An SBA startup loan is one form of merchant financing that new businesses can use to secure through lending programs that are run by the Small Business Administration. For this reason, we’re going to tell you all about how to apply and qualify for an SBA startup loan.
75% of startup business’ financing originates from an SBA start-up loan. The difference between an SBA startup loan and a traditional SBA 7a loan for businesses that already exist is that the former is more challenging to qualify for due to the greater risk of default.
But just because they’re difficult doesn’t mean they’re impossible. SBA lenders will require to pay 25-30% down payment plus collateral upfront.
However, if funding your startup business with your own money isn’t an option, then that’s where an SBA startup loan comes in handy.
What are the different types of SBA Loans?
Applying for an SBA startup loan is all well and good, and there’s a need to understand them just in case things go awry. As we’ve said, most lenders aren’t very keen with working on startups because half of them don’t last past the first five years.
So when an SBA startup loan application doesn’t go according to plan, there are other SBA loans that could be an option for you — offering rates from 6.75% to 9.25% along with very lenient repayment terms.
SBA startup loans fall under four main SBA loan types:
SBA Express Loans
This is a form of an SBA 7a loan, and it’s a nice option for startups that will only need $350,000 to start out. Lenders are also more likely to approve businesses that apply for an express loan. The risk of lending smaller amounts isn’t as high.
SBA 504 Loans
SBA 504 loans let you access $5 million to finance your business — especially if it’s real estate. They are less common than a lot of traditional SBA loans, but they are increasing in popularity consistently. You’ll still be required to pay for 25-30% in down payment.
SBA Microloans
This type of loaning program can help nonprofit intermediary lenders lend money to small businesses. These types of loans are good for businesses that only need up to $50,000 to start. And this is the only SBA program where the Small Business Administration doesn’t guarantee the loans.
SBA 7a Loans
The most popular type of SBA loan is 7a. It’s also deemed as the best for businesses that need working capital. And for startups who have proven business models (like franchises), it’s a good option because of the $5 million maximum loans available.
5 Tips on How to Apply and Qualify for an SBA Startup Loan
Applying and qualifying for SBA startup loans means typically borrowing smaller amounts of money for your small business. By taking out lower-dollar loans, there’s no need to meet so many standards to qualify for what you need.
#1 Estimate the amount of money you need
Contrary to popular belief by a lot of business owners, there is no need for you to borrow so much money as you qualify for. That will only succeed in causing financial constraints if you aren’t careful. Only borrow what you need and can afford to repay in the shortest amount of time.
To determine how much money you’re going to need for your startup, you’ll need to put together a detailed cash flow analysis. How do you do it?
Experts advise that you must:
- Forecast revenue over the next 12 months
- Forecast all expenses over the next 12 months
- Factor in any desired working capital
- Subtract the total expenses from your revenue
- The difference after all of these steps is your minimum required capital
This cash flow analysis can help you determine the amount of money that you’ll be needing each month when your business starts. You need to make sure that you have enough money to take care of potential negative cash flow months during the time period.
#2 Ensure your eligibility
Loan requirements for the SBA are the same for startup businesses as they are for the existing ones. Qualification criteria is strict, but if you pass, then you certainly can pass through.
Standard SBA startup loan qualifications include:
- Personal credit scores: You need a credit score of over 700.
- Down payments: The SBA requires that all approved lenders must hold potential borrowers under usual qualification standards. As a startup business, you are typically required to put 25% to 30% down. All of that while providing more proof that you have enough liquid assets at your disposal to cover debt payments.
- Collateral: The more collateral you have, the better your chances would be for acquiring much-needed funds.
- Financial statements: Your lender would require specific financial statements that can prove that you’re capable of paying for the loan during the duration of the agreement. No defaults, debt obligations, tax delinquencies, or bankruptcies allowed.
- Experience: SBA lenders require management and industry experience to avail of a loan. It’s that or you have an operating partner who does and is willing to help you run your business. At least 5-10 years of experience are needed to pass the test, but that varies by each lender.
#3 Craft a winning business plan
Startups can’t prove their business funding ability fully without their personal business’ past experiences in handling money and how it’s going to function. And this is where a detailed business plan comes in.
The lender not only needs to understand what your business does, but they also want your plans for future success. Nobody likes a wasted investment, after all.
The better and more detail-oriented your business plan is, the better your chances will be for receiving SBA funding. Traditional business plans have nine sections that cater to details and comprehensive plans.
- Executive summary: Tell the reader of the business plan what your company is, and why it’s going to be a success in the future. Include your mission and vision statements, your services or products, and basic information about the company’s management and leadership team, employees, as well as location. Factor in financial information and growth plans for financing.
- Company Description: This is where you put detailed information about your company. Detail the consumer problems you want to solve. List the segments of your target market (consumers, organizations, other businesses you want to cater to). Showcase your unique selling points and competitive advantages.
- Market analysis: You need to show that you have a great understanding of your industry outlook right along with your target market. Detail what your competitors are doing, and what you can do to make it even better.
- Management and organization: Your business plan should detail how your company is going to be structured; what the chain of command looks like, and who’ll be running it. Describe legal structures, and use organization charts, and show how each person’s expertise would contribute to the company’s success. You can include your key employees’ resumes if you want.
- Products and/or services: Describe what you’re selling, or what type of service you’re offering. Tell the reader how it will benefit customers, and share your plans for intellectual property.
- Sales & marketing: Strategies always evolve and change to fit the business’ unique needs. This section should detail how you’ll be retaining and attracting customers during the first few months or years.
- Funding requests: This is the part where you outline your funding requirements. Clearly explain how much funding you will need over a set number of years, and what you will be using this type of money for. Specify whether you need funding to cover utility bills, pay employees’ salaries, or purchase equipment or materials. Describe your future financial plans too.
- Financial projections: Provide further proof and support for your funding requests through financial projections. The goal here is to convince your lenders that your business is stable enough and is set up for financial success. Show collaterals, and a financial outlook for the next five years. Include balance sheets, forecasted income statements, cash flow statements, and budgets.
- The Appendix: Appendices contain supporting documents to all the claims you’ve made during the entire business plan.
Your business plan will rely heavily on assumptions for the future success of your business, so make sure that it’s backed by geographic and industry data for credibility.
#4 Look for the appropriate SBA lender
Gathering all the requirements and having down payment is one part of the equation. Finding the SBA lender that will cater to your business’ needs can be quite challenging since SBA lenders who offer loans to startups are limited. Plus, most lenders don’t advertise whether they work for startups or not.
One good way of finding the right lender for your business is to use a broker or a consulting company that has a proven track record of working with SBA lenders. They would know which firms you can work with based off of your industry and your financial profile. They’re capable of matching you with someone more likely to fund your loan.
#5 Complete your SBA loan requirements and submit
After finding the right lender who works with startups, you need to complete the proper paperwork and undergo an underwriting process. This usually takes anywhere between 45-120 and more days. It depends on the lender and how quick and alert you are with responding to document requests.
To cut down on the time you’ll spend doing this, just be prepared with the required documentation and paperwork even before your lender asks for it. Upon application, be prepared with the following requirements:
- Business’ ownership breakdown
- Comprehensive business plans
- A personal profile that showcases your management and industry experience
- Breakdown of how you’ll be using the borrowed funds
- A statement of how you’ll be repaying the loan
The Takeaway
Starting a business isn’t going to be easy or cut and dry. Providing the necessary paperwork just to qualify for funding can be tedious and might even wrack on your nerves a bit, but it’s nothing that isn’t worth it in the end. They may be difficult to acquire and qualify for, but they’re one of the best options out there for affordable funding.
