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United States Small Business Administration—or SBA—loans for new businesses can help startup founders access the cash they need to get their business off the ground. Available amounts vary by loan program but some range up to $5 million. Funds also may be more accessible to some borrowers who struggle to qualify for other business financing methods.
That said, applying for an SBA loan can feel daunting because of the eligibility requirements and application procedures imposed by individual SBA lenders. Follow these steps to get an SBA startup loan.
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1. Calculate Your Startup Costs
Before applying for an SBA startup loan, evaluate the needs of your business. To do so, first consider one-time startup costs and recurring expenses. This may include everything from renting office space to buying equipment and covering payroll for your first employees. Each SBA loan program offers different minimum and maximum loan amounts, so consider your borrowing needs before choosing the type of loan to apply for.
2. Check Your Eligibility
Specific eligibility requirements vary by SBA loan type and individual lender. However, there are a few general requirements that a business must meet to qualify for an SBA startup loan. To be eligible for loans under the SBA 7(a) program, a business must:
- Operate for profit in the US or its territories
- Constitute a small business by SBA standards
- Demonstrate a need for the loan funds
- Have reasonable invested equity
- Have already accessed alternative financial resources, such as personal assets
- Use the loan proceeds for an acceptable business purpose
- Not have any delinquencies on debt to the US government
3. Write a Business Plan
Startups do not have extensive financial records like established businesses. For that reason, it can be more difficult to qualify for an SBA loan as a startup than as an existing small business. Business owners can improve their approval odds by drafting a comprehensive business plan that demonstrates how the business will make money and on what timeline. This demonstrates to lenders that the business can cover its current and future debt payments, thereby reducing the risk to the lender.
Business plans vary by industry but should generally include an executive summary of what the company does and why it will be successful. The report should also include a description of the company, a market analysis including industry outlook, the company’s legal and management structure, and a description of any products and services.
4. Choose a Loan Type
The SBA offers business owners several loan programs to meet a range of borrowing needs. That said, not all of the loans are appropriate for startups. Consider one of these loan types if you need additional money to get your business off the ground.
The SBA Microloan program offers smaller loan amounts to help businesses begin or expand operations. Loan amounts range up to $50,000, with the average loan being about $13,000. Repayment terms extend up to six years and interest rates range from 8% to 13%. Like other SBA loans, funds can be used for a range of business purposes but may not be used to repay existing debts or to purchase real estate.
SBA Community Advantage Program
The SBA’s Community Advantage program is aimed at providing business loans to underserved business communities—including women, minors and veterans. Loans are available up to $250,000, with 75% to 85% guaranteed by the SBA. The SBA also imposes a maximum interest rate of prime plus 6%, which results in rates between about 7% and 9%. Community Advantage loans can be used for most business purposes, but funds are not available as a line of credit.
SBA 7(a) Loans
SBA 7(a) loans include a variety of options ranging from small loans maxing out at $350,000 to standard 7(a) loans up to $5 million. Eligible borrowers also can apply for an SBA Express loan, which provides an accelerated review process—just 36 hours instead of the five to 10 business days required for other options. Interest rates vary by loan type and the individual lender but cannot exceed the maximum set by the SBA.
SBA 504 Loans
The 504 loan program gives qualified borrowers access to up to $5 million in financing for the purchase of major fixed assets. Interest rates hover around 3% of the loan amount, with a down payment between 10% and 30%. Repayment terms are available for 10, 20 or 25 years.
To be eligible, the purchases must aid in job creation and growth of the business. Businesses also must operate for profit in the US, have a net worth under $15 million and bring in an average net income of $5 million after federal income taxes for the past two years.
5. Research and Compare Lenders
The SBA guarantees up to a certain percentage of each SBA loan, but loans are issued by individual lenders. Borrowers must apply for an SBA loan through an approved financial institution and meet the individual lender’s application and credit requirements. To make it easier to choose a lender, the SBA provides small business owners the Lender match platform.
Note, however, that not all SBA-approved lenders support every loan program. Choose a lender that offers the program best-aligned with your needs by considering these factors:
- SBA loan offerings
- Available loan amounts
- Interest rates
- Repayment terms
- Prepayment penalties and other fees
- Minimum credit score and other qualification requirements
- Application process
- Loan funding speed
- SBA Preferred Lender status
6. Prepare and Submit Your Application
After choosing a lender, familiarize yourself with its application process and requirements. Start organizing the necessary documentation ahead of time to streamline the application and approval process. Individual lenders impose different application requirements, but there are some materials that are requested by most lenders. In addition to a business plan, prepare the following documents as part of your loan application:
- Copies of business licenses and certificates
- Business overview and history
- Personal and business tax returns for the past two years
- Current and projected financials for one to three years
- Profit and loss statement and balance sheet
- Loan application history
Once you submit your application, the lender submits it to the SBA for review. In general, qualification takes anywhere from 30 to 90 days, but SBA Express loan applications are reviewed within 24 to 36 hours of receipt by the SBA. Following approval, your lender will close the loan and disburse funds to the bank account identified during the application process.
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Frequently Asked Questions (FAQs)
Do new businesses qualify for SBA loans?
New businesses can qualify for SBA loans, but they may not be eligible for all of the SBA’s programs. Because new businesses don’t have established financial records and cash flow history, the application process can be more difficult.
Applicants may need to provide additional materials, including a business plan that demonstrates the likely future success of the business. Startup founders should also have evidence of their prior experience in the industry and general business management experience.
What are businesses not eligible for SBA loans?
To be eligible for an SBA 7(a) loan, a business must operate for profit in the US or US territories. Borrowers also must have a reasonable amount of their own equity to invest in the business, and must already have used other financial resources—like personal assets—before applying for an SBA loan.
Some SBA loans also have industry-specific rules and time-in-business requirements. What’s more, SBA loans are not available to businesses in certain industries, those engaged in illegal activity, speculative businesses and certain other ineligible applicants.
Can I get an SBA loan to start a business?
SBA loans are available to startups, but it may be more difficult to qualify without established cash flow. For that reason, startup founders who want to take out an SBA loan should have a comprehensive business plan that clearly outlines how the company intends to make money—including projected financials. Certain SBA loan types, like microloans, are also better suited to startups than others.