SBA Loan vs. Conventional Business Loan: Which Should You Choose?

SBA Loan vs. Conventional Loan: Making the Right Choice

Financing a business in Dallas often comes down to two primary paths, and the right choice isn’t always obvious. You might be weighing the lower monthly payments of an SBA loan against the speed and simplicity of a conventional bank deal.

At Equipment Financing Dallas Pros, we guide business owners through this fork in the road every single day. The “best” loan is simply the one that aligns with your cash flow goals and timeline constraints.

This guide breaks down the critical differences between SBA-guaranteed financing and standard commercial lending to help you decide.

Understanding the Fundamental Difference

SBA Loans

SBA loans are not actually funded by the government. Instead, they are originated by private lenders (like banks or credit unions) but come with a federal guarantee. The Small Business Administration promises to cover 50% to 85% of the loss if a borrower defaults.

This guarantee incentivizes banks to say “yes” to deals they might otherwise reject. It minimizes their risk, allowing them to offer longer terms and lower down payments to businesses that might not fit strict conventional boxes.

Conventional Loans

Conventional business loans are direct agreements between you and a private lender with no government safety net. The bank assumes 100% of the risk.

Because they are on the hook for the entire amount, lenders enforce stricter credit standards and often require higher collateral coverage. You typically need a stronger financial profile to qualify, but you gain the benefit of less government red tape.

Side-by-Side Comparison

Interest Rate Comparison

SBA Loan Rates

SBA interest rates are tied to the WSJ Prime Rate plus a maximum spread set by the SBA. As of 2025-2026, lenders cannot exceed these maximum spreads for standard 7(a) loans:

• Loans over $50,000: Prime + 2.75%
• Loans $25,000 to $50,000: Prime + 3.25%
• Loans $25,000 or less: Prime + 4.25%

Most lenders will charge the maximum allowable spread. While rates fluctuate with the market, this cap protects you from predatory pricing.

Conventional Loan Rates

Conventional rates are driven entirely by your credit profile and the lender’s internal “cost of funds.”

Riskier loans will see higher rates. A bank might offer a prime borrower 8%, while an online alternative lender could charge 15% to 25% for the same capital. There is no federal cap on these rates, so shopping around is essential.

Rate Analysis

SBA loans generally offer a lower Annual Percentage Rate (APR) for borrowers who don’t have perfect credit or massive collateral. The government guarantee acts as a subsidy, lowering the “risk premium” the bank needs to charge.

Term Length and Cash Flow

SBA Loan Terms

• Working Capital & Inventory: 7 to 10 years.
• Equipment: Up to 10 years (or the useful life of the machine).
• Real Estate: Up to 25 years.

Conventional Loan Terms

• Working Capital: 1 to 5 years.
• Equipment: 3 to 5 years.
• Real Estate: 5 to 15 years (often with a rate reset every 5 years).

Why Term Length Matters (The Balloon Payment Trap)

The biggest advantage of SBA loans is often the structure, not just the rate. SBA loans are “fully amortizing,” meaning you pay off the principal and interest evenly over the life of the loan.

Conventional loans frequently use “balloon structures.” You might have payments calculated on a 20-year schedule, but the full balance comes due in year 5. You then have to refinance or pay it off.

Cash Flow Impact Example: Consider a $500,000 commercial real estate loan.

• SBA 504 (25-year fixed): Payments are spread over 300 months. Monthly cost is lower.
• Conventional (10-year term, 20-year amortization): Monthly payments are higher, and you face a massive lump sum payment at year 10.

Approval Timeline

SBA Loan Timeline

• Application Gathering: 2-3 weeks (Heavy paperwork).
• Underwriting: 2-4 weeks.
• SBA Authorization: 1-2 weeks.
• Closing: 2-3 weeks.
• Total: 45 to 90 days.

Insider Tip: While “SBA Express” loans offer a 36-hour response time from the SBA, the bank’s internal processing still takes weeks. Do not count on SBA funds for next-week emergencies.

Conventional Loan Timeline

• Application: 1-5 days.
• Underwriting: 3-10 days.
• Closing: 3-5 days.
• Total: 7 to 30 days.

Non-bank online lenders can move even faster, often funding within 24 to 48 hours, though usually at significantly higher interest rates.

Timeline Considerations

Speed costs money. If you can wait 60 days, the SBA loan usually saves you thousands in interest. If you have payroll due on Friday, a conventional line of credit is your only realistic option.

Documentation Requirements

SBA Loan Documentation

Be prepared for a “paperwork marathon.” The SBA requires a clear view of your entire financial life to grant that guarantee.

Required items often include:

• SBA Form 1919 (Borrower Information).
• SBA Form 413 (Personal Financial Statement).
• Business debt schedule.
• 3 years of business and personal tax returns.
• Resumes for all owners with >20% stake.
• Life Insurance: The SBA frequently requires you to assign a life insurance policy equal to the loan amount.

Conventional Loan Documentation

Banks still need to verify your health, but the list is shorter.

Standard requirements:

• 2 years of tax returns.
• Year-to-date profit and loss statement.
• Bank statements (3-6 months).
• Proof of collateral.

Documentation Impact

The sheer volume of SBA paperwork is the main reason applicants give up. Working with a packager or an experienced lender can prevent “document fatigue” from stalling your application.

Qualification Requirements

SBA Loan Qualification

• Credit Score: Technically no minimum, but most lenders look for 650+.
• “Credit Elsewhere” Test: You must prove you cannot get reasonable terms from a conventional lender.
• Collateral: The SBA will take a lien on business assets. If those are insufficient, they may place a lien on your personal home.
• Down Payment: 10% equity injection is standard.

Conventional Loan Qualification

• Credit Score: Typically 680 to 720+.
• Cash Flow: Lenders look for a Debt Service Coverage Ratio (DSCR) of 1.25x or higher.
• Collateral: Loans are often strictly collateral-based. If you default, they take the asset.
• Down Payment: Expect to put down 20% to 30%.

Qualification Analysis

SBA loans are ideal for businesses with strong cash flow but weak collateral. Conventional loans are better for businesses with strong assets (like real estate or heavy machinery) and excellent credit who want to avoid government liens on their personal homes.

Flexibility Comparison

SBA Loan Flexibility

Pros:

• No balloon payments.
• Capped interest rates.
• Lower down payments preserve your working capital.

Cons:

• Prepayment Penalties: For loans with terms of 15 years or more, the SBA enforces a 5%-3%-1% penalty over the first three years.
• Use of Proceeds: Strictly monitored. You cannot use funds to pay off debt that causes a loss to the lender.

Conventional Loan Flexibility

Pros:

• Covenants: Often fewer restrictions on how you run the business day-to-day.
• Renegotiation: It is easier to modify terms directly with a bank manager than to get a government agency to approve a change.

Cons:

• Call Provisions: Lenders can sometimes “call” the loan (demand full payment) if your financial ratios slip, even if you haven’t missed a payment.

When to Choose an SBA Loan

An SBA loan is typically the superior choice when:

You Want to Preserve Cash

The 10% down payment (vs. 25% conventional) keeps more money in your operational account for growth.

You Need a Long Amortization

Spreading payments over 10 to 25 years drastically lowers your monthly overhead compared to a 5-year bank term.

You Lack Business Assets

If your business is service-based and lacks heavy machinery to pledge as collateral, the SBA guarantee compensates for that gap.

You Are Buying Owner-Occupied Real Estate

The SBA 504 program is arguably the best commercial real estate financing product available for owner-users.

When to Choose a Conventional Loan

A conventional loan is typically better when:

You Need Speed

If a machine breaks or an acquisition opportunity pops up, waiting 90 days for the SBA is not an option.

You Have Excellent Credit and Liquidity

Prime borrowers can often negotiate rates lower than the SBA maximums without paying the SBA guarantee fees.

You Want to Avoid Personal Liens

Some conventional lenders offer non-recourse financing or won’t require a lien on your primary residence, whereas the SBA is strict about personal collateral.

You Need a Line of Credit

While SBA lines of credit exist (CAPLines), conventional lines of credit are generally easier to manage and renew.

Real-World Scenarios

Scenario 1: Buying Your Office Building

Situation: You want to purchase a $1.2 million warehouse for your distribution business.

• SBA 504 Option: You put down 10% ($120,000). You get a 25-year fixed rate on the CDC portion. Monthly cash flow stays healthy.
• Conventional Option: The bank requires 25% down ($300,000). The rate floats or resets after 5 years.

The Verdict: The SBA 504 wins by saving you $180,000 in upfront cash.

Scenario 2: Emergency Inventory Restock

Situation: A supplier offers a bulk discount on $150,000 of inventory, but you must pay in 10 days.

• SBA Option: The paperwork alone will take 2 weeks. You miss the deal.
• Conventional Option: A bank line of credit or online term loan funds in 48 hours.

The Verdict: Conventional wins on speed. The opportunity cost of missing the inventory outweighs the higher interest rate.

Scenario 3: Heavy Equipment Purchase

Situation: A construction firm needs a $300,000 excavator.

• SBA 7(a) Option: 10-year term. Lower monthly payments help during the slow season.
• Conventional Equipment Loan: 5-year term. Higher payments, but the loan is paid off faster, freeing up credit lines.

The Verdict: Tie. Choose SBA for cash flow, or conventional to build equity in the asset faster.

Making Your Decision

Before applying, ask yourself these five questions to narrow the field:

1. Is speed the priority? (If yes, go Conventional).
2. Is the down payment a hurdle? (If yes, go SBA).
3. Can I risk my personal home as collateral? (If no, look for specialized Conventional).
4. Do I need the lowest possible monthly payment? (If yes, go SBA).
5. How strong is my documentation? (If weak, fix it before applying to either).

Getting Expert Guidance

At Equipment Financing Dallas Pros, we help local businesses navigate these complex choices. Our team can review your financials and tell you frankly which lenders are most likely to approve your request.

Unsure which path is right for your growth? Contact us for a strategy session. We will break down the numbers and help you secure the capital you need.