One of the most notable partners in the business financing space is the Small Business Administration (SBA). Their Lendermatch network has been instrumental in providing loans to various industries in amounts ranging from a few thousand dollars to millions.
How can you qualify for SBA startup loans? What special actions can you take to better your chances of approval? Whether you’re part of many growing women-owned businesses, or you are following in your family’s footsteps by launching a new tech firm, the various SBA lending programs ensure that the right loan product is waiting for you.
How do I get an SBA startup loan?
The SBA itself doesn’t give businesses any money. Instead, they are the source of the Lendermatch program, a campaign that allows qualified businesses to be paired with the private lender that is most likely to issue the business loans they need. Banks are the ones making the loans and have their own internal practices for assessing risk and determining if you’re a worthy borrower. While they must follow some guidelines set forth through the SBA lending standards, they can ultimately make the decision for approval – or not.
Your first step is to go to the SBA Lendermatch site and read the requirements for borrowers. While each lending program has a few additional restrictions, SBA programs ask that applicants meet these goals:
- U.S.-based, existing business owners, doing business in the U.S.
- Is a for-profit entity (non-profit daycares are an exception)
- Established time in business
- Good to excellent personal credit history with responsible use of credit cards
- Owner supported and funded
- Have tried other funding options and failed, including personal loans
- Be operating a legal business in an SBA-approved industry
- Is owned by someone who isn’t a felon or engaged in dubious deeds
How does the SBA come into the picture? In addition to helping set guidelines for the lender, it backs a portion of each loan. The bank wouldn’t be on the hook for the full amount if the borrower were to default. This reduction of risk makes it easier for banks to take a chance on businesses and extend more overall credit to startups and small businesses who may not be eligible for money through other means.
Popular SBA startup loans
The SBA has over a dozen separate funding programs for entrepreneurs, with many of the traditional loans doing approximately the same thing. Within these loan lines, however, there are three most popular services. They are the SBA 7(a) loans, SBA 504/CDC loans, and SBA microloans. Here’s a bit more about each program and what each expects of applicants.
SBA 7(a) Loans
When you hear about a company getting $500,000 financing through the SBA for working capital for their established company, you’re likely getting the news about the SBA 7(a) loans. This is the loan that many franchises and larger companies who want to expand go for. With a $5 million maximum loan cap, it’s sought after by big businesses who have proven market traction and can justify the big risk that lenders are taking with them.
In addition to the franchise opportunity, mentioned before, SBA 7(a) loans are a fit for anyone who wants to get more working capital, buy equipment, purchase commercial real estate, or pay down existing debt. They have much lower rates than credit cards or vendor financing options, and they give you between 10 to 25 years to repay, depending on the purpose of the loan. Expect to prove you have very good to excellent credit to get this option.
SBA 504 Loans (CDC loans)
If you want to grow your business by buying a new building, the SBA 504 loan, also called a CDC loan, is your best choice. It’s available for qualified borrowers who want to buy real estate, invest in construction, or update equipment and machinery. You can borrow up to $20 million, if you meet the requirements, as this loan is designed specifically for such high-cost needs.
You’ll have 10 to 20 years to repay the loan amount, too, so it’s a good choice for those with a well-written, long-term plan for expansion and growth. You will have to meet the rules for buying property, however, which may include a 10% property down payment. This isn’t a loan for those with no money or experience with a business.
Have you heard about the SBA microloan? This smaller, more flexible loan type is designed for small business owners in any stage of the game, even those who haven’t launched yet. For this reason, this loan is considered a true SBA business startup loan. You can’t use the microloan for financing property or to refinance debt. The lender will probably also ask for collateral, so expect to put personal assets or business property up to guarantee your repayment of the loan.
Loan amounts go up to $50,000 and are available to those who wouldn’t otherwise get funded. These business loans aren’t guaranteed by the SBA, so (in addition to those SBA guidelines we already mentioned) expect the bank to set the rules on who is qualified – and who isn’t. This loan term is up to six years and may require you to sit in on training or mentoring sessions as part of the loan program. It’s a good option for home businesses and non-profit daycare who want to gain more knowledge, as well as money and aren’t a fit for short-term loans.
Who qualifies for SBA loans?
In addition to meeting the basic business requirements listed above (such as being a for-profit entity in the U.S.), the bank will have its own financial requirements to meet. The obvious one is credit. While the SBA loans exist as an opportunity for those who may not qualify for funding elsewhere to have a chance at a loan, they still require you to have a demonstrated ability to repay the loan.
A good personal credit score is an indication that you can manage your loan payments and are a good credit risk. If you have poor credit, your first course of action is to improve that number so that you can appear to be a good risk in the eyes of the lender. If you don’t know your personal credit score, stop everything, and get it. You can only know what improvements you need to make after you know your score.
Since it is a business loan, it wouldn’t be possible without also running a business credit check. Your FICO SBSS score, which is available for free through Nav, can tell you what – if any – established credit history you’ve built for your start-up business.
Not every small business will have much of a business history, so if you find yourself without one, don’t panic. It can be easier than you think to start a business credit score, with one of the ways to have your vendors and suppliers report your on-time payments to the credit bureaus. Often this just requires you asking, so inquire with your business partners to see if they report.
Depending on the loan you apply for, you may also need a demonstrated history of doing business. While a true startup may not have any history to share with a lender, a business plan or carefully laid-out explanation of how the funds will be used to start the business is a minimum SBA loan requirement. For loans that are available only for established businesses (such as the 7(a) and the 504/CDC), expect to show the following:
- In business at least two years
- Have a solid business plan
- Have demonstrated a plan for the capital you’ll receive and how you’ll pay it back
- Have a secure financial forecast that is demonstrated by cash flow reports, profit and loss sheets, and budgets for the next few months and the years you are paying the loan
- Have available collateral
Is it possible that a lender will extend credit to a business that doesn’t meet all of the above? It could happen. Most true startups have very little of the documentation that shows sales and future revenue, but they can overcome these obstacles by showing a solid and researched plan for the money, as well as having good credit, a substantial down payment, and collateral to secure the loan.
By having as many of the above documented and ready for your loan application and interview, however, it can speed up the process – even for the most qualified borrowers.
Top SBA Lenders
So, you think you can qualify for an SBA startup loan? You’re ready to start scouting out lenders! There are many partner lenders to choose from, and the SBA Lendermatch loan program will do its part to show you which interested lenders meet your specific financing requirements and qualifications. Here’s a quick list of some of the more active players in the SBA loan market.
Smartbiz SBA loans
If you want the security and reputation of an SBA loan, but value a shorter loan application process through online lenders, the SBA loans from Smartbiz may be the right choice for you. Their application is online and automated, even allowing your personal and business tax returns to be imported electronically. (That’s less paperwork for you!)
Expect the process to take about a month at the maximum. They do have the same lengthy requirements as other SBA loans (including having an updated business plan), so be sure you have all those items we mentioned, as well as your business incorporation papers and licenses. Small-business loans from Smartbiz cannot be used for refinancing debt, buying a new business, or purchasing real estate.
Chase SBA loans
If you like the customer service you’ve gotten as an existing Chase customer, or you are new to the brand but have heard good things, you’ll be happy to know that Chase offers SBA loan program offerings for both SBA 7(a) and 504 loans.
They also offer the popular SBA Express loans, which is designed for smaller real estate purchases, buying a new business, or working capital. Both fixed and variable rate terms are available. Chase loans must be made in person, so visit a local branch to get a better idea of their qualification process.
Wells Fargo SBA loans
Wells Fargo advertises their partnership with the SBA and currently offers the 7(a) and 504 loans to new and existing customers. With longer repayment terms offering smaller monthly payments and lower down payments to make overall costs more reasonable for startups, the Wells Fargo team is a long-time partner to the SBA programs.
The bank requires that you be an existing and on-going for-profit business with a tangible net worth of no more than $15 million have an average net income of more than $5 million during the last 24 months. These financing terms may be harder for startups to meet, and you must apply in person.
The Huntington National Bank SBA loans
Reported by the SBA to be the “#1 SBA 7(a) lender in the region made up of Illinois, Indiana, Kentucky, Ohio, Michigan, West Virginia, Western Pennsylvania and Wisconsin,” Huntington specializes in SBA 7(a) loans, express loans, and the 504 lending program.
While the microloan program isn’t specifically advertised, their loans range from $5,000 to $5 million. It’s feasible that one of their loan specialists can help you determine if a more modest loan is available for your startup situation.
Frequently Asked Questions
Are you still unsure about an SBA startup loan? Here are a few additional questions people have when applying.
How much down payment is required for an SBA loan?
SBA down payments aren’t always required unless you are buying property. What you may be referring to is collateral, which is the personal guarantee that your home or your business property would be surrendered to the bank in the case of nonpayment. Many SBA loans for startups require collateral for any type of financing. Unlike unsecured loans, you should be prepared to show what items of value you are willing to put up to secure the deal. If you want to buy real estate, some of the same rules apply as when buying a home; expect to pay 10-20% for a down payment, plus various fees and closing costs for the mortgage.
How can I get a loan to start a business with bad credit?
Traditional financial institutions aren’t usually in the market to give business loans to those with questionable repayment histories, but that doesn’t mean that you are out of the lending game. If you have good to excellent personal credit, you can apply for business cards with your social security number – or, even use personal loans or credit card to fund your endeavor.
A secured credit card may be a way to get your credit back on track, or you could try high-interest credit cards to access funding right away. You may also try any credit unions you may belong to or see if the SBA has more opportunities through their Community Advantage Loans program.
Note that lending services such as merchant cash advances are very expensive, so do your best to pay them back and avoid additional accruing interest. If you can wait for financing later, it’s best to keep working on your credit score and apply for a more affordable lending option with your new and improved business or personal credit score.
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