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What’s the Difference Between Short-Term Business Loans and SBA Loans?

Posted by Mulligan Funding Blog Team on June 11, 2015

short term business loansComing to the realization that you need additional business financing in order to cover an expense or take advantage of an opportunity is usually fairly straightforward. However, wading into the lending marketplace and trying to make sense of the various products and vehicles can be both confusing, and a little bit intimidating. A short term business loan may be just the answer.

After all, you’re an expert in running your small or mid-sized business -- not a financial wizard! And even if you have some background or knowledge in the lending industry – perhaps due to previous personal or business loans – the fact is that you don’t have time to head back to school and enroll in “Business Loans 101”.

Fortunately, you don’t have to be a money guru to get the basic information you need on different business financing options. In this article, we’ll focus on the difference between short-term business loans and SBA loans. 

An Overview of Short-Term Business Loans

A short-term business loan, as you might imagine from the name, is typically intended to meet immediate or short-term needs such as: purchasing inventory in advance of a big promotion, making emergency repairs to equipment, or taking advantage of unexpected revenue and profit opportunities. There are essentially two types of short-term business loans: conventional short-term bank loans, and working capital loans.

A conventional short-term bank loan is (obviously) provided by your bank. The application process is typically long and there is an extensive paperwork burden. Furthermore, banks definitely want to know exactly what the funds will be used for.  For example, if the loan is earmarked for equipment repairs, then that plan can’t change even if a better use of the money emerges -- such as the unexpected opportunity to purchase inventory at a deep discount. And on top of this, business owners with a less-than-great personal or business credit score are unlikely to be approved in the first place. 

If and when a conventional short-term bank loan is approved, it is paid pack each month via a fixed lump sum amount. There is also no option to pay the loan back early in order to save on interest. The loan is also reported to all three credit bureaus, and must be backed by collateral.

A working capital loan on the other hand is far more flexible and versatile. The application process is streamlined, and a decision is typically rendered within 48 hours. What’s more, once the funds are forwarded they can be used for any purpose that a business owner wishes. Since “timing is everything” in the world of small and mid-sized businesses, this freedom can be invaluable.

A working capital loan is paid back by having a small, fixed amount automatically deducted on a daily basis. This avoids having to grapple with a large loan repayment bill each month. Furthermore, the funds can be paid back early if desired in order to save on interest. There is no pre-payment penalty of any kind, nor is the loan reported to credit bureaus or backed by collateral.

An Overview of SBA Loans 

SBA loans are facilitated by banks, but backed by the Small Business Administration, which is a federal agency mandated to help entrepreneurs grow and develop their small businesses. Aside from business financing, the SBA provides education, networking opportunities and contracting opportunities.

There are a multitude of SBA loan programs available. Each has very specific qualifying criteria and application rules. For example, a typical SBA loan requires that applicants submit financial statements, business plans, personal and business credit reports, a resume, and several other documents. Failure to submit all required documents will lead to an application being delayed or rejected.

Ultimately, SBA loans need dual approval from both the SBA and the bank that is facilitating the loan. As a result, the application process is excessive and often takes months. As a result, this is categorically not a viable option for business owners who need financing in the short-term.  

Learn More About Working Capital Loans 

At Mulligan Funding, we believe that in a head-to-head comparison of conventional bank loans, working capital loans, and SBA loans, the best short-term business financing option for most small and mid-sized businesses is working capital loans. 

To learn more about this beneficial and popular business financing option, contact our experts today. We’ll provide you with honest, objective information to help you make a decision that’s best for your business now and into the future!

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Topics: Small Business, Business Loans