SBA Loans For Startups: Types, Terms, & How To Apply

Your startup is off the ground and you’re ready to make your next move, but you need funding — or maybe you have a fantastic idea that will completely shake up your industry, and you’re anxious to get your project rolling. Whether you’re in the early stages of setting up a new business or you need a boost to get started, financing is a necessity. However, when lenders look at you, they don’t see the “next big thing.” Instead, they see just one other big thing: risk.

Startups are viewed by lenders as bigger risks than established small businesses, but don’t give up just because you think funding isn’t available. Although it may be more difficult to obtain startup unsecured business loans, it isn’t impossible. With SBA loans for startups, you’ll have access to the financing you need without high interest rates and unfavorable terms.

Ready to grow your business or find government loans to start a business? Read on to learn more about the loan options that can take your startup to the next level.

How Can The SBA Help My Startup?

The Small Business Administration was established to provide small business owners with the resources they need to successfully operate their own businesses. In addition to training and advocacy, the SBA offers loan programs that give business owners the money they need for anything from acquiring a business or franchise to hiring new employees to funding equipment purchases.

The SBA helps all small businesses, including startups. It’s no secret that startups are viewed as riskier endeavors. Whereas established businesses have proof of their success in the form of financial statements, tax returns, and other documents, startup owners are reliant on their business plans and industry experience. After all, the idea behind a startup may be a game-changer, but it isn’t yet proven—at least not in the eyes of a lender.

The SBA offers different loan programs than you’ll see elsewhere. In fact, funding isn’t distributed directly through the SBA. Instead, they have established several loan programs targeted at small businesses and startups through intermediaries — think banks, private lenders, and even non-profit organizations. The SBA has outlined a set of standards for each program; because the administration backs these loans, there’s less risk for lenders – and more funding opportunities for you.

These standards keep interest rates low and terms flexible. SBA loans are designed to help businesses grow and/or stay above water (as opposed to drowning in debt).

Types Of SBA Funding For Startups

The SBA doesn’t offer funding that is specific to just startups. Instead, new businesses can qualify for many of the programs that are used by established businesses. Most of the SBA loan programs don’t have a requirement for time in business. However, it is important to note that you will have to find an intermediary that works with startups once you’ve evaluated your options and selected the type of loan that works for your business.

Microloans

The first resource for startups that need smaller loans should be the SBA Microloan program. Under this program, small businesses can receive up to $50,000 from a non-profit intermediary. On average, the typical amount funded through the Microloan program is $13,500.

Microloans are available to startups provided that they are for-profit businesses and have a solid business plan. Interest rates vary by lender, ranging from 6.5% to 13%. The average typically falls on the lower side at approximately 7.5%. The maximum maturity for a microloan through the SBA is 6 years.

Fees may be required by the intermediary to receive a microloan. Intermediaries can charge between 2% to 3% of the loan amount for packaging fees. Additional fees to close the loan, including recording fees, collateral appraisals, and credit reports, may also be passed on to the borrower.

The SBA limits how the funds from microloans are used by the borrower. Loan disbursements can be used to purchase materials, furniture, supplies, inventory, and other necessary items for the startup. The money can also be used as working capital. Funds can not be used to purchase real estate or to pay off or refinance existing debt.

The SBA Microloan program is a great choice for any startup that needs working capital or to purchase equipment that will help expand the business or get a project off the ground. However, startups that need more capital or don’t want as many limitations on how they spend their funding will be better served by another SBA loan product. If microloans seem to fit your needs, learn more before connecting with a lender.

Standard 7(a) Loans

The SBA 7(a) program is the most popular choice for most startups and small businesses because of the flexibility it offers.

Startups can receive up to $5 million in funding through the 7(a) loan program. In addition to having access to higher loan amounts, borrowers will also have more flexibility in how they can use the funds. Standard 7(a) loans can be used for equipment or inventory, the purchase of property, refinancing debt, renovations, or other purposes.

Under this program, payment terms vary depending on how the loan proceeds are used and the borrower’s ability to repay the loan. For real estate purchases, the maximum repayment term is 25 years. If the proceeds are used for equipment financing, inventory, or working capital, repayment terms are set for a maximum of 10 years. Interest rates vary but remain very competitive at 7.25% to 9.75%. Borrowers can also expect to pay up to 3.5% for guaranty fees, and a down payment may be required with the purchase of real estate or equipment. Find out more about the terms, rates, and eligibility of SBA 7(a) loans.

The long repayment terms, low interest rates, and overall flexibility make this a top choice for many startups and small businesses. That said, 7(a) loans can take a while to be processed and funded — a potentially major drawback for business owners who need cash fast. Potential borrowers can expect to wait a minimum of 30 to 90 days to get through the entire process from application to funding. Startups that require money sooner should consider other options, such as peer-to-peer lending or another source of funding.

Borrower requirements: • In business at least 2 years • Owner’s personal credit score is 650 or above • Business credit score is 150 or above

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SBA Community Advantage Loans

A startup that doesn’t meet the eligibility criteria for the standard SBA 7(a) loan should consider applying for the SBA Community Advantage program. This program offers very similar rates and terms to the traditional 7(a) program with just a few minor differences.

One of the most significant differences is the maximum amount that can be borrowed through this program. Borrowers can receive up to $250,000 with an SBA Community Advantage loan. The identical guidelines from the 7(a) program apply for how the money is spent. It can be used to purchase another business, finance equipment, or for just about any business purpose. Interest rates for these loans are comparable to those set forth by the lender based on SBA guidelines.

While the lowered maximum loan amount is a drawback, this program can be extremely beneficial for startups. This is because Community Advantage loans are designed for underserved communities, such as low-income areas. However, startups are also qualified to receive these loans. Businesses that have been operating for two years or less that have been disqualified from other loans may receive a Community Advantage loan if all requirements set by the SBA have been met.

SBA Express Loans

Another SBA product similar to the standard 7(a) loan is the SBA Express Loan program. This loan program offers benefits including low interest rates and long repayment terms. However, there are two main differences between the 7(a) and the Express programs: the maximum loan amount and the approval turnaround.

Applicants for the SBA Express loan can receive up to $350,000 through the program. This could be a drawback for anyone seeking more capital. However, this program’s biggest advantage is that it comes with expedited turnaround times. After the application is submitted, an approval decision is guaranteed within 36 hours. Although the time it takes to complete the process and receive funding could add weeks to the timeline, getting an approval quickly means that small business and startup owners no longer have to shop around and can rest assured that the money they need will soon be on the way.

Because only a maximum of 50% of the loan is backed by the SBA, interest rates may be slightly higher than the standard 7(a) loans. However, all interest rates must fall within the SBA’s guidelines, so borrowers won’t get slapped with ridiculously high interest rates.

If this sounds like it’s the right type of loan for your startup, learn more about SBA Express loans.

SBA CDC/504 Loans

The SBA CDC/504 loan program is designed for small business owners who want to make a fixed asset purchase to expand or update their business. This loan provides funding for the purchase or upgrade of commercial space or land, the purchase of long-term equipment, or refinancing debt related to the upgrading or expansion of the business.

This loan program is different because it requires the borrower to work with two partners to finance 90% of the costs of the project. A bank or other lender will loan a maximum of 50% toward the project cost. A Certified Development Company, or CDC, will provide up to 40% of the cost of the project. 504/CDC loans are backed by the SBA. The borrower is responsible for paying the remaining 10% of the project cost.

The interest rates for these loans are determined by the 5-year and 10-year U.S. Treasury issues market rates. Currently, maximum interest rates are just above 5%. Terms of 10 and 20 years are available under the 504 loan program.

This program is a good choice for startups looking to expand or improve their commercial space. With fixed interest rates, longer terms, and up to 90% financing, this is a very competitive product. However, business owners seeking capital or funds to use for other purposes will be better off applying for other SBA loans. Potential borrowers will also have to take the time to find a lender and a CDC to work with under this program, which could be time-consuming.

SBA Startup Loan Borrower Requirements

Who can qualify for a startup SBA loan? Restaurant startups, tech companies, or any other businesses that have been in business for two years or less (and meet the requirements of the SBA) are eligible.

It’s important to note that because these loans have such favorable rates and terms, they can be difficult to obtain. In order to get an SBA startup business loan, you’ll have to find an intermediary that works with startups. You’ll also need to come prepared with the right credit score and documentation to qualify.

For all of the SBA sources of funding for startups mentioned here, there are a few basic requirements across the board. Qualified businesses must be for-profit operations. They must do business in the United States, and they must have an adequate amount of owner equity. SBA loans should also be pursued after all other means of funding have been exhausted. The business must also demonstrate a reasonable need for requesting the loan.

Businesses that invest in real estate, engage in illegal operations, operate as non-profits, or specialize in loaning money are disqualified from applying for these programs.

To qualify for an SBA loan, one of the most important things to remember is that a good credit score is required. Generally, scores should not fall below 680, but this can vary by lender. Credit reports should reflect a good payment history, and any negative items must be explained to the lender. There should be no recent bankruptcies, foreclosures, or tax liens on the report. Personal credit history and business history (if applicable) will be considered by the lender.

If loan proceeds are to be used to acquire a business or to purchase property or equipment, equity or a down payment of 10% or more may be required based on the lender. Ready to learn more? Read on for more information about the requirements of SBA loans.

Do SBA Startup Loans Require Collateral?

Another potential requirement of receiving an SBA startup loan is collateral. In short, collateral is something of value that is pledged in the event that a borrower defaults on the loan. Collateral can be real estate, equipment, vehicles, or other items of value.

Because startups are seen as riskier investments by lenders, it’s very common to have to put up collateral in order to receive funding. The one exception to this rule is when the loan does not exceed $25,000. Through the 7(a) standard, Express, and Community Advantage programs, no collateral is required under SBA guidelines for any loan up to $25,000. Loans exceeding this amount will require collateral potentially valued up to the total amount of the loan. For CDC/504 loans, the project being financed often serves as the collateral.

For microloans, the SBA does not require collateral but does advise lenders to follow lending best practices and collect collateral or equity if deemed necessary.

Personal guarantees are also required to obtain SBA loans. This means that a borrower agrees to put up personal assets if they default on the loan. In the event that a startup does not have enough business property, personal assets will be used to back the loan.

One important thing to note is that while startups will not necessarily be disqualified from SBA loans by a lack of collateral (if all other conditions are met), your chances of being funded will improve if you have at least some collateral.

How To Get An SBA Loan For A Startup

Now that you’re familiar with the options the SBA has to offer and you’ve found a product that fits your needs, it’s time to get the application process rolling. The first step is to find an SBA-approved lender that operates in your area. If you have a working relationship with a financial institution, you can ask for recommendations. You can also be connected with a lender through the SBA’s Lender Match service.

In addition to finding a lender that offers SBA loans, it’s also important to inquire as to whether they work with startups. Some lenders see startup companies as too much of a risk, so it’s important to ask before devoting too much time to the process. You’ll also want to ensure that they work with startups on the specific loan that’s grabbed your interest.

Once you’ve connected with a lender, you’ll have to speak with them on the phone or, in many cases, meet with them face-to-face. While each lender has its own requirements, there are a few things you’ll always need to have on hand when applying for an SBA loan.

Because startups don’t have the history of a more established business, documentation — like three years of business income tax returns or several years of business financial statements — won’t be available. Instead, you can provide a few other standard documents, as well as a couple of additional items required from new businesses.

As previously mentioned, credit scores and reports are extremely important. Even if you haven’t yet established business credit, your personal score and report will be evaluated by a lender. If you aren’t sure of where you stand, check out these resources for getting your free credit report online. Dispute any inaccuracies with the credit bureaus and be prepared to explain any black marks on your report.

Additional SBA startup loan requirements include your personal financial statement, personal income tax returns for the last three years, resumes for each principal of the business, and your business certificate and licenses.

Because you are seen as a risky borrower, you will need a solid business plan that includes details about the current status of your business, as well as future plans. You will also need business projections. A projection of at least one year is the minimum, but more may be required by your lender. You must also be prepared to prove that you have several years of experience in the industry. A minimum of 2 years is generally preferred.

The lender will evaluate your personal credit, your business plan, and your ability to repay the loan. Once the SBA startup loan application process is completed and all paperwork has been submitted, you’ll simply need to wait for final approval. This could take weeks or even months if a challenge arises. With an SBA Express loan, you’ll receive your decision within 36 hours. Once approved, you’ll work with the lender to close your loan and receive your funds.

Final Thoughts

The process for obtaining an SBA loan is daunting for any business. As a startup, the process can be even more complicated. However, with a solid business plan in place and a good credit score, it’s possible to obtain the funding you need with competitive rates and terms and put your new business on the path to success. Good luck!