Over 30.7 million small businesses are part of the American economy.
Are you considering starting up a small business? One of the most important first steps is getting funding.
Finding a small business loan for a startup can be more complicated than for a more established business. Many lenders won’t fund startups. However, the Small Business Administration (SBA) offers several loan programs that are open to startups.
Find out more about SBA small business loans for startups. You’ll be able to choose the best program to launch and grow your business.
SBA Loans for Small Business Startups
The SBA offers a variety of loan programs. Many of these programs are open to startups and new businesses.
The SBA doesn’t fund loans directly. The loan programs work through intermediaries like banks, private lenders, and non-profit organizations.
Loans must meet SBA standards. As a result, the terms are flexible and interest rates are lower than most other lending options for startups.
Most SBA loan programs don’t require a certain amount of time in business. You’ll need to find an intermediary who works with startups, though.
SBA Microloans
Microloans provide up to $50,000 for your small business startup. The average loan is around $13,000. Intermediary lenders for SBA microloans are non-profit community-based organizations.
You can use a microloan to purchase a variety of items such as:
- Equipment
- Machinery
- Inventory
- Supplies
- Furniture
- Fixtures
You can also use an SBA microloan for working capital. The only uses that are specifically prohibited are buying real estate and paying or refinancing existing debt.
Interest rates vary depending on the lender but are usually between 8% and 13%.
The repayment terms also depend on the lender. Some of the determining factors include the size of the loan and its purpose. The maximum repayment period is six years.
SBA 7(a) Loans
An SBA 7(a) loan is a popular choice for many startups and small businesses because of its flexibility. You can get up to $5 million for your business. A 7(a) loan has a higher borrowing limit than a microloan. It also gives you more flexibility in how you use the money.
Standard 7(a) loans can be used for purposes that include:
- Short- and long-term working capital
- Purchasing equipment, furniture, fixtures, and supplies
- Purchasing real estate
- Refinancing business debt
The SBA can guarantee up to 85% of a loan of $150,000 or less. They’ll guarantee up to 75% for loans over $150,000.
Low interest rates, long repayment terms, and flexibility make the SBA 7(a) an attractive small business loan for startups.
Getting a 7(a) loan can take time, however. The entire process from application to funding can take at least 30 to 90 days.
In addition, you’ll need to provide collateral for loans over $350,000. The SBA requires lenders to get as much collateral as possible up to the amount of the loan.
SBA Express Loan
An Express loan is a type of 7(a) loan. It gives you low interest rates and longer repayment terms.
However, Express loans differ from traditional SBA 7(a) loans in three ways. First, an Express loan has a borrowing maximum of $350,000.
Secondly, the processing time is shorter. A standard 7(a) loan takes 7-10 days for an approval decision from the SBA. You’ll have a decision on your Express loan in 36 hours or less.
Finally, the SBA only guarantees up to 50% of an Express loan. The interest rates may be slightly higher than for a standard 7(a) loan.
SBA Community Advantage Loan
Community Advantage loans are a pilot program. The program is currently set to expire on September 30, 2022. Community Advantage loans are another type of 7(a) loan.
Your business must be in an underserved market to meet the criteria for a Community Advantage loan. The SBA uses a range of factors to determine whether an area is underserved. Some of those considerations include:
- Low- to moderate-income (LMI) communities
- Businesses where more than 50% of the full-time workforce is low-income or lives in an LMI area
- Businesses eligible for SBA Veterans Advantage
- Rural areas
You can borrow up to $250,000 with a Community Advantage loan. Regulations for how you can use the money are the same as for a standard SBA 7(a) loan.
The lower maximum loan amount is a potential disadvantage of this program. However, if your business is in an underserved market, you may qualify for a Community Advantage loan even if you haven’t been able to get other types of funding.
SBA CDC/504 Loans
The CDC/504 loan program provides long-term financing for major fixed assets that promote job creation and the growth of your business. You can borrow up to $5 million.
You can use a CDC/504 loan for purposes like:
- Buying existing buildings or land
- Building new facilities or improving existing ones
- Improving streets, utilities, parking lots, and landscaping
- Buying long-term machinery and equipment
You can’t use a CDC/504 loan for working capital or inventory. Other prohibited uses include repaying or refinancing debt and speculation or investment in rental properties.
A CDC/504 loan helps you preserve your working capital.
You only need a 10% borrower contribution in most cases. A Certified Development Company (CDC) provides 40% of the financing. A third-party lender like a bank provides the remaining 50%.
The interest rates are fixed. Loans are available with 10-year, 20-year, or 25-year repayment terms.
Finding a lender and a CDC can be time-consuming. The rates and terms are very competitive, though, which can make a CDC/504 loan a good choice.
Eligibility for an SBA Small Business Loan
The SBA has some general eligibility requirements for all of these loan programs. Most startups will meet the requirements. Your business must:
- Be for-profit
- Meet the SBA’s definition of a small business
- Do business in the US
- Have a reasonable amount of invested equity
- Have used up any other means of funding
- Demonstrate a legitimate need for a loan
Some loan programs or lenders may have additional requirements. In all cases, your application will need to demonstrate your business experience, show a good credit score, and have the necessary documentation.
How to Get a Small Business Loan for Your Startup
The SBA has several loan programs that can provide financing when you’re starting up a small business.
SBALenders is ready to help you understand all of your options. We’ll work with you to find the best loan program for your situation. Then, we’ll help you find the lender most likely to provide you with an SBA loan.
Contact us today and take the next step toward achieving your dream.