Traditional loans are among the most popular choices for small business owners. However, when you consider the number of loan options available, it may be hard to determine what a traditional loan is and if it's the right choice for your business. Understanding the basics about traditional loans, including their potential pros and cons, allows you to make the right choice for your company.
Depending on the purpose of your loan, your business’s credit history, as well as your personal financial history, SmartBiz Bank® may be able to help your business get the funding that it needs.
What is considered a traditional loan?
Traditional loans are any loan that the borrower repays in installments. Small Business Administration (SBA) and bank term loans fall under this umbrella. Generally, traditional loans may be broken up into certain subcategories, including:
- Bank term loans: Bank term loans are small business funding options that the borrower repays in monthly installments. You may obtain them from big-name national banks, local credit unions, and other types of financial institutions. They may require less paperwork and collateral than SBA loans, and they can be used for a wide range of business needs. Bank term loans have fixed interest rates, which means that borrowers don’t have to worry about monthly repayment amounts increasing.
- SBA loans: Unlike bank loans, SBA loans may have repayment periods of up to 25 years. SBA loans are partially guaranteed by the Small Business Administration, and this mitigates some of the risk that lenders face. The three most common types of SBA loans are:
- SBA 7(a) loans: SBA 7(a) loans are widely considered the best traditional loan for small business owners. While there are restrictions on how funds from these loans may be used, they typically have long repayment periods and lower interest rates than many other types of traditional loans. SmartBiz Bank® offers SBA 7(a) loans for business owners throughout the country.
- SBA 504 loans: The benefits of SBA 504 loans are similar to those provided by SBA 7(a) loans. You may qualify for this type of loan if your funding use aligns with the goals of your local community development corporation (CDC). These loans may help business owners obtain long-term financing to purchase real estate or large equipment.
- SBA microloans: These loans are traditionally available to new or very small businesses. The amounts are capped at $50,000, which you may be able to use for working capital, fixtures, furniture, inventory, supplies, machinery, or equipment. They are one of the very few government-backed long-term business loans for those who may have issues with their credit.
Lower interest rates
Traditional loan interest rates are typically lower than other funding options. SBA loans, for example, have lower interest rates and more borrower-friendly terms because the government guarantees a significant portion of them. That reduces the lender’s risk, so they don’t have to charge as much for their loans.
Higher loan amounts
Traditional loan amounts are generally higher than those of other types of loans. This is primarily because of the type of borrower who seeks these loans. Traditional lenders are typically risk-averse, so borrowers with high debt-to-income ratios don’t qualify. This means that lenders may provide larger loans with less risk.
Another reason is that traditional lenders often cater to business owners with higher financing needs. For example, traditional loans are the go-to for commercial real estate purchases, which often involve millions of dollars, while SBA 7(a) loan amounts range from $30,000 to $5 million.
Longer repayment terms
Traditional loans often offer longer repayment periods than other types of loans. Short-term loans usually carry repayment terms of 6 to 18 months. Some traditional loans may have repayment terms of up to 25 years.
Often requires collateral
Traditional loans often require collateral to minimize the lender’s risk. Collateral is an asset that a lender can seize in the event you can’t make the payments on your loan. If you fail to repay your loan, the lender can sell the collateral to pay off the balance of the loan.
Acceptable collateral depends on your loan amount and type. Financial institutions usually accept easily liquidated assets such as stocks, bonds, real estate, company vehicles, and inventory for small business loans. The value of all your collateral assets must be equal to or greater than your loan amount.
Strict application criteria
While the SBA guarantees a portion of these loans, lenders are stricter than ever in 2026. Loan applicants typically need credit scores of 680 or higher to qualify for most types of small business loans. However, that figure may vary between lenders. SmartBiz Bank® generally requires a credit score of 660 or higher. Higher scores let lenders know that you’re more likely to repay the loan.
Lenders may also require businesses to have been in operation for at least two years. This proves that the applicant has invested in the business.
Longer application process
Since the eligibility criteria are so strict, the application process is often longer. Not only do lenders require applicants to provide a great deal of paperwork, including financial reports and detailed plans for the use of funds, but they may also take longer to review these applications. Nowadays, much of this paperwork can be completed digitally, which speeds up the process. However, applicants should still expect a lengthy review process. Fortunately, once the application is approved, funds may appear in your account in as few as seven days.
Who offers traditional loans?
Banks and similar lending institutions typically offer traditional loans. Banks fund term loans and SBA loans, though the government guarantees part of SBA loans to try to ensure that high-value financing is more accessible to the average applicant and that lenders can confidently make more loans.
How do traditional loans work?
Digital applications have made the application process quicker, but it can still be time consuming. However, knowing what to expect may simplify the process. Take a look at the steps that you should expect when applying for a traditional loan.
1. Determine your loan amount and find a lender
The maximum loan amount that traditional institutions will offer a borrower differs among lenders. To determine which financial institution best meets your needs, identify the exact need you seek to fulfill and how much it costs.
2. Gather the required documents
You’ll need several documents to confirm your identity and help lenders determine your eligibility. These are some documents you’ll likely need:
- Personal tax returns. These help the lender ascertain whether you’re fiscally responsible.
- Professional resume. These verify your professional background, which can help banks mitigate any perceived financial risk.
- Personal background statement. This document provides a snapshot of your background. It includes your criminal record, previous names, previous residences, educational experience, and more.
3. Complete an application
After you determine how much capital you need and which lender may be able to provide it, it’s time to complete the application. Proofread your work because mistakes may cause the lender to send the application back to you, prolonging this part of the process.
4. If approved, review the terms
Once your application has been approved, the lender will provide an overview of the exact loan terms, including your loan amount, repayment term, interest rates, and other relevant conditions.
5. Await, obtain, and use your funds
Processing traditional loan funds often takes time. A standard bank loan term can take 2 to 3 weeks to fund, while an SBA loan can take up to 3 months. Once you receive your loan, you can use it for business expenses within the parameters set for the type of loan. For example, you can use an SBA 7(a) loan only for working capital, debt refinancing, or commercial real estate purchases.
Who can get a traditional loan?
Traditional loans are generally for borrowers with an established business or prior business experience, as well as good credit. The SBA works to open traditional loans to small business owners who wouldn’t usually qualify or applicants who want to fund a start up.
Is a traditional loan right for your business?
Traditional business loans are typically a strong fit for established companies with predictable cash flow and a clear plan for using the funds. Businesses seeking larger, long-term investments, such as expanding operations, purchasing equipment, or refinancing existing debt, tend to benefit most from these loans. They typically offer lower interest rates than many alternative financing options, along with predictable repayment schedules and the ability to plan ahead financially.
However, traditional loans may not be ideal for every situation. New businesses or those facing urgent cash needs might find the application process too slow, and lenders often require strong financial histories or collateral for approval. Compared with alternative financing options like lines of credit or SBA microloans, traditional loans usually provide more favorable rates and longer terms but are less flexible and take more time to secure. Evaluating your business’s needs, timing, and risk tolerance can help you determine whether a traditional loan aligns with your growth strategy.
Apply for an SBA loan with SmartBiz Bank®
SBA loans may be a valuable funding source if you qualify. Their higher loan amounts and longer repayment terms may help you affordably achieve your business goals. See if you pre-qualify with SmartBiz Bank® today.
FAQs
How do traditional bank loans work for small businesses?
Traditional bank loans provide a lump sum that businesses repay over a fixed period with interest. These loans are typically offered by banks and credit unions and are used for purposes like expansion, equipment purchases, or working capital. Repayment terms, interest rates, and structures are agreed upon upfront, which helps with financial planning. Lenders evaluate creditworthiness, financial history, and business performance before approving the loan.
What is the difference between a traditional loan and an SBA loan?
A traditional loan is funded and fully backed by a bank or lender, while an SBA loan is partially guaranteed by the U.S. Small Business Administration. This guarantee reduces the risk for lenders, which may make SBA loans more accessible to businesses that may not qualify for traditional financing. SBA loans often offer longer repayment terms and more flexible requirements. However, they may involve a more detailed application and review process.
What are the requirements to qualify for a traditional loan?
To qualify for a traditional loan, businesses typically need strong credit, consistent revenue, and a solid financial history. Lenders often review financial statements, tax returns, and cash flow to assess the ability to repay the loan. Time in business and industry experience can also play a role in approval decisions. Having organized documentation and a clear business plan may strengthen your application.
How long does it take to get approved for a traditional business loan?
Approval timelines for traditional business loans can vary depending on the lender and the complexity of the application. In general, the process may take several weeks, as lenders conduct a thorough review of financials, credit, and supporting documents. Well-prepared applications with complete documentation can help speed up the process. More complex loans or larger amounts may require additional time for underwriting and approval.
