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The Complete Guide to Government Business Startup Loans

Meredith Turits

Contributing Writer at Fundera
Meredith is a writer and editor. Drawing on her background in small business and startups, she writes on business, finance, and entrepreneurship. Her writing has also appeared in the New Republic, Rolling Stone, Vanity Fair, ELLE, The Paris Review Daily, and more.

When you’re the owner of a new business, your daily grind includes putting out fires and pulling yourself up by your bootstraps. For better or worse, though, that’s part of the joy and hardship of founding a startup. Luckily, you don’t have to do every bit of the grunt work alone. That’s where government business startup loans come in.

Through the U.S. Small Business Administration—the SBA—the government offers loans granted specifically to startup businesses. These long-term, low-interest SBA startup loans are uniquely tailored to be affordable for startup businesses that are just establishing financial track records.

Small business startup loans include the ones you might first think of—acquiring financing within family and friends circles, private investors, and traditional bank loans, too. But the gold standard of startup small business loans are backed by the SBA. Just like all other SBA loans, SBA startup loans also aren’t easy to get. The application process is a lengthy one, and qualification standards are stringent.

Here are all the government business startup loan options that are out there, plus the details on what you’ll need to qualify for one.

Government Business Loans Can Take the Pressure Off of Startups

As every new business owner knows, it takes money to make money. Every new business will incur costs both substantial and annoyingly minor. And without money, you might not (read: most likely won’t) be able to get that business off and running.

That’s where a government business startup loan can come into play.

A quick overview of some of the costs you might run into when trying to launch even an early-stage startup:

  • Legal fees
  • Operating space
  • Equipment (yep, computers count toward this)
  • Supplies (perhaps you’ll need a business card?)
  • Inventory (or prototyping, especially for consumer products companies)
  • Advertising
  • Website

The Basics of Government Business Startup Loans

SBA startup loans don’t work exactly like other business loans, so it’s worth going through basics on these. Government startup loans have a few qualities that you’ll want to be fully aware of before you apply.

First: the SBA doesn’t actually give out loans. (If you’re familiar with traditional SBA loans, this part is beginning to sound familiar, yes?) The SBA isn’t technically a lender, but they do pair with lending partners—traditional banks—so that they’re able to fund loans.

Because the SBA guarantees a portion of their loans, the lending partners can take on higher risk and offer loans to businesses that are less likely to pay back their loans. In turn, that lets businesses that wouldn’t usually qualify—like, say, a startup—to get funding. And although you’re certain your startup will be a success (and we’re certainly in your corner), unfortunately, one of the reasons it’s so difficult to get financing for a startup business is that 50% fail within the first five years.

That stat makes startups risky investments for lenders. So, if a borrower does default on an SBA loan, the SBA will pay a portion of that cost to the lending partner, minimizing their losses.

Mitigating risk and covering costs makes SBA loans a win-win situation for both borrowers and lenders. Lenders get a partial guarantee in the chance that the borrower defaults on the loan. Borrowers receive long terms and low-interest payments on the loan.

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The Best Candidates for a Government Business Startup Loan

Government business startup loans are very attractive to new business owners because they offer fantastic repayment terms over a long period of time. But strict eligibility requirements limit who can qualify for SBA startup loans—otherwise the government would be doling out this financing like candy.

Two things to think about:

Q: Have you personally invested in your business?

This is a really good sign if so. The SBA is always looking for a loan applicant whose business owner has put time or capital into their operation. Owner investment often signals business success—the more an owner has personally invested in their business, the harder they will work toward its success.

Q: What do you know about your industry?

The SBA might also look to see if the business owner has prior professional knowledge of or ties to the industry in which they’re working and in managing others. This signals a level of professionalism and experience, which is also a good sign.

Government Business Startup Loan Options

The SBA three government business startup loans:

  • SBA Microloan
  • SBA Community Advantage Loan
  • SBA 7(a) loan

Typically, the limiting factor for loan eligibility is time in business. Many lenders—including the SBA and its lending partners—want to assess a business’s likelihood to repay a loan by their financial history. That’s often why they require loan applicants to have been in business for a certain period of time.

Startups don’t have this financial history, leaving them ineligible and out of luck.

Luckily, not all loans have time-in-business requirements. The SBA Microloan, SBA 7 (a) loan, and SBA Community Advantage Loan are available to startup businesses.

Government Business Startup Loan: The SBA Microloan

The most ubiquitous SBA loan product for startups is the SBA Microloan. Because the Microloan has a top limit of $50,000, applicants incur fewer eligibility requirements.

In comparison to traditional bank loans, which are on average $130,000, this isn’t much money, sure. But for most startups, it’s enough to get started. And, in contrast to other SBA loans, the SBA doesn’t guarantee any portion of SBA Microloans. This raises the risk taken on by the lender, which makes quite a bit of sense as to why that dollar amount isn’t sky high.

SBA Microloans are available for up to six years, with an interest rate of 8% to 13%. Loan amounts are as small as $500.

An SBA Microloan can be used for:

  • Working capital
  • Buying inventory or supplies
  • Buying machinery or equipment
  • Adding furniture or fixtures

An SBA Microloan can’t be used for:

  • Buying real estate
  • Refinancing other debt

A top-level look at SBA Microloan qualifications:

  • 640 or higher credit score
  • Some collateral
  • Possible personal guarantee

This means that eligibility requirements to be approved for an SBA Microloan are pretty minimal. That’s good news as a startup—you need a decent credit score, you might need some collateral, and if you don’t need collateral, you might need to offer a personal guarantee.

TL;DR: This is by far the best, most accessible government business startup loan for new businesses.

How to improve your chances of SBA Microloan approval as a startup:

Build a relationship with a local lender that has issued SBA Microloans in the past. If this lender gets to know you and your startup, your chances of getting approval could go up.

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Government Business Startup Loan: The SBA Community Advantage Loan

The SBA Community Advantage Loan is a subset of the SBA Microloan Program. This program specifically aims to offer SBA Microloans to businesses that operate in an underserved community.

The SBA Community Advantage Loan:

  • Is federally guaranteed
  • Ranges from $50,000 to $250,000
  • Has 7% to 9% interest rates
  • Is paid off over 7 to 10 years

These terms and interest rates are high value to small and startup businesses—especially for those that normally have limited access to needed resources.

A top-level look at SBA Community Advantage Loan qualifications:

  • Set by individual lenders

What’s great here is that, unlike other loan products, a business’s financial history, credit score, and ability to provide collateral are less important when assessing eligibility for this government business startup loan.

TL;DR: Because SBA Community Advantage Loans don’t exclude startups and are held for specific candidates that can benefit from their terms, if you think your startup is a candidate for this government business startup loan, certainly apply.

Government Business Startup Loan: The SBA 7(a) Loan

The most common SBA loan is the SBA 7(a) loan. Because there are few restrictions on how borrowers can use the loaned funds, this is a favorite of small business owners. It also comes with the great terms offered by all other SBA loans.

The SBA 7(a) loan is available to startups, since there aren’t any time-in-business restrictions for eligibility. That said, this is the most desirable loan product on the market and isn’t easy to get—whether you’re running a startup or not.

A top-level look at SBA 7(a) loan qualifications:

  • 680 or higher credit score
  • No recent financial blemishes (bankruptcies, liens, or foreclosures)
  • Collateral
    • Exceptions: Loans under $25,000 don’t need collateral
    • Insufficient collateral isn’t enough for a loan denial, but it helps to improve chances of approval
  • 10% down payment (if you’re purchasing real estate, equipment, or a business)

It’s not impossible for your startup to be eligible for an SBA 7(a) loan, but it’s not easy.

The biggest determining factor for eligibility here is your credit score. Lots of startup business owners and businesses don’t have a 680 or higher credit score. If you do, however, you’re really well positioned to be eligible.

The other requirements are all less difficult to meet, especially if you’re not borrowing a ton. And, as long as you’re not using the loaned funds to purchase real estate, equipment, or a business, a down payment isn’t required.

TL;DR: The SBA 7(a) loan is worth investigating if you’re a startup. But, as with all SBA loans, it’s tough to be approved for this government business startup loan.

How to Get a Government Business Startup Loan

The application process for how to get a government business startup loan is simple, sure. But there are a few tricks to know when preparing your SBA loan package to improve your chances of approval for one of the SBA startup loans.

Create a Thorough Business Plan

Before approving your business for an SBA startup loan, the SBA and intermediary lender will want to see your business plan.

Your business plan should include:

  • Business goals
  • How you’ll make money
  • Marketing and advertising strategies
  • What supplies and inventory you’ll need
  • Who the stakeholders in your business are

Your business plan is your time to show the lender your business prowess—and, of course, how you plan to make money. Always remember that what the lender cares about most is getting their money back. If your business makes money, they get repaid.

A thorough business also plan shows the lender your dedication to your business. And they’re looking for this—because that means money to them. A well-thought out and described plan for a successful business shows that you’re already invested in making your business profitable.

Check Your Credit Report and Fix Errors

Although not every SBA loan qualification is contingent on having perfect credit, these government loans do take into account your credit scores (both personal and business if you have one established). Plus, the higher your credit scores, the more likely you are to be approved, and the lower your interest rate will be.

And, as the most paperwork-intensive business loans out there, this financing option should prompt you to put all your financial ducks in a row. So, before you submit an application for a government business startup loan, request your credit score and history from the three major credit reporting bureaus: TransUnion, Experian, and Equifax.

It’s important to check your credit report before applying to make sure there aren’t any errors. Approximately 1 in 5 credit reports have an error—which can have a major effect on your score. Have these errors addressed and you might just see an increase in your credit score.

You also need to pull your business credit score from an agency such as Dun & Bradstreet. As a startup business, it’s likely that your business credit report will be blank. This is normal. Pulling your business credit report lets you make sure there are no errors and to attach the proper file to your application.

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Consider Collateral

If you’re approved for an SBA loan for your startup, you might be asked to put down collateral or a personal guarantee. Collateral can be any personal property that you own, such as your car or home. If you default on your loan, your collateral can be collected to repay the loan.

A personal guarantee is a guarantee you make to repay a certain amount if your business defaults on the loan and cannot pay. A personal guarantee might include savings, investments, or assets to repay the loan.

Neither of these scenarios sounds like much fun. Fortunately, most government business startup loans are for small amounts of money. You’ll lose less than if you defaulted on a larger loan. In the case of default, the lender can only reclaim up to the value of the principal plus interest still owed.

Assess Your Personal Investment

Remember: the lender wants to be repaid. Lenders are aware that businesses with invested owners are more likely to be successful.

If you’ve invested time or money into your business, be sure to include that in your loan application. The more you’ve invested in your business, the more skin you have in the game. Your monetary investment in your business shows that you’re serious about what you’re doing.

Now, Go Get That SBA Loan for Your Startup, or Build Business Credit in the Meantime

Surprised at how many opportunities are out there for government business startup loans? There’s a possibility your new startup might have options on the table, even with little or no time in business or business credit history. The SBA offers products to startups with long repayment terms and low interest rates.

Or, if you’ve read through all of this and it looks like an SBA loan isn’t going to be on the table for your startup, you do still have options for capital. (Beyond trying to raise venture and asking around to your friends and family, yes.)

A huge part of small business loan eligibility is building business credit history—and you can start that now with a business credit card. You can take a look now to see which options your startup is qualified for today, including 0% APR business credit cards. Those might just hold you over until you’re ready for that SBA loan after all.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Meredith Turits

Contributing Writer at Fundera
Meredith is a writer and editor. Drawing on her background in small business and startups, she writes on business, finance, and entrepreneurship. Her writing has also appeared in the New Republic, Rolling Stone, Vanity Fair, ELLE, The Paris Review Daily, and more.

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