SBA Startup Loans: Definition, Cost, Features & Providers

The Small Business Administration (SBA) offers SBA startup business loans to help get new businesses off the ground. SBA loans are available for up to $5 million, with rates ranging from 7.75% to 10.25%, and terms of up to 10 years (25 years for real estate). You can apply through a traditional bank.

One great way to come up with your down payment required by many SBA loans is by utilizing a Rollover for Business Startups (ROBS). If you have at least $50,000 in a tax deferred retirement account you can schedule a free one-on-one consultation with our recommended ROBS provider, Guidant, to learn more. What’s more, it can also help you with SBA loan packaging, increasing your chances of approval.

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How SBA Startup Business Loans Work

SBA startup loans are made by a traditional lender and backed by the Small Business Administration (SBA). You apply for an SBA loan with a traditional lender, and the SBA guarantees a portion of that loan. This SBA guarantee means that in the event you default on the loan, the SBA will repay the lender for the guaranteed portion.

Having this guarantee from the SBA is a form of insurance for the lender. This is because the lender knows it can recoup a portion of its losses on your loan by using the SBA guarantee in the event that you fail to repay. This insurance reduces the lender’s risk, so you may be able to get a loan the lender might not be willing to make absent the SBA guarantee. The borrower benefits from a lower interest rate than may otherwise be available with other startup business loans.

Qualifying for an SBA loan as a startup is slightly different from qualifying as an established business. As a startup, you will need to be able to show the lender that you have a well thought out business plan, and experience not only managing a business, but also in the industry. Most lenders will want to see evidence of at least five years of business management and industry experience.

Who SBA Startup Loans Are Right For

SBA startup loans are a good choice for businesses in the early stages of development that need funds to get their business up and running. Small business loans from the SBA can be used for working capital, to purchase inventory and supplies, finance fixtures and equipment, or purchase real estate. Plus, SBA loan funds can be used for initial seed money to kick-start a business, especially if you are opening a proven franchise business.

SBA startup business loans are right for businesses needing:

• Working capital: SBA loans can be used for working capital needs, including inventory and equipment purchases. SBA loans for working capital are available in amounts up to $5 million and have repayment terms that can extend up to 10 years.
• Financing for real estate: SBA loans, like SBA 504 loans, can be used to purchase commercial real estate for your new business. The SBA offers commercial real estate loans of up to $14 million, with repayment terms of up to 25 years.
• Funds to open a franchise: SBA 7(a) loans are often a good loan choice for those that are trying to secure funding to open a franchise, due to the program’s ability to fund up to $5,000,000. The 10-year repayment terms on these loans create more affordable payments than some of the shorter term alternatives.

If you can qualify for them, SBA loans are a low-cost financing option for your business. They can be used to finance a plethora of your small business startup needs, and are readily attainable from a variety of lenders nationwide.

SBA Startup Business Loan Costs

The costs associated with SBA startup loans will vary based on the loan program and lender that you are utilizing. In general, you can expect SBA interest rates in the range of 7% – 13%. SBA 7(a) and Express loans will have a loan guarantee fee of 2% – 3.5%. Lenders may also charge origination and/or packaging fees.

The typical costs that you can expect with an SBA Startup Loan are:

• Interest Rate: 7% – 13%
• Guarantee Fee: 2% – 3.5%, no guarantee fee for microloans
• Origination/Packaging Fee: 0.5% – 3.5%

Loan costs can vary by lender, but the SBA limits the interest rates that are charged on SBA loans, and interest rates cannot exceed what the lender would charge for similar non-SBA loans. Fees charged for origination and packaging may be based on a percentage of the loan amount or a fixed fee.

Where to Get SBA Startup Loans

Many traditional banks, community development financial institutions (CDFIs), and certified development corporations (CDCs) can provide SBA 7(a) and SBA 504 loans, as well as SBA Express loans. These SBA startup loans can be used for a variety of purposes, including funding working capital, providing funds to purchase furniture, fixtures, and equipment, and financing commercial real estate. SBA microloans up to $50,000 can be obtained through SBA-approved nonprofit microlenders, many of which operate regionally.

SBA startup Loans can be obtained from:

• Traditional Banks: SBA 7(a) loans and SBA Express loans are made directly through SBA-approved lenders (often traditional banks), and are guaranteed by the SBA. Most of these lenders will also partner with certified development corporations (CDCs) to provide SBA 504 loans up to $14,000,000 to finance commercial real estate.
• Community Development Financial Institutions (CDFIs): A CDFI is a financial institution that’s mission is to foster community economic growth in low-income or otherwise disadvantaged areas. Many of these lenders are SBA approved lenders for SBA 7(a) and SBA Express loans.
• Microlenders: SBA microlenders are typically area nonprofit organizations that provide small loans, up to $50,000 to small businesses that are unable to obtain conventional financing. To get an SBA Microloan you will need to apply through an approved microlender that serves your geographic area.

There are a variety of entities that can provide you with an SBA loan to fund your business startup, but not all of these lenders provide all of the SBA options. Your choice of lender will be made, in part, based on the type of loan for which you are applying.

Top SBA Startup Loan Providers

Some of the most active SBA lenders are:

Wells Fargo Bank

Wells Fargo Bank was the leading SBA lender in 2018, having made nearly 4,000 SBA loans totaling nearly $1.2 billion. The SBA loans made through Wells Fargo Bank in 2018 had an average interest rate of 8.56%, and an average repayment term of 12 years. To apply for an SBA startup loan through Wells Fargo you will need to visit one of the Wells Fargo branch locations. Getting an SBA loan from Wells Fargo Bank typically takes between 30 and 60 days.

Chase Bank

Chase Bank was another top national lender of SBA loans in 2018, making over 2,600 SBA loans. The average SBA loan amount was $232,363, with an average interest rate of 7.9% and average repayment term of nine years. To apply for an SBA startup loan through Chase Bank you can visit one of the Chase Bank branch locations. The SBA loan process generally takes between 45 and 60 days with Chase Bank.

U.S. Bank

U.S. Bank had over 2,200 SBA loans approved in 2018, making it another lender with significant experience in SBA lending. Its average SBA loan was $153,567, with an average interest rate of 8%, and an average repayment term of eight years. To get started with an SBA startup loan through U.S. Bank you can contact the U.S. Bank SBA Division. The entire SBA loan process can typically be completed in 45 to 60 days with U.S. Bank.

SmartBiz

SmartBiz streamlines the application and lending process by partnering with top SBA lenders. The online prequalification process for SBA loans up to $350,000 is quick and simple, taking only minutes to complete. With its expedited loan processing, SmartBiz can often get your SBA loan funded in 30 days or less.

Celtic Bank

If you prefer to apply online, Celtic Bank offers you an option for online application for an SBA loan. In 2018, Celtic Bank made over 1,200 SBA loans averaging $347,425 each. Its average interest rate was 7.3% and average repayment term was 12 years. You can begin the application process for your SBA startup loan through the Celtic Bank website. Applying through Celtic Bank generally takes between 45 and 60 days.

Accion

Accion is an SBA preferred lender for its microloan program and it has the ability to lend nationwide. Accion offers microloans of up to $50,000 with interest rates starting at 8%. You can apply with Accion online for an SBA microloan.

SBA Startup Loan Terms

The maximum amount for SBA startup loans is determined by the SBA program you are applying for. The maximum SBA microloan is $50,000, and SBA 504 loans can offer as much as $14,000,000. Repayment terms vary based on the loan type and purpose, with microloans having the shortest maximum term of six years, and real estate loans having the longest term at 25 years.

The typical terms that you can expect with an SBA Startup Loan are:

• Maximum Loan Amount: Up to $50,000 at the low end and up to $14,000,000 at the high end
• Repayment Term: Typically five to 25 years, depending on loan purpose; real estate has the longest term, and working capital has the shortest term
• Down Payment: Typically 20% – 30% for startup businesses

While SBA loans typically require a 10% down payment, for startup loans a down payment of 20% – 30% is recommended. This increased down payment amount shows your lender your level of commitment to the business, and reduces the amount of the loan that the lender will need to give you.

As a startup business, most SBA loans will require a down payment. A Rollover for Business Startups (ROBS) can help you acquire those down payment funds. If you have at least $50,000 in a retirement account you can schedule a free consultation with Guidant, our recommended ROBS provider to learn more. Additionally, Guidant can also help you with SBA loan packaging, which may increase your chances of approval.

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SBA Startup Business Loan Qualifications

The exact qualifications for your SBA startup loan will depend on the loan program that you use; however, for the most part the requirements are similar. In most cases, you will need to have a credit score of at least 680 (640 for microloans). You will need to have collateral to secure the loan, as well as provide a personal guarantee.

In addition to the standard qualifications, startup businesses will additionally need to provide a solid business plan, projected cash flow statements, and be able to demonstrate both business management and industry experience. While exact experience requirements may vary by lender, you can anticipate that at least five years’ experience will be required.

The typical qualification requirements that you can expect with an SBA loan for startups are:

• Credit Score: At least 640 to 680 (check your credit score free)
• Management and industry experience: Typically 5 to 10 years’ experience
• Business plan: A well prepared business plan
• Projected cash flows: Estimated cash flow projections indicating profitability
• Equity: A down payment of 20% to 30%
• Collateral: Required in most cases
• Personal Guarantee: Required from all business owners with 20% or greater ownership interest

While you may not need to have 100% collateral to back your SBA loan, the more collateral you have the more likely it is your loan will be approved. A personal guarantee pledges your personal assets as collateral against the loan. In the event your business defaults on repayment, your personal assets can be collected by the lender. Similar to collateral, the more you have as a down payment, the more serious the lender will see you as a borrower.

In addition to the qualification requirements varying by loan program, they can also vary by lender. Overall, you will find all of the qualification requirements to be very similar, but there is a possibility that there can be some variance in specific credit score and financial requirements. However, these are a good rule of thumb as you are evaluating if your business is likely to qualify for an SBA startup loan.

How to Apply for an SBA Startup Loan

To apply for an SBA startup loan, you will first need to select a lender. Once you have selected a lender you will need to gather pertinent business documents and personal financial documents. This information, in conjunction with a number of SBA forms, will be submitted to your lender as part of your application. Overall, you can expect it to take 45 to 90 days from application to funding.

Preparing your business documents before starting your application can ease some of the burden. As a startup business, your lender will expect you to present a well-prepared business plan. Preparing a business plan can be daunting, so completing it in advance allows you the time you need to devote to it. We recommend utilizing business plan software, which provides you with templates and examples, as well as guides you through the process so you don’t miss anything important.

In addition to your business plan, you should be prepared to provide the following information to complete your application:

• Executive summary
• Business profile
• Ownership breakdown
• Management experience
• Breakdown of how funds will be used
• Statement of how loan will be repaid

After compiling this information, you will also need to complete a number SBA forms that are required to be submitted with your application. The SBA forms needed will be determined based on the specific SBA loan type you are applying for, the use of loan proceeds, and your business type.

Some of the most common SBA forms are:

• SBA Form 1919 Guide (Borrower Information Form): Used for all 7(a) loans, this form provides standard information for your business.
• SBA Form 912 Guide (Statement of Personal History): This form is used to evaluate your character and requires information about any prior legal issues.
• SBA Form 413 Guide (Personal Financial Statement): This form is used to assess the personal financial standing of you, your spouse (if applicable), and anyone who is a proprietor of the business.
• SBA Form 159 Guide (Fee Disclosure Form and Compensation Agreement): This form is only necessary if you hired someone to help you with your SBA loan application. It details how much you paid them and the services they provided.

You will also need to complete a loan application for your SBA startup loan. Each lender will likely have its own application, which will include an SBA specific application. The SBA will also require you to fill out a number of SBA forms; the exact forms required vary based on the loan that you are applying for, and the purpose of the loan.

Applying for an SBA loan can be a challenging and lengthy process. When selecting a lender it is important to choose one that has significant experience making SBA loans, and that fully understands the process. Having a knowledgeable lender will help make your SBA application process much more efficient, but you can still expect it to take 45 to 120 days.

You can speed up the application process by having all of the information required gathered in advance, and by utilizing an SBA loan packager to assist you with your application. Guidant can help you package your SBA loan, and can also assist with ROBS if needed to meet down payment requirement.

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Pros & Cons of SBA Startup Loans

There are many advantages to SBA loans for small business startups. They have lower interest rates and longer repayment terms than alternative lenders, and you will build a rapport with a local lender. However, SBA loans can be difficult to qualify for, it can take months to receive loan funds, and you will likely be required to provide a sizable down payment.

Pros of SBA Startup Loans

Some of the benefits to SBA Startup Loans are:

• They have lower interest rates than alternative lenders ― One significant advantage of an SBA loan is that it has lower interest rates than you would be able to get from an alternative lender (7.75% to 10.25% for an SBA 7(a) loan, compared to online lenders with APRs of 30% to 50%). Because the SBA is providing a guarantee for your loan, there is not as much risk to the lender, allowing it to offer lower interest rates.
• They have longer repayment periods than alternative lenders ― With most online and alternative lenders, the loans that they offer to startup businesses are short term loans with maximum repayment terms of one to three years. SBA loans have longer repayment periods that can extend up to 10 years, or longer for real estate loans.
• Your lender is often local ― Because SBA loans are made through traditional banks, the lender you choose will often be local. This can be advantageous as your business grows and you need additional financing. You will already have an established relationship with your lender, which can make future financing less challenging.

Cons of SBA Startup Loans

Some potentially negative aspects of SBA Startup Loans are:

• It can take months to receive funding ― If you need funding quickly, an SBA loan may not be the best choice. It can take several months from the time you initially apply for the SBA loan until you actually receive the loan funds, whereas an online lender can usually provide funding within one to three days.
• They can be difficult to qualify for ― Compared to online and alternative lenders, the qualification requirements can be difficult. SBA loans require that you have higher credit scores, sufficient collateral, and higher debt service coverage ratios than other financing options.
• Most require you to provide a down payment ― SBA loans generally require that you provide a down payment, and for startup businesses this could be up to 30%. Depending on the loan amount that you need, this could equate to a substantial amount of money that you need to have upfront.

If you qualify for an SBA startup loan, and don’t mind that it may take a few months to receive funding, SBA loans have lower interest rates and longer repayment terms than most small business financing options. Coming up with the down payment requirement can be a challenge. If this is holding you back, you may want to consider contacting Guidant and inquiring about a ROBS.

Alternatives to SBA Startup Loans

SBA loans have a lengthy application process, and it can take months to receive funding. There are a number of alternative sources of startup funding other than those options that are provided by the SBA, many of which do not have the extensive application process. Some alternative funding options are a rollover for business startup, personal loans, credit cards, and seeking angel investors.

Some alternatives to using an SBA loan to fund your business startup are:

Rollover for Business Startups (ROBS)

A rollover for business startups (ROBS) can provide you with startup funding for your small business by allowing you to utilize funds from your retirement account. A ROBS is not a business loan or a 401(k) loan, so there’s no debt to repay or interest payments to make, and you can use a ROBS without paying early withdrawal penalties or taxes on the funds.

Personal Loans for Business

Taking a personal loan can provide you with funds for your startup based on your personal credit, and without requiring business plans and projections. Additionally, if you’re a homeowner with some equity in your home, you may be able to get a home equity line of credit (HELOC) to fund your startup. A HELOC is a credit line that can be drawn against as you need funds, and you only pay interest on the balance you currently owe.

Credit Cards

Using personal credit cards for business or small business credit cards can be a relatively cost-effective way to finance your startup. Many have introductory periods that offer zero percent APR and valuable cashback or rewards programs. This can equate to significant savings for your business if you use credit cards regularly. Having access to a business credit card can be a quick source of funds for your small business.

Angel Investors

Angel investors are individuals who provide your business money in exchange for an equity stake in your business. Because angel investors are providing their own personal money, they are investing as much in the business owner, as they are in the business. An angel investor will want to be confident in your ability to succeed, as well as your business’ projected growth.

SBA Startup Loans Frequently Asked Questions (FAQs)

A lot of information has been covered in this article about SBA startup loans, what they are, how they work, finding the right lender, and what you need to apply for a loan. We have answered some of the most frequently asked questions regarding SBA startup loans below.

Some frequently asked questions pertaining to SBA startup loans are:

How do I get an SBA startup loan?

You can get an SBA startup loan by applying with an SBA approved lender. You will need to meet the standard SBA qualification requirements (e.g., have a credit score of at least 680, have collateral, provide a personal guarantee). Additionally, you will need to have business and industry experience and a thorough business plan.

Who qualifies for SBA loans?

Qualifying for an SBA loan typically requires having a personal credit score of 680 or higher, and proven ability to repay the loan (which is generally indicated by a debt service coverage ratio of 1.25x+). Additionally, for most SBA loans you will need to have collateral and provide a personal guarantee.

How much down payment is required for an SBA loan?

In general, you will need a down payment of 10% to 20% of the loan amount for an SBA loan. Startup businesses may be required to have a higher down payment of 20% to 30%. The more you are able to contribute to the down payment, the more likely you are to have your loan approved.

Bottom Line

SBA loans can be great for startup businesses if you can qualify. They offer lower interest rates than you would likely be able to get through a conventional business loan, or alternative lender. However, the application and approval process isn’t fast or easy. SBA loans can take several months to fund. If you are able to qualify, and can wait for funding, SBA loans will provide you with some of the longest repayment terms, and the lowest cost of capital available.

SBA loans require a lot of paperwork, if you want help with this process Guidant can help. Additionally, if you are struggling to meet the down payment requirements for an SBA loan and have at least $50,000 in a retirement, Guidant can assist you with setting up a ROBS.

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