Find The Right SBA Loan For Your Startup: Types, Terms, & How To Apply In 2023

Lenders view startups as bigger risks than established small businesses, but SBA loans for startups give you 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.

Can I Get An SBA Loan To Start A Business?

Startup businesses can qualify for SBA loans. Startup businesses must show the ability to repay the loan and meet all requirements of the SBA lender to receive funding. These may include having good personal credit, creating a solid business plan, and meeting annual revenue requirements.

How Can The SBA Help My Startup?

The Small Business Administration (SBA) was established to give small business owners the resources they need to operate their businesses successfully. In addition to training and advocacy, the SBA offers loan programs. SBA loans can be used for purposes including:

• Acquiring a business or franchise
• Hiring new employees
• Buying new or replacement equipment
• Purchasing real estate or other fixed assets
• Accessing working capital
• Refinancing high-interest debt

The SBA helps small businesses, including startups, acquire funding.

Startups are viewed by lenders as risky endeavors. 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. Whereas established businesses have proof of their success in the form of financial statements, tax returns, and other documents, startup owners rely on their business plans and industry experience.

SBA loans aren’t distributed directly through the SBA. Instead, the organization has established several loan programs targeted at small businesses and startups through intermediaries — banks, private lenders, and even nonprofit organizations.

The SBA has outlined a set of standards for each loan program. 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).

Which SBA Startup Loan Is Right For Your New Business?

You can’t go wrong with SBA loans if you need startup funding. New businesses can qualify for many of the SBA’s most popular types of loans. The best kind of SBA loans for new businesses and startups 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 underserved 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.

SBA Microloans For Startups

Under the SBA Microloan program, small businesses can receive up to $50,000 from a nonprofit intermediary. The average amount funded through the Microloan program is $13,500.

Microloans are available to for-profit businesses with solid business plans. Interest rates vary by lender but tend to be low compared to other startup loans. Additional fees may be charged including:

• Packaging fees
• Collateral appraisals
• Closing fees

The SBA limits how borrowers can use microloan funds. Loan disbursements can be used for:

• Materials
• Furniture
• Supplies
• Inventory
• Working capital

Funds cannot be used to purchase real estate or pay off or refinance existing debt.

Standard SBA 7(a) Loans For Startups

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. Borrowers will also have more flexibility in how they can use the funds, including:

• Equipment
• Inventory
• Property
• Debt refinancing
• Renovations

Repayment 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 fees charged by the SBA and its partners. A down payment may be required to purchase real estate or equipment.

SBA Community Advantage Loans For Startups

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.

Borrowers can receive up to $350,000 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 for:

• Purchasing a business
• Financing equipment
• Purchasing inventory or supplies
• Refinancing debt
• Buying property or paying for renovations

Community Advantage loans are designed for underserved communities, such as low-income areas. Startups are qualified to receive these loans. Businesses 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 For Startups

An SBA Express Loan for your startup business is a type of 7(a) loan that offers up to $500,000 with low-interest rates and long repayment terms. Funds can be used for the same purposes as standard 7(a) loans.

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 will still receive competitive rates.

SBA CDC/504 Loans For Startups

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:

• Purchasing or upgrading commercial property
• Purchasing or upgrading land
• Long-term equipment
• Refinancing debt related to upgrading or expanding the business

This program requires the borrower to work with two partners to finance up to 90% of the project’s costs:

• A bank or other lender will provide a maximum of 50% toward the project cost
• A Certified Development Company (CDC) will provide up to 40% of the cost of the project
• 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.

SBA Loan Borrower Requirements For A Startup

There are a few basic SBA loan requirements businesses must meet in order to receive funding.

SBA Loan Requirements For A Startup Business

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
• Show the ability to repay the loan

The following startups are disqualified from receiving SBA loans:

• Real estate investors
• Businesses engaged in illegal operations
• Nonprofits
• Lenders

Most startups will meet the SBA’s basic borrower requirements to qualify for a business loan. Borrowers must find a lender that works with startups and meet additional requirements that may include:

• Good personal credit score & history
• Business credit score & history
• Industry experience
• Documentation to show that the startup has a good chance for success
• Down payment of 10% or more for the purchase of property or equipment

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.

Do SBA Startup Loans Require Collateral?

Looking for startup business loans with no collateral? 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. If the startup does not have enough business property, personal assets will be used to back the loan.

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 Startup Loan

Ready to get an SBA loan for your startup? Here’s a breakdown of 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 at one of our favorite free credit score services. If your credit isn’t where it needs to be, you’ll need to put in the time to improve your score before applying. If you need fast funding but don’t meet SBA requirements, consider applying for a startup loan for bad credit.

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. In addition to offering SBA loans, the lender should also work with startups. Start your search by:

• Inquiring about SBA loan options from your financial institution
• Asking for a recommendation from your financial institution
• Using the SBA’s Lender Match service
• Checking out Merchant Maverick’s list of best SBA lenders

3) Gather Documents

Startups may not have the documentation that established businesses provide for an SBA loan. But there are a few other standard documents that you will need to provide to your lender during the SBA application process. This may include:

• Personal financial statements
• Personal income tax returns for the last three years
• Resumes for each principal of the business
• Business certificates & licenses
• Business plans that include the current status of your business & future plans
• Financial projections for at least one year
• Proof of industry experience (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 Startup Businesses

SBA Loans For Startups: Final Thoughts

The process of 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 with SBA loans for startups to put your new business on the path to success. Good luck!