How To Get an SBA Startup Loan in 6 Steps
Tricia has nearly two decades of experience in commercial and federal government lending. Her expertise is highlighted throughout small business loan content on Fit Small Business.
Andrew has over a decade of experience in finance and mortgage lending. He shares his expertise in Fit Small Business’s financing content.
This article is part of a larger series on Business Financing.
To get a Small Business Administration (SBA) loan as a startup business, you’ll need to do some preparation and research before you even submit your application. Startup companies have a high failure rate, so these loans often involve a lot of paperwork to give lenders a thorough understanding of your business finances, credit, and business plan.
Step 1: Create a Business Plan
A business plan is a document that details your company’s goals and how it will achieve them. It provides details on a company’s leadership team and its qualifications, background, marketing strategy, and income projections. For startup companies with little or no prior history of being in business, lenders will use this document to determine the chance that your business will succeed and whether it will issue a loan based on the level of risk involved.
The specific sections in your business plan may vary depending on your industry, but commonly include the following:
- Executive summary: This is an overview of the various aspects of your business plan. It should briefly discuss what your business products and services consist of, what your company’s goals are, and how you plan on achieving them.
- Product or services overview: You should go into as much detail as possible regarding your company’s product or services. This section should discuss how your product delivers value to consumers, expenses, and pricing.
- Competitor and industry analysis: This section of the business plan should contain information about the industry and who your competitors are. You should show growth potential, the added value your product provides, and what differentiates your product or service from that of competitors.
- Target market: This section should contain information about who your ideal customers are, and how your product or service will be used.
- Marketing strategy: A successful marketing strategy will attract and inform customers about your product. You should discuss what marketing channels you intend on using, how it may differ from competitors, and why you believe it will be effective.
- Financial analysis and plan: This section should cover several items, such as your company’s budget, expected monthly cash flow, revenue projections, expenses, and what you intend on doing with the proceeds with the SBA loan.
- Qualifications of leadership team: Including a resume of all members of the leadership team can give lenders insight as to your company’s relevant skills and how it can be used to create a profitable business.
If you need help creating a business plan, you can take advantage of several resources.
- Go the SBA website, which has a section on planning your business
- Take an online course on how to develop a business plan from SCORE
- Use our SBA business plan template and guide as a starting point
Step 2: Determine How Much Funding You Need
For this step, you’ll need to have an understanding of your costs and projected revenue. You should know how much cash you’ll need, when you need it, what it will be used for, and the revenue it is expected to generate. You should also prioritize using the funds on the most important aspects of the business, differentiating between mission-critical items and items that aren’t urgent.
A cash flow analysis for the next 12 to 36 months can be helpful, and you should include recurring and one-time expenses. Requesting too little cash could hinder your company’s ability to operate efficiently. On the other hand, requesting too much cash could result in unnecessary interest expenses and can also result in your loan application being denied.
A cash flow analysis should include these steps:
- Step 1: Forecast revenue and expenses for the next 12 to 36 months.
- Step 2: Factor in upfront expenses such as licensing and certification fees.
- Step 3: Consider all one-time and recurring expenses, including estimates for expected maintenance and repair of equipment.
- Step 4: Calculate your minimum required capital by subtracting your expenses from projected revenue.
Step 3: Review Your SBA Startup Loan Options
There are several different types of SBA startup business loans, including the following:
- SBA 7(a) loans: This is the most common type of financing offered by the SBA. You can obtain up to $5 million in financing that can be used for working capital, refinancing current business debt, or purchasing equipment, furniture, fixture, and supplies.
- SBA Microloans: This can provide up to $50,000 in funds that can be used to help start, rebuild, repair, or improve your business. Some examples include purchasing supplies, furniture, machinery, equipment, or other working capital. Microloans cannot be used to pay existing debts or acquire real estate.
- SBA Community Advantage loans: This is a temporary program that is designed to help businesses in underserved areas. Businesses that are eligible can obtain loans up to $350,000. The program currently runs through September 30, 2024.
- SBA CDC/504 loans: These loans are available through Certified Development Companies (CDCs) and can provide up to $5 million in financing. 504 loans must be used to acquire or improve assets that promote business growth and job creation. Some examples of qualifying asset purchases include buildings, land, machinery, and equipment. 504 loans cannot be used for working capital or paying debt.
Step 4: Consider Your SBA Loan Eligibility
To be eligible for an SBA startup loan, there are general requirements that must be met, regardless of the type of loan you need. Additional requirements can also apply depending on the specific type you’re applying for and the lender you’re using.
To obtain any type of SBA loan, you must meet the following requirements:
- Operate as a for-profit business: You must have a goal of making money and earning a profit. You must also meet SBA size standards.
- Conduct business in the United States: You must be engaged in or have the intention of operating in the US or its territories.
- Have invested equity into the business: At a minimum, you should expect to provide 10% of the loan amount as a down payment, or equity injection, into the business.
- Have been denied financing from other lenders: SBA loans aren’t meant to be a primary source of financing, so you must demonstrate that you have been unable to obtain financing from other lenders before seeking assistance from the SBA.
Depending on the type of SBA loan you are applying for, you’ll need to consider the following additional requirements:
- SBA 7(a) loans: Being delinquent on any federal debt will result in a denial on a 7(a) loan. The SBA also provides a list of industries that are ineligible for financing.
- SBA Community Advantage loans: The minimum credit score as measured by the Small Business Scoring Service (SBSS) is 140.
- SBA Microloans: In exchange for this type of loan, business owners must pledge collateral and provide a personal guarantee.
- SBA CDC/504 loans: Eligible borrowers must have a tangible net worth below $15 million. You must also have an after-tax average net income of less than $5 million for the past two years and demonstrate industry experience and a feasible business plan.
Although SBA startup loans may be similar to a standard SBA loan, some lenders have much stricter qualification requirements.
Here is a list of additional requirements you may run into:
- Time in business: Some lenders only work with established businesses, while others are more willing to lend to startups that have less than 24 months’ of history.
- Personal credit score: The SBA has no set minimum credit score, but lenders often require a credit score of 680 or higher.
- Business credit score: Your business credit score as measured by the FICO Small Business Scoring Service (SBSS) ranges from 0 to 300. While some programs such as SBA Community Advantage have a minimum of 140, lenders can have more strict requirements, particularly with startups. You should have an easier time getting approved with an SBSS score of 160.
- Debt service coverage ratio (DSCR): The DSCR is calculated by taking your company’s net operating income and dividing it by your current year’s obligations. This is a measure of your company’s ability to repay debts, and a DSCR of 1.25x or greater will significantly improve your likelihood of getting a loan.
- Down payment: In addition to the minimum 10% down payment required for many 7(a) loans, microloans, and CDC/504 loans, lenders may require a larger down payment depending on your company’s qualifications.
- Collateral and personal guarantee: While not all programs require collateral or a personal guarantee, lenders may require this as a condition of issuing a loan approval.
Step 5: Find an SBA Lender
You can begin your search for an SBA lender by using our list of the best SBA lenders, all of whom are highly knowledgeable and experienced in navigating the SBA process. You can also conduct your own research. SBA loans are offered by a number of lending and financial institutions such as banks, credit unions, online lenders, and SBA brokers.
We recommend working with SBA-preferred lenders, as they have gone through extensive training and review by the SBA and have the authority to make a loan decision on its behalf. Working with one of these lenders eliminates the need for a second review by the SBA, which can save you time and money.
SBA Lender Match is an online tool provided by the SBA. The questionnaire takes just five minutes to complete and is designed to connect you with a lender that can help you. To complete the questionnaire, you’ll need to provide some information about your company and the type of loan you’re looking for.
If you are looking for an SBA Microloan, you can utilize the SBA’s list of providers to find a local lender. The lenders you find on the list may also offer additional products and services.
504 loans are only available through Certified Development Companies (CDCs). You can use the SBA’s online resources to find a local CDC to connect you with a qualified lender.
SBA brokers are experts in understanding which lenders are likely to approve your loan request with the terms you’re looking for. Many brokers can also help you navigate some of the complex requirements and steps involved in getting an SBA loan, such as identifying paperwork requirements and tips for how to best present your business.
If you’d like to work with an SBA broker, we recommend Guidant Financial. You can get prequalified online in under two minutes and can work with a dedicated team member to find the best SBA loan for your business.
Other Factors to Consider
With little or no history of being in business, SBA startup loans can be difficult to obtain. To make the most of your time, here are some additional questions you should ask to ensure you’re working with a lender that is likely to issue a loan approval:
- Are you an SBA preferred lender?
- Does your company issue SBA loans to startup businesses?
- What are your company’s minimum requirements for time in business and revenue?
- Are you familiar with issuing loans to businesses in my industry?
- How long will it take to get approved?
- Does the lender have high customer reviews?
- What are your company’s customer service hours?
Step 6: Submit Your Application & Provide Required Documents
After you’ve found an SBA lender to work with, you’ll need to complete its loan application and provide the necessary documentation. The exact documents needed can vary depending on the type of SBA loan you’re applying for. Individual lenders may also have additional requirements.
Here’s a list of the most common documents you should be expected to provide:
- Borrower information SBA form 1919: This provides the lender basic information about your business and details on your loan request.
- Personal financial statement SBA form 413: Used by the SBA to determine your financial condition, creditworthiness, and ability to repay a loan.
- Loan application history: Since SBA loans aren’t intended to be a primary source of financing, you must demonstrate you have attempted to and been unable to obtain a loan from other lenders.
- Proof of business ownership: Copies of tax returns, articles of incorporation, or stock certificates are several examples of documents that may be accepted as proof of ownership.
- Business plan: A document that outlines your company’s goals and how it plans on achieving them. This should include information on your company’s leadership qualifications, industry analysis, revenue projections, and more.
- Business license and relevant industry certifications: If not included with your business plan, you may be required to provide proof you can operate legally in the industry by providing copies of business licenses or industry certifications.
- Financial statements (if applicable): As a startup, you should provide as much information as you can such as tax returns, profit and loss (P&L) statements, or balance sheets.
- Financial statement projections: If not already included in your business plan, you should provide more details on your expectations for revenue and expenses.
What To Expect After Applying
It can take between one and two months after you submit your application to receive proceeds from the loan. To give you an idea of where you’re in the process, here’s a timeline of events that will occur and how long it typically takes to reach these steps.
A letter of intent contains the terms and conditions a lender is willing to issue for your loan. Lenders will provide this document to you once they have completed a preliminary review of your full application and determined that it likely meets its qualification requirements. To move forward in the process, you’ll need to agree to the loan terms.
After you have accepted your letter of intent, your file will move forward to loan underwriting. This step can take one to three weeks. During this stage, your credit, income, and other aspects of your business will be reviewed in greater detail. It’s common for the lender to have clarifying questions during this stage, so you should expect to provide explanations and documentation to clarify things like unusual deposits or fluctuations in income and expenses.
Once your loan has gone through underwriting and the lender issues an approval, you’ll receive a commitment letter that confirms the terms of your loan and any outstanding steps you must take.
After accepting and completing the remaining requirements in the commitment letter, you should expect to sign your final loan documents within several business days to two weeks. This is one of the last steps before your loan is funded.
Frequently Asked Questions (FAQs)
Is it hard to get an SBA startup loan?
Getting an SBA startup loan can be difficult because lenders know that new businesses have a high failure rate—and a commonly cited figure is 90%. Without a prior track record of success or a strong business plan, getting approved could still mean higher rates and fees.
Do SBA lenders have the same requirements to get a loan?
Lenders can have varying requirements. While the SBA has certain criteria that must be met for its loans, individual SBA providers can have more strict requirements for things like credit score, time in business, and annual revenue.
How long does it take to get an SBA startup loan?
It usually takes one to two months to get an SBA startup loan. In general, SBA loans can take between four and six weeks, but as a startup business with little to no prior history of performance, your SBA lender may require additional documentation that can take time to review.
Bottom Line
SBA startup loans can be complex due to the strict qualification requirements and amount of paperwork that’s often involved. By knowing what’s required in each step, you can be proactive in preparing the necessary documentation to present your business in the best possible way. Doing so cannot only improve your chance of getting approved, but it can also save you time and help get you funding more quickly.
