SBA Loan vs Conventional Business Loan: Which Is Better?

When Dallas business owners come to us looking for financing, they often feel stuck between two very different paths: the government-backed SBA loan or the traditional conventional loan. Both get capital into your bank account, but the “price” you pay for that capital—in terms of rate, time, and paperwork—varies wildly.

You might have heard that SBA loans are “too slow” or that conventional loans are “too expensive.” The truth is a bit more nuanced. With the Prime Rate currently sitting at 6.75% (as of January 2026), the gap between these options has shifted.

We are going to break down exactly how these loans stack up right now, explain the hidden costs most lenders won’t mention upfront, and share a few “insider” shortcuts our team uses to get deals across the finish line.

Understanding the Risk (And the Guarantee)

The fundamental difference here isn’t just about who gives you the money; it’s about who takes the hit if things go wrong.

With an SBA loan, the federal government guarantees a portion of the loan—typically 75% to 85%. If a business defaults, the SBA repays the lender for that guaranteed percentage. This safety net allows lenders to say “yes” to deals they would otherwise reject, such as those with less collateral or slightly lower credit scores.

Conventional loans have no such safety net. The bank takes 100% of the risk. Because of this, they are far pickier. They usually demand higher credit scores, stronger cash flow, and more tangible collateral to offset that risk.

The “Personal Guarantee” Reality

There is one thing you must know before proceeding: Both options will likely require a personal guarantee.

• SBA: It is non-negotiable. Any owner with 20% or more equity must personally guarantee the loan.
• Conventional: While huge corporations can avoid this, small business owners (even established ones) will almost always have to sign one. Don’t assume a conventional loan lets you off the hook personally.

Interest Rates: The 2026 Breakdown

Rates have stabilized recently, but the difference between “good” and “great” can still save you thousands a month.

SBA Loan Rates

SBA rates are strictly regulated. For the popular 7(a) program, lenders are capped at a maximum spread over the Prime Rate.

• The Formula: Prime Rate (6.75%) + Maximum Spread.
• Loans over $350,000: The max rate is typically 9.75% (Prime + 3%).
• Loans under $50,000: The rate can go higher, up to 13.25% (Prime + 6.5%), as these are riskier to service.

The Hidden Gem: SBA 504 Rates If you are buying real estate or heavy equipment, the SBA 504 program is often the winner. As of January 2026, the effective fixed rate for a 25-year term is hovering around 5.85%. That is a fixed rate that often beats even the best conventional mortgage offers.

Conventional Loan Rates

Conventional rates are the Wild West. They depend entirely on the lender’s appetite and your financial strength.

• Traditional Banks: For “A-paper” borrowers, rates currently range from 6.7% to 11.5%. If you have a perfect relationship with a major bank, you might beat the SBA 7(a) rate.
• Online Lenders: Speed costs money. Non-bank online lenders often charge anywhere from 15% to 50%+ APR.

Summary of Rates

Loan Type	Typical Rate Range (2026)	Rate Structure
SBA 504 (Real Estate)	~5.85%	Fixed for 20-25 years
Conventional Bank Loan	6.7% - 11.5%	Fixed or Variable
SBA 7(a) (Large)	~9.75%	Variable (adjusts quarterly)
SBA 7(a) (Small)	11.25% - 13.25%	Variable
Online Alternative	15% - 50%+	Fixed

Repayment Terms and Prepayment Penalties

SBA loans are designed to be cash-flow friendly. They offer some of the longest terms in the industry:

• Real Estate: Up to 25 years (fully amortized, meaning no balloon payments).
• Working Capital / Equipment: Up to 10 years.

Conventional loans are usually shorter. A typical bank term loan for equipment might be 3 to 7 years. For real estate, you often face a “balloon payment” structure—for example, a 20-year amortization where the full balance is due after year 5 or 10. That forces you to refinance later, which introduces future rate risk.

Insider Warning: The Prepayment Penalty

• SBA 7(a): For terms under 15 years, there is usually no prepayment penalty. You can pay it off early to save interest. For terms 15 years or longer, there is a sliding penalty (5%, 3%, 1%) only during the first three years.
• Conventional: Many bank loans carry “yield maintenance” or “breakage fees” that can make refinancing incredibly expensive. Always check the fine print for early payoff fees.

Down Payment Requirements

One of the biggest hurdles for our clients is the “equity injection”—cash you have to put down upfront.

SBA Loans

The SBA is famous for high leverage.

• Standard Deal: 10% down is the norm for real estate and business acquisitions.
• Expansion: If you are expanding an existing business, some SBA lenders can do 0% down if your existing cash flow supports the new debt.

Conventional Loans

Banks want you to have more “skin in the game.”

• Equipment/Business: Expect to put down 20% to 30%.
• Real Estate: 25% to 35% is standard.

If you are buying a $2 million building, the difference between 10% down ($200k) and 30% down ($600k) is $400,000 of working capital that stays in your pocket with an SBA loan.

Qualification: The “1.25x” Rule

Qualification is where the rubber meets the road.

SBA Requirements

It is a myth that SBA loans are for “bad credit.” They actually require decent credit (typically 660+ FICO), but they are flexible on collateral. The most critical number for 2026 approvals is the Debt Service Coverage Ratio (DSCR).

• The Magic Number: Lenders want to see a DSCR of 1.25x.
• What this means: For every $1.00 of loan payment, your business needs to show $1.25 in Net Operating Income.

Conventional Requirements

Banks usually want a higher DSCR (often 1.35x or higher) and stronger secondary collateral. If your business assets don’t fully cover the loan amount, a conventional lender might decline the deal where an SBA lender would use the government guarantee to bridge the gap.

Application Speed: The “Preferred Lender” Shortcut

This is the biggest frustration for borrowers: “SBA takes forever.” It can, but it doesn’t have to.

The PLP Cheat Code Most delays happen because a lender has to mail your file to the SBA for approval. To avoid this, you must work with a Preferred Lender (PLP).

• How it works: PLP lenders have “delegated authority.” They approve the loan in-house on behalf of the SBA.
• The Result: Instead of 90 days, we often see PLP deals close in 30 to 45 days.
• Action Step: When talking to a bank, explicitly ask, “Are you a PLP lender with delegated authority?” If they say no, expect a longer wait.

Conventional loans are generally faster (2-6 weeks for banks, days for fintechs), but a PLP SBA lender can be surprisingly competitive on speed.

Fees: The Manufacturer Advantage (2026 Update)

Here is a massive update for 2026 that few business owners know about yet.

If you are a manufacturer (NAICS codes 31-33), the SBA has waived the upfront guarantee fees for the 2026 fiscal year.

• SBA 7(a): 0% fee for loans of $950,000 or less.
• SBA 504: 0% fee on ALL loans.

For a standard non-manufacturer, SBA guarantee fees can run between 2% and 3.75% of the guaranteed portion. This waiver can save a manufacturing business $20,000 to $50,000 instantly. Conventional loans have origination fees too (0.5% - 2%), but they rarely offer sector-specific waivers like this.

When to Choose Which?

Go with SBA if:

• You want to keep cash: You need the lower 10% down payment.
• You need time: You want a 10-25 year term to keep monthly payments low.
• You are a Manufacturer: The 2026 fee waivers make this a no-brainer.
• You lack hard collateral: Your business has cash flow but few physical assets.

Go with Conventional if:

• You need speed above all: You have a hard deadline in 2 weeks.
• You have massive liquidity: You can easily afford a 30% down payment.
• You have a “Blue Chip” profile: Your credit and assets are so strong a bank will offer you 7% fixed.
• The deal is huge: You need more than the $5M - $5.5M SBA cap.

Expert Guidance Available

Choosing the right loan isn’t just about the rate today; it’s about how that debt sits on your balance sheet for the next decade.

At Equipment Financing Dallas Pros, we help businesses review their numbers against the current 1.25x DSCR requirements and shop their file to both PLP SBA lenders and aggressive conventional banks. We can spot the hidden fees and structure the deal to protect your working capital.

Contact us today to run the numbers and see which program actually saves you money.