We are sometimes asked by borrowers why one would choose a SBA loan to fund a business project versus a standard commercial loan or a home equity loan.
We put together this table showing some of the key differences regarding the popular loan options for small business entrepreneurs:
| SBA Loan | Commercial Loan | Home Equity Loan or HELOC | |
|---|---|---|---|
| Eligibility | Small businesses with < 500 employees | Any established businesses | Homeowners with equity in their properties |
| Credit Quality | Medium | High | High |
| Collateral | Not needed but all collateral (personal & business) pledged | First lien on all business assets | Property is used as collateral |
| Personal Guarantee | Yes for all >20% owners | Yes | Yes |
| Interest Rate | Highest | Lower | Lowest |
| Terms | 10 or 25 years | 5 to 7 years most common | Varies but 5 - 10 years the most common |
| Lending Institution | SBA-approved lenders (~ 1K) | Banks and other financial institutions (~10K) | Banks and other financial institutions (~10K) |
| Maximum Amount | $5,000,000 | Any amount | Based on the equity in the property |
| Down Payment | >10% if acquisition | 20%+ | None |
| Closing time | <45 days for express loans; 45 - 90 days for real estate, acquisition, or > $350K | 30 to 60 days. | <30 days |
Even though SBA loans cost more than commercial, mortgage, or home equity loans or lines, , here are the top reasons SBA loans are selected by borrowers:
- No collateral required
- Longer amortization periods
As a result of these two key benefits, SBA loans are wildly popular for business acquisition loans since most small businesses do not have sufficient collateral and borrowers need more than five years to pay back the principal.