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NGExpert financial copywriter
New businesses or startups that need funding may be able to get financing through U.S. Small Business Administration (SBA) loans.
Most SBA loans are targeted toward businesses that have been operating for a few years, but there are some available to startups.
A startup loan is a business loan meant to help a new business get started. Many startups need funds to cover the costs of equipment, inventory, machinery and even real estate. But they can have a difficult time finding financing because they can’t prove creditworthiness or annual revenue. This means that financial institutions like banks or credit unions will be taking on more risk to lend to the startup than they would lending to established businesses.
Because most traditional business loans are targeted toward small businesses that have several years under their belts, it can be difficult for a startup to qualify for a loan. On top of that, many small business owners don’t have the high credit scores, downpayments or collateral that may qualify them for traditional bank loans. However, there are several options available to new businesses who want funding, including SBA loans.
The U.S. Small Business Administration (SBA) backs loans that are administered by other lenders, including community-based or nonprofit organizations, banks and credit unions. While the SBA doesn’t lend the money directly to borrowers, they guarantee the loans, which means the lenders can lend money to borrowers that may look riskier on paper based on creditworthiness.
Each lender sets their own terms and rates for SBA-backed loans, although the SBA sets certain limits on how much interest they can charge and how long they can set their terms. The SBA also has guidelines on which businesses can borrow through their programs.
There are four programs that startups may qualify for under the SBA:
If you need $50,000 or less for your new business, the SBA microloan program may be the right choice for you. These loans can be used for a number of purposes, including working capital, furniture or fixtures, equipment, inventory, supplies and machinery. Rates and terms are relatively competitive, and loan term lengths are all eight years or fewer.
Community-based and nonprofit organizations administer the program on behalf of the SBA, and they set their own qualifications and rates. However, they’re usually less strict than other SBA programs, which means that small businesses who have less than stellar credit or less annual revenue may have more success applying. The SBA microloan program will require collateral (usually your business or the equipment you’re purchasing with the loan) and a personal guarantee.
The SBA Community Advantage loan program was started specifically to help small businesses that are starting out in underserved communities. Startups can qualify for as much as $350,000 under the program, which is managed by community-based and mission-oriented lenders. The program also doesn’t require collateral or minimum annual revenue, and most borrowers have been in business for under three years. Term lengths for working capital loans mature after 10 years and 25 years for real estate loans.
As the most competitive small business loan program that the SBA administers, the SBA 7(a) program is made up of several different programs. Small businesses can borrow up to $5 million for working capital, equipment, supplies and even real estate. SBA Express loans fall under this umbrella, and borrowers can get up to $500,000, with the SBA responding to most applications in under 36 hours.
However, the SBA 7(a) program generally requires that you have a credit score of 680 or above and that your business has been operating for at least two years. They may also require collateral or a downpayment.
The SBA CDC/504 loan program is meant specifically for small businesses to promote business growth and job creation. Borrowers can use these funds for purchasing or improving commercial real estate or major business assets, such as machinery or equipment. The maximum borrowing amount is $5.5 million for certain projects, but borrowers have to provide at least 10% of the loan as a down payment. The term length is 10 to 20 years, and the program is managed by Certified Development Companies (CDCs) and traditional financial institutions such as banks or credit unions.
To work out the monthly repayments of your loan, use our SBA loan calculator here.
In order to qualify for an SBA loan for your startup, you first need to determine how much money you need and what you intend to use it for. You’ll also need to make sure that you have the necessary paperwork for the loan you choose, such as business licenses, incorporation documents, tax returns, and more. It’s a good idea to have a business plan in place before applying, as lenders will want to know what you plan to do with the money they lend you.
Once you’ve determined the best SBA loan for your startup, you can use the SBA’s lender match tool to find the right lender. These financial institutions or community-based programs will administer the loan on behalf of the SBA and manage rates, terms and application processes.
After finding the right lender, it’s time to apply for your loan. Gather all the information you’ll need to apply and make sure you have your financial information in order. The requirements will vary by lender, but you can expect to need to provide:
Your lender will be able to help you determine if your application is complete before you submit it. It can take one to three months to apply and receive funds for an SBA loan, so it’s important to make sure you have all the proper documentation in order.
The SBA has a few rules about who can qualify for one of their loan programs. These include that the business must be a U.S.-based for-profit business that is considered a “small business” under their guidelines, which are based on number of employees, annual revenue and net worth of the business per industry.
A borrower must also not be involved in certain industries, such as investment, lending, gambling or speculation. The owners must be in good legal standing and not have outstanding government debts such as taxes.
Approval rates for SBA startup loans vary by program. Up to 30% of SBA microloans go to startups or new businesses, but this doesn’t mean that every startup that applies is approved. In 2022, the SBA microloans program approved a total of 59 loans, while the SBA 7(a) program approved 47,681. In 2022, small banks approved 49% of SBA business loans, while larger banks approved 25%.
You can improve your odds of being approved for an SBA loan by making sure you match their qualifications, choosing the right lender, having the right collateral and working on getting a higher credit score.
Finding the right lender can be confusing for many new businesses. It’s important to make sure that you match your qualifications to the lender that’s right for you. Understanding the terms and conditions of each loan, as well as fully outlining your intentions with the money, is the best place to start.
It’s a good idea to research lenders in your area based on which industries they lend to. Many lenders work specifically with business owners like you, and can help guide you through the process. There are several tools available through the SBA to help you find the right lender for your needs.
Professional advisors, like Swoop, who understand the SBA loan landscape can also give you a better idea of what kind of loan and lender will be best for your small business needs.
Use Swoop to help you find the right SBA startup loan for your new business. We can guide you through the process and match you with a lender that is more likely to approve your loan. Download the app today to get started.
Written by
As a B2B finance content specialist, Kat Cox's goal is to distill complicated financial issues into useful information for small business owners, to save them time they could be using to build their companies. Her work has been featured in Forbes and on financial health platform Nav.com. When she's not writing blogs, web copy, or fiction, Kat can be found walking her dog or singing karaoke in Austin, Texas.
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