Business Loan Types Compared

Understanding the True Cost of Borrowing

The interest rate alone does not tell you the full cost. Origination fees (1-5%), SBA guarantee fees (2-4%), and other closing costs increase the effective APR. A loan advertised at 9% with a 3% origination fee effectively costs 10-11% when you account for fees. The calculator shows the effective APR including all fees.

SBA Loans vs Conventional Business Loans

Not all business loans work the same way. The three most common options — SBA 7(a), SBA 504, and conventional term loans — differ in rates, collateral, processing time, and maximum amounts. Picking the wrong type costs thousands in unnecessary interest or months of wasted time.

SBA 7(a) Loans

The SBA 7(a) is the most flexible government-backed option. Maximum loan amount is $5 million. Rates are variable, tied to the Prime rate plus 2.25-2.75%, currently landing in the 10-13% range. Terms go up to 25 years for real estate and 10 years for working capital or equipment. The SBA guarantees 75-85% of the loan, which reduces lender risk and enables lower down payments (as low as 10%). Collateral is required but the SBA will not decline a loan solely for lack of collateral if other factors are strong. Processing time: 30-90 days through traditional banks, 2-3 weeks through SBA Preferred Lenders.

SBA 504 Loans

SBA 504 loans are designed specifically for major fixed assets — commercial real estate or heavy equipment. The structure splits the loan: a bank covers 50%, a Certified Development Company (CDC) covers 40% (the SBA-backed portion), and the borrower puts down 10%. Maximum SBA portion is $5.5 million. Rates on the CDC portion are fixed and typically 1-2% below SBA 7(a) rates. The catch: you cannot use 504 loans for working capital, inventory, or debt refinancing. Processing takes 60-90 days minimum because both a bank and a CDC must approve the deal.

Conventional Term Loans

Conventional bank loans skip the SBA entirely. Rates range from 7-12% for strong borrowers with 2+ years in business, good credit, and solid revenue. No guarantee fee (saving 2-4% upfront), and processing is faster — typically 2-4 weeks. The tradeoff: banks require stronger financials, higher down payments (20-30%), and full collateral coverage. Maximum amounts vary by bank but generally cap at $1-5 million for small businesses. If you qualify, conventional loans cost less than SBA loans after factoring in guarantee fees.

Understanding Effective APR

The interest rate on your loan agreement is not the true cost of borrowing. Fees charged at origination reduce the amount you actually receive while keeping payments the same, which increases the real annual percentage rate. Every business owner should calculate effective APR before signing.

Origination fees on business loans typically range from 1-3% of the loan amount. SBA guarantee fees add another 2-3.75% on loans over $150,000. Closing costs — appraisals, legal fees, title search, environmental review — add $2,000-$10,000 depending on loan size and type. These costs are either paid upfront or rolled into the loan balance, and either way they increase what you actually pay.

That 10% rate became 12.5% once fees were included — a 25% increase in the true cost. On a $250,000 loan over 10 years, the difference between 10% and 12.5% effective APR means roughly $18,000 in additional cost. Always ask lenders for the full fee schedule and calculate the effective APR before comparing offers. The calculator above does this automatically when you enter fees.

What Lenders Look For

Business loan approvals hinge on five factors. Understanding them before you apply saves time and increases your odds of getting funded at the best rate.

Debt Service Coverage Ratio (DSCR)

DSCR measures whether your business generates enough income to cover loan payments. The formula is simple: net operating income divided by total annual debt payments. Most lenders require a minimum DSCR of 1.25x, meaning your business earns $1.25 for every $1.00 in debt payments. SBA lenders may accept 1.15x for strong applications. A DSCR below 1.0x means you cannot cover payments from business income — an automatic decline.

Personal Credit Score

For SBA loans, most lenders require a personal credit score of 680 or higher from all owners with 20%+ stake. Conventional bank loans typically want 700+. Online and alternative lenders may accept scores as low as 600 but charge significantly higher rates — often 15-30%. A score above 750 gets you the best available rates and fastest approvals.

Time in Business and Revenue

SBA loans require at least 2 years in business for most applicants, though startups can qualify with strong personal credit and a solid business plan. Conventional lenders typically want 2-3 years of operating history. Revenue requirements vary, but most lenders want to see at least $100,000-$250,000 in annual revenue for loans over $100,000. Lenders will review 2-3 years of tax returns and 3-6 months of bank statements to verify income stability.

Frequently Asked Questions

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