What Are Conventional and Small Business Administration Loans?

Law Offices of Peter V Lathouris LLC July 22, 2020

Whether you are launching a new business or you are interested in expanding your current business, financing your business goals is probably one of your top concerns. Small business owners and entrepreneurs have several different options when it comes to securing funding for a new business venture. Some of these individuals use their own savings, borrow from their home’s equity, withdraw retirement funds, or even use a credit card to finance the business. However, many people find these options to be too risky and instead choose to take out a loan. Conventional bank loans and Small Business Administration (SBA) loans are two popular options to consider when financing your small business.

Conventional Bank Loans

Conventional loans are the most popular type of lending for small businesses. When a borrower obtains a conventional loan, the bank lends him or her a set amount of money at a fixed or floating interest rate. Payment schedules are negotiable and may involve monthly payments, quarterly payments, or annual payments. The parameters of the loan are based on the bank’s particular policies and the business’s overall credit risk. Typically, the higher a business’s perceived risk, the higher the interest rate. Conventional loans are highly dependent on personal and business credit scores. Young business owners with less credit history may not qualify for a traditional loan.

Small Business Administration Loans

If a business does not qualify for a traditional loan, a Small Business Administration loan may be a good option. SBA loans are backed by the government and involve lenders that participate in the Small Business Administration loan guaranty program. If a borrower defaults on an SBA loan, the SBA will buy back a percentage of the loan from the bank. This percentage generally ranges from 50 percent to 85 percent. The three most common types of SBA loans are:

  • The 7(a) loan program: This program helps fund business startup costs, purchase inventory and equipment, and acquire working capital. 7(a) loans may be used to buy an existing business, launch a new business, or develop your current business.

  • The 504 Loan Program/Certified Development Company program: 504 loans offer long-term, fixed-rate loans for the purpose of expanding or updating a current business. These loans may be used to purchase land, construct or renovate facilities, and buy machinery and equipment.

  • SBA Microloans: The SBA microloan program provides startups and existing small business loans of up to $50,000. These loans may be used for working capital, inventory, equipment, and machinery, plus furniture and fixtures. However, they may not be used to pay existing debts or purchase real estate.

Contact a Stamford, CT Business Law Attorney

Securing financial capital may be the largest hurdle you must overcome to achieve your business goals. The experienced Fairfield County commercial financing lawyers at The Law Offices of Peter V. Lathouris, LLC are equipped to help you understand your financing options and negotiate a loan agreement that sets your business up for success. To learn more, schedule a free consultation by calling our office today.