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Starting a business can be both exciting and scary. A major question new business owners must answer is how they will fund their business. Entrepreneurs in the United States can apply for an SBA loan to start a business.
The U.S. government administers these loans through the Small Business Administration. The application process is lengthy, but SBA startup loans are backed by the SBA and typically have more favorable terms than conventional business loans. We’ve outlined everything you need to know if you want an SBA startup loan.
How to get an SBA loan for your startup
SBA loans for startups require lots of research and patience. If you want an SBA loan for your new business, you will need to plan out business details and understand the requirements for each loan type.
Follow these key steps to apply for an SBA startup loan.
1. Write a business and financial plan.
Before you even start the application process for an SBA loan to start a business, you need to have a business plan. Starting a business requires knowing what you want your business to do and how you want it to operate, including a financial plan.
Spend time researching similar businesses, competitors in your area and projections for the field of business. Use the information you gather to write an informed business plan. There are many different structures you can use to craft a successful plan, but business plans typically include these components:
- Executive summary
- Company description
- Market analysis
- Business organization and management
- Description of service or product line
- Marketing and sales strategy
- Financial projections
- Supporting documents for the above
2. Understand how much funding you will need.
As a part of your business plan, you will need to make financial projections and determine how much money you will need to start and run the business. These projections will give you something clear to show investors and lenders when you ask for business funding.
List everything in detail. You will want to provide cost projections for everything from equipment and materials to team salaries and marketing costs. The more detail you can provide, the more prepared you will be to apply for an SBA loan or seek other funding sources.
3. Determine your eligibility.
There are several different SBA loan types, which we discuss in more depth below. You will need to review each type to decide which fits your needs best. The eligibility requirements differ slightly for each loan type. Each lender may have additional requirements, like a certain time in business, minimum annual revenue requirement or a certain credit score. But typically you will need the following to be eligible for an SBA loan for a new business:
- Operate as a for-profit company
- Meet the SBA size requirements for a small business
- Show expertise and experience in the industry
- Have invested your own resources first
- Be able to demonstrate financial need
Review the SBA loan website to see exact requirements for each loan type.
4. Connect with lenders.
SBA funds are disbursed through banks and other lenders rather than the SBA itself. You’ll need to find a lender that offers loans in your area or online.
You can use the SBA’s lender match tool to find lenders likely to work with you. You will need to answer a few questions about your business. Then, you will hear back from the SBA with a list of interested lenders within a few days.
You can talk to each lender to find the best loan package for your startup. Compare the SBA loan rates, terms and fees to decide which lender you want to work with.
5. Gather documents and info.
Once you choose a lender, you will need to gather some documents for your loan application. This can be a lengthy process. Typically, you will need to submit these documents as a part of your application:
- Business plan
- Amount of funds you need and how you will use them
- Your credit history
- Financial projections for at least the next five years
- Any collateral you will use to guarantee your loan (such as your home, vehicle or other property you own)
- Documentation of your industry experience
- Any SBA forms, which are specific to the type of SBA loan you are applying for
Your lender will also look up your personal and business credit score.
Your lender may have additional document requirements. Communicate with your lender to make sure you have everything you need.
6. Work with your lender to submit your application.
Your lender can review your application before submitting it to ensure nothing is missing. This step can take some time, as you may need to prepare certain documents or rely on others to provide them.
Keep open communication with the lender. They can usually give you tips on what to focus on and additional pieces you may need to successfully apply for an SBA loan to start a business.
7. Wait for approval.
SBA loan approval time varies widely depending on the loan type you apply for. You may hear back soon as 36 hours for an SBA Express loan, but approval for other loans may take 30 to 90 days. CDC/504 loans often have a long wait time because both the certified development company and the SBA must give approval.
The lender may also request additional documents after you’ve submitted your application. Stay in touch with the lender even after you’ve applied. This way, you can provide any additional details as soon as they are needed and keep the process moving.
Even after approval, it may be several weeks before you receive the funds.
Best SBA loans for startups
There are multiple SBA loan types, and many are helpful to small business startups. Understand how each loan type can be used and compare that to your financial needs to decide which loan type is the best fit.
A 7(a) loan is the most common type of SBA loan.
The loan is best suited for funding real estate purchases, but it can also be used to fund working capital, refinance business debt or purchase furniture, fixtures and supplies.
There are several types of SBA 7(a) loans, including the standard 7(a) loan, 7(a) small loan, SBA Express and Export Express.
Eligibility requirements vary by lender. Some may be willing to work with startups that meet the SBA’s minimum requirements. However, sometimes lenders require two years in business, good credit scores and minimum annual revenue requirements.
Maximum loan amount: $5 million
Interest rate: Varies by lender but cannot exceed the SBA maximum rate. This rate varies by loan and interest type but is pegged to a prime rate, LIBOR rate or SBA optional peg rate.
Community Advantage Loan
The Community Advantage loan is one of the SBA’s pilot program loans. These loans are only available for a limited amount of time. The CA Loan, available until Sept. 30, 2024, serves small businesses in underserved markets.
Lenders may be microloan program intermediaries, companies focused on development designated by the SBA, or other specified not-for-profit organizations.
Maximum loan amount: $350,000
Interest rate: For loan amounts $50,000 or less: Wall Street Journal Prime plus 6.5 percent; for loan amounts between $50,001 and $250,000: WSJ Prime plus 6 percent; for loan amounts between $250,001 and $350,000: WSJ Prime plus 4.5 percent.
Used to promote business growth and job creation, 504 loans are long-term, fixed-rate business loans provided through Certified Development Companies. 504 loan funds may be used to purchase buildings, land, machinery and equipment. Funds cannot be used for working capital or inventory, refinancing debt or speculating on real estate.
Maximum loan amount: $5.5 million for most projects
Interest rate: Rates are pegged to the current market rate for 10-year U.S. Treasury issues plus a percentage.
Microloans are small loans disbursed by nonprofit organizations chosen by the SBA. These loans are designed with startups specifically in mind.
Loan funds can be used to launch, repair, re-open, renovate or grow a small business. Microloan funds can’t be used to purchase real estate or pay existing debts.
Maximum loan amount: $50,000
Interest rate: Generally between 8 percent and 13 percent, depending on the lender
SBA loan alternatives
SBA loans aren’t always easy to get. Lenders may set stringent requirements to apply and you have to provide a substantial amount of information to even be considered for the loan. If your startup plan isn’t buttoned up perfectly, you may have difficulty getting an SBA loan.
No matter how good your business plan is, you may need to try several funding options before finding one that works for your business. Consider these options as an alternative to getting an SBA startup loan:
- Self-funding: Use your equity and assets to fund the business if you have the money.
- Private investors: If you know people who have money to invest, you might propose that they invest in your business. If they are friends or family, be sure that a financial relationship won’t hurt the personal relationship.
- Venture capital firms: If you want to use a venture capital firm, research your options and be ready to get rejected. Make a proposal and prepare extensive business information and projections to argue why your business is worth the investment.
- Crowdfunding: Fund your business by rallying your peers and community. Online platforms make organizing a crowdfunding campaign simple. Depending on the type of campaign, investors may receive a tangible reward, a repayment over time or equity in your company.
- Conventional business loans: Explore business loan options from online and traditional banks, credit unions and online lenders. Banks typically have strict funding requirements that may be difficult for startups to meet, but online lenders often boast nontraditional underwriting requirements.
FAQs about SBA startup loans
There are many ways to get funding for a startup business, so consider multiple financing strategies. Options include conventional business loans, private investors, venture capital funds, SBA loans and crowdfunding.
Yes, both conventional business loans and SBA loans can cater to new businesses as long as your business meets the other requirements for the loan.
There are multiple types of SBA loans, and the requirements for each type are different. Some examples of things that may disqualify you from receiving an SBA loan include not qualifying as a small business, doing business outside of the U.S. and having access to alternative funding options. Having bad credit will also make it difficult to qualify.
While SBA microloans may be available to startups, other kinds of SBA loans with larger borrowing limits can be harder to find. If you’re just starting a business, you may also want to look into bootstrapping, crowdfunding, peer-to-peer lending or other alternatives if you have trouble securing an SBA loan.