thinking about a loan from the Small Business Administration (SBA).

What is an SBA loan? 

It’s a loan backed by the SBA.  The lender is not the government. Instead, the government guarantees a portion of the loan amount. Due to government backing, private lenders are more willing to approve business owners.

However, you cannot use SBA loans for personal reasons. Choose a personal loan if you need the money for personal use. You can also use a personal loan for business matters.

This article will explain the best type of loan for you. Let’s explore. 

The Benefits of SBA Loans

SBA loans are ideal if you need capital to sustain your business. Many owners also use business loans to expand business operations. Consider the benefits:

  • A guarantee of up to 80%
  • Interest-rate caps 
  • Lower down payments
  • Lucrative terms (i.e. 10 years for non-real estate loans)

The SBA provides different loan options: SBA 7(a), CDC/504 loans, and microloans. The 7(a) option is the conventional SBA loan program. You can borrow a max of $5 million, but you’ll receive 85% coverage for loans up to $150K. You’ll also receive 75% backing for loans over $150K.

The interest rate depends on your application, but the rate is negotiable. You don’t need collateral for loans under $25K, but the SBA requires collateral for loans over $25K.

The 504 program is for real estate or machinery. Under this program, the SBA secures 40% of the overall project cost. Then, the bank contributes another 50% of the project cost. As the borrower, your contribution amounts to 10%.

You can only use 504 loans if you possess fixed assets in the form of buildings or land. For machinery, you’ll receive approval if you intend to use the equipment long-term. 

The microloan program is similar to the 7(a) program, but it comes with shorter terms and a lower borrowing limit. The borrowing max is $50K, and you can get a six-year term. Regardless of the loan type, all SBA loan types are for business purposes only.

SBA Drawbacks

The SBA could impose collateral requirements before lenders approve your application. Collateral includes personal assets, such as your home or your car. 

  • Example: The bank can place a lien on the home if you have equity. You could lose your home if you fail to pay back the loan. Also, liens can follow you as you move to another home. 

Additionally, pledging collateral could restrict your liquidity.

Further, applying for an SBA loan is a cumbersome process, and you may not receive approval in a timely fashion. Even if you gain approval, you may not receive the desired amount. 

Plus, the SBA option isn’t ideal for upstart companies, as the SBA prefers existing companies with a stable track record. Approved businesses could also be subject to ongoing requirements.

For instance, lenders could stipulate a debt-to-income ratio threshold throughout the lifetime of the loan. If business debts become too high, the bank could demand immediate payment of the entire loan. 

Lastly, you’ll need a credit score of at least 640 to qualify for an SBA loan. The SBA doesn’t have a credit minimum, but many banks impose the 640 minimum.

Benefits of a Personal Loan

There are many personal loan options for applicants with bad credit. This is a solid alternative if you don’t qualify for small business loans.

The credit standards depend on the institution. However, you can get a loan with a credit score of less than 640. Many lenders also welcome all credit types. 

More importantly, personal loans are more flexible than SBA loans. Most personal lenders don’t care how you use the money, as long as you pay the money back within the stipulated terms. Therefore, you’re free to use loans for personal reasons or business reasons.

In addition to business purposes, you can use the loan for the following purposes:

  • Personal debts
  • Car repairs
  • Vacation
  • Medical debts

Also, most personal loans don’t require collateral. This is an attractive option for applicants who don’t have collateral to pledge. Lenders will look at other factors when assessing your personal loan application, such as your debt-to-income ratio or your income. 

Further, you can obtain a personal loan in a speedier timeframe. In many cases, you can receive funding in the next business day. SBA loan processing, on the other hand, can take anywhere from a month to six months.

You’ll also benefit from flexible terms. The terms can range anywhere from a year to seven years. The term depends on the lending standards and your credit. 

Personal Loan Drawbacks

Lenders could attach a high interest to the loan. Plus, lenders don’t cap interest rates on personal loans. Worst case scenario, you could pay a high-interest rate of over 20%. Despite this, you can find a reputable personal lender who won’t charge high rates to low-credit borrowers. 

Higher interest rates make it much harder to pay back the loan in full. In some cases, lenders may penalize you for paying the loan back early, as the lenders rely on interest income throughout the loan term. 

Personal Loan vs SBA Loan: Which is the Right Decision?

A choice between a personal loan or business loan boils down to your needs. Choose an SBA loan if you want lower interest rates and lower down payments. However, you can only use SBA loans for business-related ventures.

A personal loan has no restrictions on how you use the money. With that, personal loans have cons in the form of high-interest payments, especially if you have a low credit score. 

Interested in learning more about loans? Click here to learn more about different loan types. 


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