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Applying for an SBA Loan vs. Funding From an Alternative Online Lender

Donna Fuscaldo
Donna Fuscaldo

SBA and alternative loans are two very different ways to fund your business.

There are many options available to small business owners trying to choose the right type of loan to grow their business, and sorting through the various options (and which lender is right for you) can be difficult and time-consuming. 

Having all of the necessary information (and documentation) gathered before beginning the process can eliminate major headaches. To help you navigate the U.S. Small Business Administration (SBA) loan application process, business.com has created a free, downloadable checklist, which you can find at the end of this article.

In addition, we've outlined the steps involved in applying for an SBA loan versus an alternative lender as well as the pros and cons of each option to help you decide which is right for you when considering all your financing options.

What is an SBA loan?

An SBA loan is guaranteed by the U.S. Small Business Administration; SBA loans tend to offer more flexible limits and repayment terms and lower interest rates than conventional bank loans. The SBA does not provide small business lending. Instead, they guarantee a business loan provided through an SBA-preferred financial institution or preferred lender. (If the borrower defaults, the government will pay back up to 85% of the loan.)

It's often difficult to qualify for an SBA loan, so you should take steps to ensure that you and your business are prepared by checking first that your personal and business credit scores are up to par. 

Applying for an SBA loan can be a complicated and involved process, particularly compared to seeking a loan from an alternative online lender. The SBA provides an overview of what to expect when you embark on the business loan application process. 

What is an SBA 7(a) loan?

If you decide to apply for an SBA loan through a bank, you will likely apply for a 7(a) loan, one of the most popular SBA loan programs.

One of the reasons 7(a) loans are so popular is that they provide a guarantee against default. Lenders may be more forgiving if your business has less than perfect credit or a lack of cash flow history. However, lenders are not required to accept 7(a) loans.

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What you need to apply for an SBA loan

The SBA has a lengthy checklist of required documents. Here are the steps to get the process going:  

  1. Be ready to provide personal background and financial statements, including a statement of personal history (SBA Form 912) and a personal financial statement (SBA Form 413). You'll need to write up a business overview and history, in which you explain the story of your business and its challenges, with an explanation of why the SBA loan is needed and how it will help the company grow.

  2. You'll need to prepare your business's financial statements. The first of these is a profit and loss (P&L) statement current within 90 days of your application, as well as supplementary schedules from the last three fiscal years.

  3. Put together financial statements that consist of a one-year projection of income and finances. As an applicant, you must attach a written explanation of how you plan to reach your revenue projections. Your loan application history is also relevant to the SBA, so you should include records of loans you have applied for in the past. Your application must also include the names and addresses of any business subsidiaries and affiliates. Provide resumes for all the business principals, as well as income tax returns.

  4. Gather and include three years' worth of signed personal and business federal income tax returns of your business's principals. You'll need to provide your business certificate or license, too. If your business is a corporation, stamp your corporate seal on the SBA loan application form.

  5. Don't forget to include a copy of your business lease or a note from your landlord stating the proposed lease terms.

Because the application for this loan program is lengthy and involved, it's best not to tackle it in a day or two. Work on one item of the SBA 7(a) application checklist at a time. Enlist the help of your bookkeeper or accountant. Pay attention to details and don't rush it. The SBA is trying to make the process easier these days with SBA Express and SBA Lender Match, so spend some time familiarizing yourself with these new options before you begin.

TipTip: Before you start filling out the SBA loan application, gather all the necessary paperwork. The more you have at the ready, the easier the process will be.

What is the maximum SBA 7(a) loan amount?

You can apply for an SBA 7(a) loan of up to $5 million, with an SBA loan guarantee of 75%. For loans up to $150,000, the SBA guarantees 85%. Interest rates are based on the size of your loan, the prime rate and the loan maturity. The terms are 25 years for real estate and equipment, and seven years for working capital. You make monthly payments until the loan is paid off.

How long does it take to get an SBA 7(a) loan?

Applying for an SBA 7(a) loan is a long and difficult process. As a business owner, plan to spend about 25 hours between preparing the documentation and filling out the loan application, and expect to wait anywhere from two to three months for your application to be approved. Approval time varies based on your situation and your lender.

SBA 7(a) loan eligibility requirements

To be eligible for an SBA 7(a) loan:

  • Your business must be defined as a small business by the SBA.
  • You must be operating for profit in the United States (or its possessions).
  • You must be able to invest in your business.
  • You are able to repay the loan.
  • You are able to prove that the loan is for a sound business purpose, such as equipment purchases. ­­
  • You must not be delinquent on other debt obligations to the U.S. government (e.g., student loans). 

How to apply for an SBA 7(a) loan

To speed up the process of getting an SBA loan, follow these two steps: 

1. Gather your documents.

Start by ensuring you have all the required documents, primarily your personal financial statement and a business plan with financial statements. You will then fill out SBA Loan Application Form 1919.

2. Check your credit score. 

Next, check your personal and business credit scores before you get too deep into the loan application process, because the entire process could be derailed by bad credit.

"Most entrepreneurs don't realize that if they apply for an SBA 7(a) loan for $350,000 or less, their business and personal credit will be prescreened to calculate a FICO LiquidCredit SBSS small business score," said Gerri Detweiler, education director at Nav.

This credit score ranges from 0 to 300, and a minimum score of 140 is required to pass the SBA loan requirements. "Just as it's a good idea to review your personal credit scores before you apply for a mortgage or car loan, it's a good idea to check your FICO SBSS score before you apply for an SBA loan," Detweiler said. "If it's not strong enough, it's advisable to work on building better credit before you apply." 

What is an alternative loan?

An alternative loan, also known as a nonbank business loan, is a loan that is issued outside of a bank. Many small businesses use alternative loans when they cannot qualify for a conventional business loan or SBA loan. Alternative loans are available via financial groups, nonprofits, community groups and individual investors. Peer-to-peer lending, the practice of lending money to businesses through online matching services, is a popular option. [Read related article: Small Business Guide to Alternative Lending]

Alternative loans from online lenders have become popular for their accessibility and ease of use, and there is a steadily increasing number of providers for these loans.

Types of alternative loans

Alternative loans encompass a variety of lending types. These are some of the most popular: 

  • Merchant cash advance: With this type of loan, a lender offers you a cash advance on your sales in exchange for a portion of your future credit card sales. You get access to credit quickly, sometimes within one day, and then pay it back as a percentage of your daily credit card sales.

  • Equipment financing: This type of financing is used to cover the cost of expensive business equipment. The collateral is the equipment being financed. Equipment financing is easy to obtain, given the lender gets the equipment if you default.

  • Invoice financing: With invoice financing, you get an advance on unpaid invoices. Typically, a lender will advance you as much as 85% of the value of your unpaid invoices. Once the customers pay up, you'll get the remaining 15%, minus fees the lender charges.

  • Lines of credit: A line of credit is a fixed amount of money you borrow that can be drawn from on a need-to-use basis. You pay interest only on what you borrow.

  • Short-term loans: Used to meet near-term goals, short-term loans typically have repayment terms of three to 18 months. They can be used for working capital or to cover one-time costs.

  • Installment loans: With an installment loan, you get a lump sum of money that you have to make regular payments on until it is fully paid off. These loans typically have fixed interest rates. They are most commonly used to purchase real estate, vehicles and business equipment.

  • Microloans: These are small loans, typically maxing out at $50,000. Some have repayment periods that last just a few months. They are aimed at startups and business owners that banks would turn down. 

Bottom LineBottom Line: There are abundant opportunities for alternative loan products, from short-term loans to equipment financing. Don't let the number of choices overwhelm you; think about why you need the money, how soon you need it, and what you are willing to pay for access to it. Then select your loan type.

What you need for an alternative online lender loan

Applying for a loan through an alternative online lender is a faster, easier option than applying for an SBA loan. Generally, only three or four documents are required, and the process can take minutes instead of days. It's possible to get your funding in under 24 hours.

Alternative loans offer multiple creative options for small businesses, such as invoice financing and lines of credit, which can be helpful depending on your business's unique needs.

As an example, here's what you'll need in terms of documentation should you choose an alternative lender:

  • Bank statement (two months of recent statements)
  • Voided check
  • Proof of valid ID showing you are over 18 years of age

Because only three documents are required, you can complete the online application and upload the required documents in as little as five minutes. [Want more details about the best business loans and financing options? Check out our reviews and best picks.]

However, interest rates for alternative loans are usually higher than traditional bank loans. Further, rates vary depending on the lender and your credit score.

Also, compare APRs, or annual percentage rates, among the lenders you are considering, and be sure that you understand your loan repayment terms. Free calculators can help you, and you can use the free downloadable template below as a reference.

SBA loan vs. alternative loans

SBA and alternative loans both serve an important purpose in supporting business owners, but there are vast differences between the two. From speed to cost, here's a look at the pros and cons of both loan types. 

SBA loans

SBA loan prosSBA loan cons
SBA loans charge less in interest than alternative lenders. As of April 2021, the maximum interest rate on an SBA loan is 8%.SBA loan applications are complicated and can take a while to fill out.
SBA loans have longer terms, ranging from 10 to 25 years. That makes the monthly payment much smaller.SBA loans require more paperwork than alternative loans.
These loans are more flexible, offering different repayment options if you find yourself struggling financially.The approval process can take weeks with an SBA loan.

Alternative loans

Alternative loan prosAlternative loan cons
Lenders are willing to work with borrowers with challenged credit.The interest rates on alternative loans are higher than SBA loans.
Loans can be in your bank account the same day as approval.Some alternative lenders tack on fees. It's important to work with a reputable lender that is transparent about its pricing and terms.
Alternative lenders do not need you to fill out a lengthy application and provide reams of documentation.Prepayment discounts aren't available with some of the alternative lenders.

Kiely Kuligowski contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

Image Credit: Wasan Tita / Getty Images
Donna Fuscaldo
Donna Fuscaldo
business.com Staff
Donna Fuscaldo is a senior finance writer at business.com and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Foxbusiness.com. Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining business.com. Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at business.com include business loans, accounting, and retirement benefits.