Small Business Startup Loans: How to Compare Options

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Could a business loan from the U.S. Small Business Administration (SBA) help you fund your startup? It's possible. While the SBA doesn't fund loans itself, it does offer loan guarantees to banks and other lenders that might help encourage them to approve your loan application. In the 2020 fiscal year, the SBA backed nearly $23 billion in 7(a) loans for working capital, $5.5 billion in 504 real estate and fixed asset loans and more than $56 million in microloans to businesses in underserved communities.

Are you considering an SBA-backed business loan for your small business? Here's a rundown on SBA business loan programs—and how to compare your options to find the right fit.

Can I Use an SBA Loan to Start a Business?

You can use an SBA loan to fund your startup, but being a new business may affect your chances of approval. Like every kind of business loan, SBA loans are more difficult to come by if your business is still on the launchpad. Without a track record that demonstrates your ability to generate cash flow, manage the business, build business credit and pay your bills, you may look like a risky borrower.

How does the SBA help? The SBA may guarantee up to 85% of your loan. This reduces the risk to the lender, which makes your loan application more appealing. Competitive interest rates and long loan terms generally keep your monthly payments manageable.

Of course, there's a catch. Applying for an SBA loan can be a lengthy and complicated process. You may not be approved unless you've sought funding elsewhere first and can submit documentation that you were denied. Although the SBA doesn't require you to be in business for a set period of time before applying for most of its loan programs, many lenders prefer borrowers to have at least two years in business.

Your credit will also make a difference. Since most startups have not had the opportunity to build business credit, your loan application may rely on your personal credit to assess your creditworthiness. You may also need to provide collateral for your loan, either in the form of business assets or personal assets such as your home. For more information on business lending requirements for startups, study up on the business lending process.

What Are the SBA Options for Startups?

Listed below are 12 SBA loan programs. Not all of them are ideal for startups, but if you've been in business for a year or more, you have a better chance of qualifying for these loans.

Quick Reference: SBA Loans
Loan TypeMaximum AmountWhat It's ForTerm Loan or Credit Line?Who Qualifies?
SBA 7(a)$5 millionWorking capital, inventory, new construction, renovation, fixtures, starting a businessTerm loanFor-profit small businesses that show good character, credit, management and ability to repay
SBA 7(a) Small Loans$350,000Same as 7(a) but with a smaller loan capTerm loanSame as 7(a)
SBA Express$350,000Same as 7(a) but with a faster turnaround. Loans may process in 36 hours.Credit lineSame as 7(a)
CapLines$5 millionHelp with short-term capital needs such as for seasonal businesses, builders or businesses with unfulfilled contractsCredit lineSame as 7(a) with additional short-term loan requirements
Community Advantage$250,000Loans funded through community-based nonprofits, especially for businesses in underserved communitiesTerm loanSame as 7(a) but friendly to startups
SBA Veterans Advantage$350,000 under SBA Express

$5 million under 7(a)

Same as 7(a)Term loan or credit lineMust be owned and controlled by a veteran, active-duty military, reservist or National guard member or spouse
International Trade$5 millionWorking capital, equipment, facilities or landTerm loanMust engage in international trade or be adversely affected by import competition
Export Working Capital $5 millionShort-term working capital loansShort repayment terms (3 years or less)For direct or indirect exporters
Export Express$500,000Same as SBA Express with additional letters of credit requiredTerm loanMust be in business for 12 months; loan must be used to enter a new or expanded export market
504 Loans$5 million to $5.5 millionFinancing for real estate, equipment or other major fixed assetsTerm loanCannot exceed $15 million in tangible net worth or $5 million in average annual sales over the past two years
504 Loan Refinancing$5 million to $5.5 millionRefinancing for the same purposes as 504 loansTerm loanBusiness must be at least two years old with a qualifying loan
Non 7(a) Microloans$50,000Working capital, supplies and equipmentShort-term loansDirect loans from nonprofit intermediary lenders; appropriate for startups; comes with technical assistance

How Do I Compare SBA Options?

For most startups, the process of elimination is one way to quickly narrow the field. For example, if your business doesn't involve international trade, exporting or any significant international competition, International Trade, Export Working Capital and Export Express loans aren't for you.

Are you a veteran or active-duty military? If so, SBA Veterans Advantage loans may open the doors to a few more lenders than their corresponding 7(a) loans do. Of course, if you're not a veteran or the spouse of one, these loans aren't a fit either.

Two types of SBA loans are especially suitable for startups, but they may not suit every entrepreneur:

  • Non 7(a) Microloans are small loans designed to help small businesses get started or grow. Lenders for this program are nonprofit intermediaries. In addition to providing loan funding, the goal of these nonprofits is to help small business owners learn how to succeed. If you apply, your participation in the loan program may be contingent upon completion of training or planning.
  • Community Advantage Loans are for entrepreneurs in underserved communities who have a proven business idea and are creditworthy, but may not qualify for traditional loans. Community Advantage works with mission-based lenders such as Community Development Financial Institutions (CDFIs) and Certified Development Companies (CDCs) and provides technical and management assistance that can help you put together a business plan, for example, or learn how to run payroll.

SBA 7(a) loans are the SBA's most popular loans. They can provide working capital, help fund renovations or buy equipment. They're also fairly competitive. Be prepared to show your business plan and financials, share your business and personal credit, and provide some share of the money.

SBA 504 loans are similarly competitive. They can be useful for financing real estate, equipment and other large fixed assets.

An SBA-approved lender can help you understand these options and walk you through the necessary paperwork. Because finding the right lender can be critical, the SBA offers a program called LenderMatch that helps you locate interested lenders. Though working with LenderMatch does not guarantee you'll get SBA funding, it can help you find a good match among the many lenders and types of lenders out there.

What if SBA loans aren't right for my business? Securing an SBA loan for a startup can be a challenge. If you don't find an SBA loan that's right for you, consider other sources of funding, including online lenders that may be more amenable to working with new business owners. You can always revisit the idea of applying for SBA loans after your business has been up and running for a few years.

The Bottom Line

An SBA loan can help get your business off the ground. It may also provide critical funding for your new enterprise in the years to come. Whether you secure an SBA loan for your launch or find alternative funding to get your startup going, building and maintaining business credit will help you open up options for the future. To learn more about how to build—and use—business credit to grow your business, visit Experian's small business resource center.

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