The Ultimate Guide to SBA Loans for Startups

Updated on October 1, 2020
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SBA Loans for Startup Businesses

When you have a startup business, finding the right funding is essential. After all, as a new business, you have a variety of initial startup costs to cover and the right capital can help pay for those costs and get your operations off the ground.

Along these lines, if you’re exploring your options for business loans, you might be looking into SBA loans. With some of the best rates and terms on the market, SBA loans are one of the most competitive types of business funding.

To qualify for an SBA loan, you’ll need to meet a series of specific requirements—typically, including at least two years in business. Unfortunately, therefore, if you’re searching for SBA loans for startups, you might find it difficult if your startup is under two years old.

This being said, however, just because it’s more difficult to find SBA startup loans, doesn’t mean they don’t exist.

In this guide, therefore, we’ll break down everything you need to know about your options for SBA loans for startup businesses—including the Microloan and Community Advantage program. We’ll also discuss some of the best SBA loan options for startups with more time in business, as well as the steps you need to take to actually get one of these SBA startup loans for your new business.

Apply for an SBA Paycheck Protection Loan

The Best Options for SBA Startup Loans

As we mentioned above, finding an SBA startup loan can be difficult—because in most cases, you need strong business financials, a solid credit score, and at least a few years in business to qualify for an SBA loan.

In general, these qualifications can be tough for many small businesses to meet, and even more so for a business that’s just starting out. This being said, however, the purpose of the SBA loan program is to be able to make financing more accessible for small businesses, and therefore, there are some programs that are better-suited for startups with only a little time in business.

Best SBA Loans for Startups

SBA Microloan Program

The SBA Microloan program has almost become synonymous with SBA loans for startup businesses. Unlike some of the other SBA loan programs, the Microloan program offers startups tailored access to smaller amounts of capital.

Through the Microloan program, the SBA lends capital to non-profit intermediary lenders who, in turn, lend that capital to local small businesses. These SBA startup loans are offered in amounts between $500 and $50,000, with interest rates typically ranging from 8% to 13%.

As with the majority of SBA loans, some of the specifics will depend on the intermediary lender you work with, however, the SBA sets the maximum term on these loans at six years.

An SBA Microloan can be used for a variety of purposes:

  • Working capital
  • Inventory or supplies
  • Machinery or equipment
  • Furniture or fixtures, and more

If you’re a new business with a low capital requirement, this type of SBA startup loan may be right for you.

  • The SBA and Your Startup

    One of the reasons that Microloans are great SBA loans for startups is that their qualifications are slightly more flexible. Whereas many SBA loans require at least two years in business, you can likely qualify for an SBA Microloan as a startup—as long as you can prove your ability to pay back the loan.

    Along these lines, if you don’t yet have strong financials or revenue to show to the lender, you can prove your business’s ability to repay with a detailed business plan that includes financial projections.

    This being said, as we mentioned briefly above, because SBA Microloans are provided by intermediary lenders, some of your SBA startup loan requirements will depend on the individual lender.

    Generally, however, you should expect to need to show that you’re running a for-profit business with good character, have average credit, as well as offer up collateral and a personal guarantee.

SBA Community Advantage Loans

Like the SBA Microloan program, the SBA Community Advantage loan program is much more friendly for startup businesses. Started in 2011, this loan program was created to improve access to business capital for startup founders (as well as other business owners) operating within underserved communities.

SBA Community Advantage loans are federally guaranteed term loans administered by community-based lenders who have a history of helping small businesses start in disenfranchised communities. These organizations consist of SBA-authorized Microloan intermediaries, Community Development Financial Institutions, and Certified Development Companies.

These SBA startup loans range in amounts from $50,000 to $250,000, with terms from seven to 10 years, and interest rates typically ranging from 7% to 9%.

Like the Microloan program, Community Advantage loans can be used for a variety of different purposes.

In this way, Community Advantage loans are worthwhile SBA loans for startup businesses in disenfranchised communities who are looking for access to larger amounts of capital to support and grow their operations.

  • What is the Microloan Program?

    Again, like the Microloan program, one of the reasons that Community Advantage loans are great for startup funding is they don’t require a number of years in business to qualify.

    Instead, you’ll need to be able to prove that you’re a responsible borrower and that your business idea is a good one. Along these lines, you’ll want to be able to show that you have a vision for the future, that you have experience in your business’s field, and that you have average credit, or better.

    Of course, some of the more specific SBA startup loan requirements will vary based on the community lender you work with.

SBA 7(a) and 504/CDC Loans

The 7(a) and 504/CDC loan programs are two of the most popular SBA loan programs for small businesses. Compared to the Microloan and Community Advantage loan programs, however, these options are not as well-suited for startup businesses.

As we’ve mentioned, where the SBA loan requirements are more flexible for the Microloan and Community Advantage programs, the 7(a) and 504/CDC programs usually require at least two years in business.

This being said, the characterization of “startup,” can encompass a wide variety of businesses. Therefore, if you’re not necessarily looking for funding to start your business, but more so are searching for options for your more established startup, you might consider either of these SBA loan programs.

  • SBA 7(a) Loans

    With the SBA 7(a) loan program, SBA lending partners (typically banks) provide loans in amounts up to $5 million with terms up to 25 years. SBA 7(a) loans can be used for a variety of purposes—including working capital, buying equipment, refinancing debt, buying an existing business, purchasing real estate, and more.

    Although interest rates will range based on the lender you work with and your credit profile, the SBA does set maximum limits, and typically, you’ll see rates from around 8% to 13%.

    Just like the other SBA loan programs we’ve discussed, some of the requirements for a 7(a) loan will depend on the SBA lender you’re working with, however, generally, you’ll need to have good personal credit, strong business financials, and at least a few years in business to qualify.

    In this way, 7(a) loans are great SBA startup loans for more established startups who can meet the necessary requirements. Newer startups may also be able to qualify if their other qualifications are particularly strong.

  • SBA 504/CDC Loans

    Whereas 7(a) loans can be used for a variety of business purposes, SBA 504/CDC loans are designed specifically for the purchase of real estate, equipment, and other fixed assets.

    SBA 504/CDC loans are also one of the more complex SBA loan programs, as the loans are issued in part by SBA lending partners, in part by certified development companies (CDCs), and in part by a down payment from the borrower.

    This being said, however, SBA 504/CDC loans can range as high as $5.5 million, with terms up to 25 years. Interest rates on these loans generally fall between 5% to 6%.

    Once again, like 7(a) loans, 504/CDC loans typically require at least a few years in business to qualify (among other requirements)—making them a worthwhile SBA startup loan option for more-established startups looking to finance fixed asset purchases.

SBA Investment Programs

Although our final option may not necessarily qualify as SBA loans for startups, the different SBA Investment programs can be worthwhile solutions for startups looking for financing.

  • Small Business Investment Company (SBICs): SBICs are privately-owned investment companies that are licensed and regulated by the SBA. These investment companies use their own funds, as well as capital borrowed from the SBA (with an SBA guarantee) to invest in small businesses. SBICs offer both equity and debt financing and therefore, can be a great funding option for startups who can qualify.
  • Small Business Innovation Research (SBIR) Program: If your startup business is involved in science and technology, you might look into the SBIR program for financing. Through the SBIR program, your business can qualify for grants from government agencies looking to promote and facilitate the commercialization of research in these particular fields.
  • Small Business Technology Transfer (STTR) Program: Similar to the SBIR program, the STTR program offers grants for small businesses and nonprofit organizations involved in research and development within the fields of science and technology. Again, although these might not be SBA loans for startups, if you can qualify for one of these competitive grants, you won’t have to worry about interest or paying back the funding.

How to Get an SBA Startup Loan

As you can see, from the Microloan program to the SBIR program, there are a variety of options available for SBA startup loans.

Like we’ve discussed, however, the right SBA loan for your startup will largely depend on what kind of financing you’re looking for and what program you can qualify for.

In addition, the SBA startup loan requirements that you’ll need to meet will also vary based on the loan program and the lender you’re working with.

Generally, though, you can expect to need to do the following in order to get an SBA loan for your startup.

Find the Right SBA Lender and Program

First and foremost, you’ll need to decide which SBA loan program is best for your startup funding needs. For example, if you determine that an SBA Microloan is right for your business, you’ll then need to find an intermediary lender in your area and work with that institution through the application and funding process.

On the other hand, if you think an SBA 504 loan is right for your startup, you’ll need to find an SBA lender who works within this program—and this lender will likely be able to point you in the direction of CDCs available in your area.

Prepare your SBA Startup Loan Requirements

Once you’ve found the right SBA lender and program, you’ll need to start gathering documentation for your application and ensuring that you meet the necessary SBA startup loan requirements.

As we’ve discussed, some of the requirements you need to meet will vary based on the program and the lender. Nevertheless, you can expect to need some, if not all, of the following:

  • To be able to meet the SBA definition of a small business, among other similar eligibility criteria
  • Basic information about your business and any and all owners, stakeholders, or investors
  • Personal and business tax information
  • Personal and business financial information
  • Business plan with financial projections (this will be particularly important if you’re a newer startup)
  • Personal and business credit scores
  • Collateral and SBA personal guarantee

Complete and Submit Your Application

The last step, of course, will be to submit your application—with all of the information and documentation that’s required.

After you’ve submitted your application, you should be prepared to address any questions or requests your lender has promptly—as this will help speed up the underwriting process.

Generally, SBA loans for startups (or any businesses) have a lengthy application process and funding can take anywhere from 60 to 90 days. If you’re approved for your SBA startup loan, you’ll want to review the terms and conditions carefully and thoroughly before signing any agreement. You may also decide to consult with a business attorney or other professional before agreeing to the terms of the loan.

Learn more about the details of the SBA loan application process here.

See Your Loan Options

Frequently Asked Questions

The Bottom Line

At the end of the day, although some SBA loan programs are designed for more established businesses, there are still options available for startups.

If your business is a true startup—in that you’re just starting out and have less than two years in business—you’ll probably find that Microloans or Community Advantages loans are the best SBA startup loan options for your business.

On the other hand, if you can meet the requirements for an SBA 7(a) or 504/CDC loan, these programs are also worth considering. Plus, if your startup is eligible for one of the SBA Investment programs, you may be able to access small business grants—and won’t have to worry about repaying the funding you receive.

With all of this in mind, it’s also possible that you find SBA loans are not the right option for your startup. Luckily, 75% of startup financing comes from small business startup loans—which means there are a variety of other funding products you can explore—from online term loans to lines of credit to business credit cards, and more.

Meredith Wood
GM, New Markets at NerdWallet

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.

Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.

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