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 find out how the SBA can help you get a small business startup loan? Read on to learn more about the loan options that can take your new business to the next level.
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How Can The SBA Help My Startup?
The Small Business Administration (SBA) 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. SBA loans can be used for reasons such as:
- Acquiring a business or franchise
- Hiring new employees
- Funding equipment purchases
- Purchasing real estate or other fixed assets
- Accessing working capital
- Refinancing debts
- And more
The SBA helps many types of businesses get small business loans, 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, the organization has 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 loan program. And because the administration backs these loans, the lenders assume less risk, which translates to more funding opportunities for you.
SBA loan 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 SBA’s standard loan programs. The best type of SBA loan programs for startups and new businesses include:
- SBA Microloans: Best used for working capital and small equipment purchases.
- SBA 7(a) Loans: Best for flexible funds.
- SBA Community Advantage Loans: Best for businesses in low income or otherwise under served communities.
- SBA Express Loans: Best for fast SBA funds.
- SBA CDC/504 Loans: Best for purchase of real estate, equipment, or other fixed assets.
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.
Learn more about each type of SBA loan for new businesses and startups below.
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, but tend to be low in comparison to other startup funds.
The intermediary can also charge fees such as packaging fees, collateral appraisals, closing fees, and so on.
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.
Standard SBA 7(a) Loans
The standard 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. Borrowers can also expect to pay a percentage of the borrowing amount for for fees charged by the SBA and its partners. A down payment may be required with the purchase of real estate or equipment.
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.
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 amount that can be borrowed through this program. Borrowers can receive up to $250,000 with an SBA Community Advantage loan.
Guidelines for how money is spent are the same as standard SBA 7(a) loans. Funds from the Community Advantage program can be used to purchase another business, finance equipment, or for just about any business purpose.
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 under served communities, such as low-income areas. Startups are 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
An SBA Express Loan for your startup business is another option. This loan program offers benefits including low interest rates and long repayment terms. Although the Express Loan is a type of 7(a) loan, 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. However, this program’s biggest advantage is that it comes with expedited turnaround times. After the application is submitted, an approval decision from the SBA is guaranteed within 36 hours (as opposed to the 5-10 days for a regular 7(a) loan).
One drawback to the Express program is that the SBA will only guarantee a maximum of 50% of the loan. Because the guarantee is lower, 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.
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. In many cases, 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.
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, 504 loans are a very competitive product.
However, business owners who are not looking to purchase fixed assets will want to consider other SBA loan programs. 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 Loan Borrower Requirements For Startups
For all of the SBA loan programs available to startups mentioned here, there are a few basic requirements across the board. To qualify for an SBA loan, your startup must:
- Be for-profit.
- Do business in the United States.
- Have an adequate amount of owner equity.
- Have exhausted all other means of funding.
- Demonstrate a reasonable need for requesting a loan.
Startups 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.
In other words, most startups will meet the SBA’s borrower requirements to qualify for a business loan. However, to get a SBA loan for your new business, you will need to find an intermediary that works with startups. You will also need to come prepared with the right experience, credit score, and documentation to qualify.
To qualify for an SBA loan as a startup, one of the most important things to remember is that lenders will require good or excellent credit. Credit reports should reflect a good payment history, and any negative items must be explained to the lender. Your report shouldn’t contain any recent bankruptcies, foreclosures, or tax liens. 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.
Do SBA Startup Loans Require Collateral?
Although you won’t necessarily have to put up collateral to qualify for an SBA loan, the ability to do so will improve your chances of approval. SBA loans that might not require collateral include:
- SBA microloans
- CDC/504 loans (because the asset being financed serves as collateral)
- SBA 7(a) loans, Express Loans, and Community Advantage Loans under $25,000
SBA 7(a) loans, Express Loans, and Community Advantage Loans exceeding $25,000 could require collateral valued up to the total amount of the loan.
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 agreement means the borrower agrees to put up personal assets if they default on the loan. In the event the 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. Here’s how to apply for an SBA loan for your new business:
1) Check Your Credit
Credit scores and reports are extremely important because they show your history of repaying your debts. Even if you haven’t yet established business credit, your personal score and report will be evaluated by a lender. In general, you want a credit score that is considered good or excellent before applying for SBA funding.
If you aren’t sure of where your credit stands, take a look with one of our favorite free credit score services. If your credit isn’t up to snuff, learn how you can improve your report.
2) Find A Startup-Friendly SBA Lender
After you have assessed your credit health, the next 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 Lender Match service run by the SBA.
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.
3) Gather Documents
Because startups don’t have the history of a more established business, you most likely won’t have documentation, like three years of business income tax returns or several years of business financial statements. Instead, you can provide a few other standard documents, as well as a couple of additional items required from new businesses.
Additional SBA startup loan documents include:
- Personal financial statements
- Personal income tax returns for the last three years
- Resumes for each principal of the business
- Your business certificate and licenses
- Business plans
- Financial projections
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 two years is generally preferred.
4) Meet With Your Lender & Await Approval
Your 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. Once approved, you’ll work with the lender to close your loan and receive your funds.
FAQs About SBA Loans For Startups & New Businesses
SBA Loans For Startups: Final Thoughts
The process for obtaining an SBA loan is daunting for any business. As a startup or new business, 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 and put your new business on the path to success. Good luck!