Conventional Loans

How is it different from an SBA loan?

Starting a business?



What is a Conventional Loan?

The majority of business loans are either SBA or Conventional loans.  SBA loans are made directly by lenders and are guaranteed by the government reducing the risk to the lender in the event the loan goes into default.  Conventional bank loans are not guaranteed by the government and typically provide financing for established businesses rather than startups.  However, the conventional loan can finance a wider range of businesses that do not qualify for an SBA loan.  The conventional loan can be a valuable source of funds for those businesses and properties including non-owner-occupied commercial properties, investment properties, and other passive income investment properties such as apartments, rental properties, etc.



Conventional loans provide short-term, intermediate and long-term funding with fixed and variable rates and Loan to Value (LTV) or Loan to Cost ranging from 70% to 85% of the hard assets.  The rates may be lower than SBA loans and vary between each lender.  The rates and terms depend on the overall credit risk of the businesses applying for the loan.  Loan terms can range from 3 to 20 years for the fixed or variable rate.   In addition, the loan term may be fixed for a set number of years and reset at the end of the term to a fixed rate or a variable rate, or they may have a balloon payment.  The prepayment penalty on each rate structure and term is factored into the overall loan.  An origination fee in the amount of 1% of the loan amount may be charged by the lender.



The downside to a conventional loan is that they require higher business and personal credit scores and typically provide funding for well-established businesses.   Since there are numerous variables and combination of terms and rate structures, it is best to compare the different terms offered by several conventional lenders to determine which commercial loan offer best fits the financial requirements and goals of the business.

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