What are startup business loans?
Getting a new business up and running often requires considerable capital. Aspiring entrepreneurs and new business owners usually don’t have the total capital needed at their disposal.
One option for funding a startup is to take out a business loan. While most small business loans are intended for established companies, some lenders provide loans for new startups.
What are SBA business loans?
SBA loan programs are the most coveted small business financing option. The US Small Business Administration (SBA) administers and oversees the SBA loan program.
The SBA does not service the loans or provide funding. Instead, borrowers apply to SBA-approved lenders. An SBA lender is either a commercial bank, credit union, or alternative business financing facilitator, like United Capital Source (UCS). The only notable exception is that the SBA does provide funding for disaster loans.
Lenders must apply to the SBA for approval to offer the loans. The SBA sets lending guidelines and limits the interest and fees lenders can charge.
One of the most significant contributions of the SBA is that it partially guarantees the loans, anywhere from 50%-85%. In a way, the federal government agency almost acts like a cosigner on your loan.
Lenders take on less risk since the SBA partially guarantees the loans. Less risk means lenders can offer higher borrowing amounts at lower interest rates and longer repayment terms than are available with other business loans.
What are the best SBA loans for startups?
Many SBA lenders only accept applications from established businesses. However, some SBA-approved lenders cater to newer companies, and those lenders usually offer SBA loans designed for startups.
Here are the top SBA loans to consider for a startup business.
SBA Microloan
The SBA Microloan is the only financing package in the program designed explicitly for startups. While it’s possible to get a different SBA loan as a startup, your best chance of approval is with the Microloan.
SBA Microloan details:
- Maximum borrowing amount: $50,000.
- Terms: Up to 6 years.
- Interest: 8%-14%.
While you can get up to $50k, the average SBA microloan amount is $13k. New business owners can use the funds for working capital needs, purchasing equipment, inventory, furniture, and fixtures. You cannot use the funds to purchase commercial real estate or refinance business debt.
SBA Microloans require working with specially designated intermediary lenders. Most intermediary lenders are nonprofit community-based organizations. The SBA partners with these lenders to ensure funding is available.
Each lender sets its own qualifications in terms of credit scores and other factors. However, the qualifications are typically lower than other SBA loans since they are intended for startups and new businesses.
Community Advantage Loans
The Community Advantage loan is an SBA pilot program set to expire on September 30, 2024. The program aims to promote business and economic development in underserved communities.
Community Advantage loan details are as follows:
- Maximum borrowing amount: $350,000.
- Terms: 25 years for commercial real estate; 10 years for all other purposes.
- Interest rates: Wall Street Journal (WSJ) Prime + Lender’s spread (cannot exceed 6.5%).
The use of funds is broader than the Microloan, as you can use the money for commercial real estate or refinancing business debt. The loan program is a subset of the SBA 7(a) loan, which we will cover shortly.
Potential borrowers must apply to a Community Advantage lender, or “CA lender.” These specialized lenders are community partners with the SBA. Some CA lenders only work with established businesses but many offer loans to startups and younger companies.
The loan program also helps women, minorities, and veteran business owners secure small business financing. To qualify, your business must be in an underserved community.
SBA 7(a) loans
The SBA 7(a) loan is the most common financing package in the SBA loan program. The primary loan details are:
- Maximum borrowing amount: $5 million.
- Terms: 25 years for commercial real estate; 10 years for all other purposes.
- Interest rate: Pegged to the Prime rate.
Subsets of the 7(a) loan include Express loans, Export loans, and CAPLines of credit. It’s the most versatile loan in the program, and borrowers can use the loan proceeds for almost any business purpose.
However, most lenders that offer SBA 7(a) loans only work with companies that have a minimum of two years in business. In addition, you’ll generally need a good to excellent credit score (650-700+) and high annual revenue.
Some lenders would accept SBA 7(a) loan applications from a startup or newer business, but it would most likely be for the 7(a) small loan or Express loan.
The SBA 7(a) small loan has a maximum borrowing amount of $350,000, while the SBA Express loan caps out at $500,000.
SBA 504/CDC loans
The SBA 504/CDC loan program is designed to help small business owners secure long-term financing for major fixed assets that promote job growth. 504 loans require working with a Certified Development Company (CDC). CDCs are the SBA’s community partners that regulate nonprofits and promote economic development within the community.
SBA 504 loan details are as follows:
- Maximum loan amount: $5 million, or $5.5 million, for certain energy projects.
- Terms: Typically 10-20 years.
- Interest rate: Varies but usually does not exceed 3% of the loan amount.
504 loan funds can only be used for commercial real estate, property or land improvements, equipment, machinery, or other major assets. You cannot use the money as working capital.
Another caveat of the SBA 504 loan is that the project you’re funding must create jobs, promote the local economy, or achieve a public policy goal. This is why you’re required to work with a CDC on your loan application.
Businesses must have a tangible net worth of under $15 million and cannot earn more than $5 million after taxes to qualify. Like the SBA 7(a) loan, 504 loans are primarily intended for established businesses. You may have difficulty finding a lender or CDC that will work with a startup business on the loan.
How can I get an SBA business loan for a startup business?
SBA loan applications are tedious and time-consuming. You’ll need extensive documentation.
As a startup or new business, you won’t have the business financial statements that more established companies can provide. As such, you might have to do additional research and compile more information to apply.
Follow these steps to prepare for an SBA startup business loan application.
Step 1: Find your startup costs
Before applying, you should calculate your startup costs to know how much to request. SBA loan applications also require a detailed explanation of how you’ll use the funds.
Figure out your one-time startup costs for things like business licenses, materials, and a security deposit or down payment on the business property. You’ll also want to calculate your overhead costs and ongoing business expenses for the first year. You want to ensure you will have enough runway to get the business up and running and generating revenue.
Step 2: Determine your eligibility
All businesses applying for an SBA loan must meet basic eligibility requirements, regardless of their time in business. To be eligible, your intended business must meet the following criteria:
- Be a for-profit business operating and physically located in the US.
- It must be a small business, as defined by the SBA.
- The business owner must have invested time and money (equity) into the company.
- Must demonstrate good character and ability to repay the loan.
- Cannot have defaulted on any previous government-backed loans.
- Must not be eligible for credit elsewhere (SBA loans are “last resort” financing).
Step 3: Write your business plan
The importance of this step as a startup business cannot be overstated. As a startup, this is your best chance to show the viability of your business and why you’ll have the cash flow to support loan repayments.
Business plans vary by industry, but most comprehensive plans include an executive summary, company description, market analysis, the legal and management structure, and a description of the goods or services you will provide. You should include projected financial and cash flow statements, how you will make money, and your timeline.
An effective business plan should demonstrate that you have identified your target market, pricing structure, potential challenges, and competition. You want to showcase a realistic path to business and financial success.
Step 4: Choose an SBA loan
Now that you have a solid understanding of your intended business, financial projections, and funding needs, you can narrow down your SBA loan selection. As discussed, startups are most likely to qualify for the SBA Microloan or Community Advantage loan if they meet the criteria.
If you need more funding than is available in the Microloan program, getting a different SBA loan might be possible. However, there is no guarantee that you will find a startup-friendly lender for a larger loan product.
Step 5: Gather your documents
SBA loans require exhaustive documentation, and the application process will go much smoother if you prepare them ahead of time.
Here are some key documents you will most likely need for your application:
- Personal and business (if applicable) tax returns for the previous two years.
- Personal financial statements.
- Bank account statements.
- Personal statement of character.
- Business plan and any relevant financial projections.
- Resumes for each principal of the business.
- Your business licenses and certificates.
Step 6: Find a lender
Many financial institutions only work with established businesses on SBA loans. For example, you would need two years in business to apply for an SBA loan through our lender network here at UCS.
But that does not mean you won’t find a lender, just that you’ll have to narrow your options. You can use the SBA match tool to help find SBA lenders that meet your business needs.
You might be able to find a commercial bank or credit union that accepts startup SBA loans. But there are plenty of alternative online lenders that have some more flexibility in the businesses they can fund.
Step 7: Apply for your loan
Chances are that if found a startup-friendly lender, their team can help you compile and submit your application. This step of the process requires patience, as it can take weeks to get a determination on your loan.
If approved, it could take additional time to receive your funds. Most SBA loans take anywhere from 60-120 days from the initial application to closing and funding the loan.
What are the advantages of SBA startup loans?
SBA loans are generally the lowest-cost small business financing options on the market. This is mainly because of the SBA guarantee and the agency’s limits on fees and interest rates.
The SBA microloan is designed for startups and young businesses. Also, while the Community Advantage pilot program is still active, you could use it as a startup loan.
Depending on the loan type, you can use SBA loan funds for almost any business purpose. SBA loans also have longer repayment terms, so your monthly payment will be lower. This eases the burden on your cash flow.
SBA lenders report on-time payments to the major credit bureaus, so you can also use the loans to build your credit history. Startups that receive an SBA loan and pay it off on time and in full stand a higher chance of receiving more significant loan amounts to grow and expand in the future.
What are the disadvantages of SBA startup loans?
The most significant drawback to using an SBA loan for a business startup is the limited options available. You’ll likely have a difficult time finding lenders who will accept the application.
The Microloan is your best option for an SBA startup loan, but it has a maximum borrowing amount of $50,000. Microloans also tend to have slightly higher interest rates than other SBA loans.
The application process for all SBA loans is complex and requires a lot of documentation. The funding time can also take weeks or months.
Pros & Cons
Here is a quick summary of the SBA startup loan benefits and drawbacks.
Pros:
- The SBA partially guarantees the loan.
- It’s usually the lowest-cost small business financing option.
- Extended repayment terms bring down your monthly payment.
- The SBA Microloan is designed specifically for startup businesses.
- The Community Advantage loan pilot program is still active and helps startups.
Cons:
- Limited SBA loan and lender options for startup businesses.
- The SBA Microloan caps out at $50,000.
- Lengthy application process with challenging documentation requirements.
- It could take between 60-120 days to close and fund the loan.
Frequently Asked Questions
Here are the most common questions about using SBA loans for a startup business.
How can the SBA help me with my startup business?
The Small Business Administration provides many resources and assistance beyond the SBA loan program. The agency provides extensive business guides to help you plan and launch a business.
In addition, the SBA provides federal contracting services and local assistance resources. You can also find funding strategies beyond the loan program.
Do SBA loans require a down payment?
SBA 7(a) and 504 loans require a down payment between 10%-30%, depending on various factors. However, you do not need a down payment for the SBA Microloan, CAPLines of credit, or disaster loans.
Do SBA loans require collateral?
Most SBA lenders will require collateral for loans over $25,000. SBA guidelines state that loans over $350,000 should be “collateralized to the maximum extent possible.”
Collateral requirements apply to Microloans as well. However, the SBA stipulates that a lack of collateral cannot be the sole reason for denying a loan. That being said, the more collateral you can provide, the more likely you will get approved since the lender takes less risk
Regardless, each business owner with a stake of 20% or greater is required to sign a personal guarantee on SBA loans. If you default on your loan, the lender or SBA can go after your personal assets to recoup their losses.
Is it hard to get an SBA loan for a startup business?
Getting an SBA loan for a startup or newer business is quite challenging. Most lenders view startups as high-risk ventures.
The main thing you need to do is prove that you have the experience, organizational resources, and viable business plan necessary to ensure repayment. The best way to demonstrate your financial responsibility and the viability of your business is with documentation. Your financial statements and business plan must convey that your business venture is less risky than most lenders assume about startups.
What disqualifies you from an SBA loan?
Businesses located or primarily doing business outside the US are not eligible for SBA loans. You could be disqualified if you don’t meet the SBA size standards to qualify as a small business.
SBA loans are available to businesses in certain industries. Restricted industries include:
- Real estate investment firms.
- Companies engaged in speculation.
- Gambling businesses such as casinos.
- Rare coin and stamp dealers.
- Multilevel marketing (pyramid scheme) businesses.
- Religious businesses, charities, and other nonprofits.
- Government agencies.
- Lending institutions.
The SBA and SBA lenders also prefer working with business owners who demonstrate good character. Business owners:
- Cannot be incarcerated, on parole, or on probation.
- Cannot be currently under indictment or other forms of criminal charges.
- Cannot have previously defaulted on federal loans, such as student loans.
Why don’t banks give startup business loans?
Commercial banks are hesitant about taking on risky loans and prefer more calculated risks. Most have stringent underwriting and high eligibility requirements.
Most business owners need an established business history, high annual revenue, and excellent credit scores to qualify for a business bank loan. Startups usually can’t meet those high requirements.
Some banks might still approve a startup business loan, but you’ll need a solid business plan and significant collateral. If you can invest a considerable amount of your own money as startup capital, banks might be more willing to loan the remaining amount needed as you demonstrate you also have “skin in the game.”
What are my alternatives to SBA startup loans?
There are many paths to startup capital outside the SBA loan program. Some small business lenders provide non-SBA startup loans, although those usually come with higher costs and shorter repayment terms.
Outside of business loans, you can try one of the following strategies.
Bring in Investors
One option to raise startup capital for your business is to sell equity in your company to investors. If you have a robust business model and plan, you might be able to attract people who believe in your company’s future.
Obviously, getting investors won’t work for every business model, and you might be hesitant about selling shares in your company. But there are situations where it would be advisable to get some investment capital.
In some cases, your investors might be able to add business expertise to your ownership group. Consider ways you can pitch your business to potential backers.
Personal Savings & Retirement Accounts
Many small businesses get off the ground with the owner’s personal capital. Even when you use a business loan, it often supplements your own investment to launch the company.
It might be possible to use retirement savings as well. You could consider a Rollover as Business Startup, or ROBS, which is when you move money from a retirement account like a 401(k) into your business tax-free.
Using your retirement or personal savings as startup capital carries some risk as you’re potentially mortgaging your future to launch a company. However, it could be worth it if you have a solid business plan.
It’s virtually impossible to launch a company without taking some risk. As the saying goes, “nothing ventured, nothing gained.”
Crowdfunding
With modern technology tools, you could also attempt to use crowdfunding to gain the money needed to launch your business. Crowdfunding is when you gain micro-investments from many people to fund a project or venture.
The most common way to crowdfund is via the internet, and there are several web-based crowdfunding platforms. Many of those platforms cater to small business investments.
Some examples of companies that launched through crowdfunding include Oculus VR, Popsocket, and Peloton.
Business Credit Cards
Getting approved for a business credit card might be easier than a loan. The reason why is that credit card companies don’t weigh time in business as heavily as lenders.
Most credit card companies will look at your personal credit score and ability to repay through both business and personal income. In addition, many business credit cards offer bonuses and incentives that can help a young company.
According to the Federal Reserve Small Business Credit Survey, 53% of businesses reported funding their operations with business credit cards. Opening a credit card exclusively for your company is also a good way to keep your personal and business finances separate.
Personal loans
Taking out a personal loan to start a business is a bit unconventional and risky, but it’s certainly been done before. Sometimes getting a personal loan is easier since you don’t need an established business history.
You can apply for a personal loan through a bank, credit union, or online lender. Another option is taking a personal loan from friends or family.
Getting an investment or loan from family is actually one of the more common ways to launch a business. We would advise you to be careful when pursuing this option.
If you use money from friends or family to start your business, you might want to establish business credit as soon as possible after launch. Your business should ideally be able to stand on its own in terms of accessing funding.
Small Business Grants
Small business grants are very competitive, but you won’t have to repay the funds if you obtain one. You will most likely have to pay taxes on the money, though.
Multiple organizations offer small business grants. The federal government runs several grant programs, some of which you can access through the SBA.
You could also look into your state and local government for business grant opportunities. Some government agencies provide grants for businesses that will promote job growth and increase the tax base in their areas.
Outside of government, some private foundations offer business grants. You might also be able to find other businesses that provide grants to support entrepreneurship.
Alternative Financing Methods
When you’re just starting out and can’t get a loan, there are some options for financing. Some alternative financing methods include merchant cash advances, invoice factoring, and revenue-based financing.
While many financial institutions and factoring companies require some business history (at least 6 months), some are willing to work with startups. In some cases, you could use combination funding such as a personal loan to get your company started and then supplement the business with a merchant cash advance or invoice factoring once you have six months of business history.
SBA Loans for Startups – Final Thoughts
Funding a business startup can be challenging, but it’s not impossible. Many entrepreneurs are able to secure financing through various methods.
But the lowest cost option for business owners are SBA loans. It’s difficult to qualify for SBA loans, especially as a startup, but the SBA Microloan was designed for just that purpose.
It might be possible to take out a different SBA loan if you need more than the $50,000 maximum of the Microloan. However, finding a lender would be far more challenging, and you would need a convincing loan application.
Regardless of the type of financing you pursue, having a solid business plan and understanding your target market and your market competition is essential. It would be best if you had realistic financial forecasting to demonstrate the ability to repay the loan.
Contact us if you have more questions on SBA loans and what options are available.
