Comparisons
Business term loan versus the SBA 7(a) loan
On $250,000 the SBA 7(a) costs about $67,000 more in total dollars and $2,314 less every month. Most comparisons get that backwards. Here is the worked math.
The short version. Take the SBA 7(a) if the monthly payment is the binding constraint or you need more than five years to pay it back. Take the conventional term loan if you can carry the bigger payment, you need to close in two weeks instead of two months, or your file cannot pass SBA eligibility. And read the last section, because there is a third structure that beats both.
Nearly every article on this subject says the SBA loan is cheaper. On the interest rate, that is true. On the total dollars you will actually hand over, it is usually false, and the reason is not the rate. It is the term. Ten years of a lower rate costs more than five years of a higher one, every time. Here is the arithmetic that most comparisons skip.
The same $250,000, priced both ways
Assume a business with three profitable years, $600,000 a month in deposits, and an owner at 700. That file gets a conventional term loan at 13 percent over five years, or an SBA 7(a) at roughly Prime plus 3, call it 10.5 percent, over ten years for working capital.
| Conventional term loan | SBA 7(a) loan | |
|---|---|---|
| Rate | 13 percent | About 10.5 percent, Prime plus 3 |
| Term | 60 months | 120 months |
| Monthly payment | $5,688.00 | $3,373.50 |
| Interest paid | $91,280 | $154,820 |
| Up front fees | 2 percent origination, about $5,000 | Guaranty fee about $5,625, closing about $2,500 |
| All in cost | About $96,280 | About $162,945 |
| Cash flow needed at 1.25x | About $7,110 a month | About $4,217 a month |
| Time to close | 3 to 14 days | 30 to 90 days |
| Prepayment penalty | Varies, often none after 12 months | Generally none on terms under 15 years |
| Collateral | Blanket UCC, sometimes specific assets | All available business assets, often real estate |
| Personal guarantee | Yes | Yes, every owner at 20 percent or more |
The SBA loan costs about $67,000 more in total dollars and $2,314 less every single month. Both halves of that sentence are true and most owners have only ever been told one of them. Which half matters depends entirely on whether your constraint is lifetime cost or monthly cash, and for a growing business it is almost always monthly cash.
The break even, stated plainly
The honest break even here is not a dollar figure. It is a cash flow threshold, and it determines whether you even get to choose. Lenders underwrite to a debt service coverage ratio of roughly 1.25x. To clear that on the term loan's $5,688 payment you need about $7,110 a month of free cash flow after existing debt. To clear it on the SBA payment you need about $4,217 a month.
So: between roughly $4,200 and $7,100 a month of free cash flow, the SBA loan is the only one of these two that approves. Below $4,200 neither approves and you are looking at a different product entirely. Above $7,100 you have a real choice, and only then does the total cost comparison mean anything. Run your own number before you decide which one you want, because the market may already have decided for you.
The structure that beats both
Here is the part worth the whole page. An SBA 7(a) with a term under 15 years generally carries no prepayment penalty. That means you can take the ten year loan at the $3,374 payment, then voluntarily pay it on a five year schedule.
Retiring a $250,000 loan at 10.5 percent in 60 months takes a payment of $5,373 a month and produces $72,398 of interest. Add the guaranty fee and you are at about $78,000 all in. The conventional term loan at 13 percent over the same 60 months costs about $96,280 all in. You pay roughly $18,000 less, on a payment that is $315 a month lower, and you keep the right to drop back to $3,374 in any month the business needs the cash.
That optionality is the actual product. A conventional term loan locks you into $5,688 for 60 months whether the quarter went well or not. The SBA loan locks you into $3,374 and lets you volunteer the difference. The only price you pay for that flexibility is 30 to 90 days of process and a document list. Confirm the prepayment terms in your loan agreement before you count on it, because terms of 15 years or more carry a declining penalty in the first three years.
Who each one is actually for
- The SBA 7(a) is for you if your monthly cash flow is tight, if the use of funds has a payback longer than five years, if you are buying a business or real estate, or if you want the option to accelerate later without committing to it now.
- The conventional term loan is for you if you need to close in two weeks, if a seller will not wait 60 days, if your file cannot pass SBA eligibility, or if you would rather not pledge every available asset and personally guarantee alongside every other 20 percent owner.
- The term loan is also for you if the SBA paperwork will genuinely not get done. A perfect product you never complete is worth nothing. See what the process demands in preparing for underwriting.
- Neither if the business cannot produce $4,200 a month of free cash flow after existing debt. At that level the honest answer is a smaller amount, a shorter product, or fixing the operating problem first.
One thing that is not different: both require a personal guarantee, and both will file a UCC. Owners often assume the conventional loan is the more aggressive one on collateral. In practice the SBA lender is required to take available collateral under its collateral policy, and that regularly includes a lien on your home if you have meaningful equity. Read what a UCC filing does before you decide which one feels safer.
What we do with this
Exp Capital Solutions is a broker, not a lender. We do not originate SBA loans or fund term loans and we do not set anyone's pricing. What we do is run your actual free cash flow against both payments before anyone submits anything, so you find out in week one rather than week six which of these two your file will support. When the SBA path is right we will tell you to wait the 60 days, even though a term loan placed this week pays us sooner. Then we show every offer side by side with rate, term, payment, fees, and prepayment terms in the same units.