1. SBA Startup Loans
Best for Low Interest Rates and Long Term
SBA loans are great for low rates and long terms. Ideal for the right business owner who is patient and meets the strict SBA guidelines. As a startup business, the business owner will usually be required to make a 20-30% capital contribution alongside the lending bank.
How Does It Work?
How Do I Get Approved?
How Much Does It Cost?
Getting an SBA startup loan can be very difficult but worthwhile if you meet the criteria. The funding rages between $25,000 to $350,000. Keep in mind that you can only use these funds on approved expenses and it takes about 3 to 6 months to get the funding if you are able to pass through all of the strict requirements.
In order to get approved, you will need the following business documents: business plan, 2-5 year financial projections, profits & loss statement, balance sheet and personal financial statement. You are also required to be in business for more than 6 months, unlike using credit cards which don’t even require a business to have actually started operating.
The biggest problem with SBA small business start up loans is that they require the owner to contribute 20-30% to the loan. However, if you are able to do so you can $25,000 to $350,000 for between 6%-10% which is unbeatable. The origination fee for SBA startup business loans is between 1% to 3% which is relatively low.
When it comes to the SBA, there is a lot of rumors, stories, misconceptions and even a little truth out there.
To start with, who is the SBA? The SBA stands for the Small Business Administration. The SBA is a US government agency that provides support for entrepreneurs and small businesses. SBA loans are made through banks, credit unions and other lenders who partner with the SBA. The SBA provides a government-backed guarantee on part of the loan.
The Inside Scoop on How SBA Startup Loans Work
How does it work? At the simplest level, the SBA says to their approved lenders that if they provide a loan under a pre-set of conditions, they will guarantee a certain percent of the loan in case of default. That means the lender is guaranteed, not the entrepreneur. Because the SBA is guaranteeing the loan, they require the loan to be low risk. They will look at requirements from the entrepreneur such as; personal investment, years of industry experience, time in business, business plan, financial forecasting. They want to ensure they are truly lending to businesses that have a proven track record and the ability to continue to grow and repay the loan.
According to the SBA, when you use the microloan program you can qualify for up to $50,000. The SBA has a lending program known as 7(a), which can also be used to start businesses. The SBA website states that: “7(a) loans have a maximum loan amount of $5 million. SBA does not set a minimum loan amount. The average 7(a) loan amount in fiscal year 2015 was $371,628.”
The Challenge of SBA Loans to Start a Business
The challenge with the SBA loans is that in order to qualify the SBA usually requires collateral or a 20% capital contribution. Meaning, for every $1 the business owner borrows, they must be able to contribute $0.20. In other words, the SBA says if you want to borrow $100,000, they want to see the startup owner contribute $20,000 of their own startup capital. This can be very difficult for some new business owners. In startup business funding, there is no one size fits all.
SBA startup loans have very strict qualification criteria as the federal government will ultimately be insuring them. For this reason, there is a large amount of due diligence that the lender will do, they have an extensive application process and very specific documents required. The application process is very thorough and obviously no guarantees of approval. With that said, for the right business with the suitable criteria, the SBA route may be ideal as their rates are typically very competitive and they provide long terms to ensure the monthly repayment is extremely manageable to the startup business owner.
So what should you do next?
While not a perfect fit for all business owners, if your business does meet the criteria, you can make the capital contribution and are patient enough to go through the process, SBA loans maybe the idea funding choice for your startup business. Funding in a timely manner is usually integral to the survival of your business.