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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 start their business. The amounts available vary by loan program, but some go up to $5 million. Funds may also be more accessible to certain borrowers who find it difficult to qualify for other methods of business financing.
That said, applying for an SBA loan can seem daunting due to 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 start-up loan, assess your business needs. To do this, first consider one-time start-up costs and recurring expenses. This can include everything from renting office space to purchasing equipment and paying your first employees. Each SBA loan program offers different minimum and maximum loan amounts, so consider your borrowing needs before deciding which type of loan to apply for.
2. Check your eligibility
Specific eligibility requirements vary by SBA loan type and individual lender. However, a business must meet a few general requirements to qualify for an SBA start-up loan. To be eligible for loans under the SBA 7(a) program, a business must:
- Operate for profit in the United States or its territories
- Incorporating a Small Business According to SBA Standards
- Demonstrate a need for loan funds
- Have a reasonable invested capital
- Have previously accessed alternative financial resources, such as personal assets
- Use loan proceeds for acceptable business purposes
- Have no defaults on debt to the U.S. government
3. Write a business plan
Startups do not have extensive financial records like established companies. For this reason, it may be more difficult to qualify for an SBA loan as a startup than as an existing small business. Business owners can improve their chances of approval by writing a comprehensive business plan that shows how the business will make money and in what time frame. 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 generally should include a summary of what the business does and why it will be successful. The report should also include a description of the business, a market analysis including industry outlook, the legal and management structure of the business, and a description of all products and services.
4. Choose a type of loan
The SBA offers business owners several loan programs to meet a range of borrowing needs. That said, not all loans are suitable for startups. Consider one of these loan types if you need extra money to start your business.
The SBA Microloan program offers smaller loans to help businesses start or grow their businesses. Loan amounts range up to $50,000, with the average loan being around $13,000. Repayment terms extend up to six years and interest rates range from 8% to 13%. Like other SBA loans, the funds can be used for a variety of business purposes, but cannot be used to pay off existing debts or to purchase real estate.
SBA Community Benefit Program
The SBA’s Community Advantage program aims to provide business loans to underserved business communities, including women, minorities, 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 translates to rates between about 7% and 9%. Community Advantage loans can be used for business purposes, but the 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 of up to $350,000 to standard 7(a) loans of up to $5 million. Eligible borrowers can also apply for an SBA Express loan, which offers an expedited review process – just 36 hours instead of the five to 10 business days required for other options. Interest rates vary by loan type and individual lender, but cannot exceed the maximum set by the SBA.
SBA 504 Loans
The 504 loan program gives qualified borrowers access to financing of up to $5 million for the purchase of major capital assets. Interest rates hover around 3% of the loan amount, with a down payment between 10% and 30%. Repayment terms are available over 10, 20 or 25 years.
To be eligible, purchases must contribute to job creation and business growth. Companies must also operate for profit in the United States, have a net worth of less than $15 million, and generate an average net income of $5 million after federal income taxes over the past two years.
5. Research and Compare Lenders
The SBA guarantees up to a certain percentage of each SBA loan, but the loans are issued by individual lenders. Borrowers must apply for an SBA loan through an approved financial institution and meet the application and credit requirements of the individual lender. To make choosing a lender easier, the SBA provides small business owners with the Lender Match platform.
Note, however, that not all SBA-approved lenders support all loan programs. Choose a lender that offers the program best suited to your needs by considering these factors:
- SBA loan offers
- Loan amounts available
- Interest rate
- Repayment Terms
- Penalties for prepayment and other fees
- Minimum credit score and other qualification requirements
- Application process
- Speed of loan funding
- SBA Preferred Lender Status
6. Prepare and submit your application
After choosing a lender, familiarize yourself with their application process and requirements. Start organizing the necessary documentation in advance to streamline the application and approval process. Individual lenders have different application requirements, but certain documents 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
- Presentation and history of the company
- Individual and business income tax returns for the past two years
- Current and projected one to three year financial statements
- Profit and loss account and balance sheet
- Loan request history
Once you submit your application, the lender submits it to the SBA for review. Typically, qualification takes 30-90 days, but SBA Express loan applications are reviewed within 24-36 hours of receipt by the SBA. Upon approval, your lender will close the loan and disburse the funds to the bank account identified during the application process.
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Frequently Asked Questions (FAQ)
Are new businesses eligible for SBA loans?
New businesses may qualify for SBA loans, but they may not be eligible for all SBA programs. Since new businesses do not have established financial records or cash flow history, the application process can be more difficult.
Applicants may need to provide additional documentation, including a business plan that demonstrates the likely future success of the business. Startup founders should also have proof of previous industry experience and general business management experience.
Which businesses are not eligible for SBA loans?
To be eligible for an SBA 7(a) loan, a business must operate for profit in the United States or US territories. Borrowers must also have a reasonable amount of their own equity to invest in the business and must have already used other financial resources, such as personal assets, before applying for an SBA loan.
Some SBA loans also have industry-specific rules and company time requirements. Additionally, SBA loans are not available to businesses in certain industries, those that engage in illegal activities, speculative businesses, and certain other ineligible applicants.
Can I get an SBA loan to start a business?
SBA loans are available for startups, but it can be harder to qualify without established cash flow. For this reason, startup founders looking to take out an SBA loan must have a comprehensive business plan that clearly outlines how the company intends to make money, including financial forecasts. Certain types of SBA loans, like microloans, are also better suited to startups than others.