SBA Loans for Startup Businesses
It is possible to find money for your new business with this review of the top three SBA loan programs.
It doesn’t matter what you see on websites or infomercials, there aren’t any SBA loans that will involve free money, no-interest loans, or government grants. The truth is that the SBA won’t lend funds directly to an entrepreneur – you have to get chummy with your loan officer at your local bank, nonprofit financial intermediary, or credit union in order to access the programs.
Once you have access, there are plenty of resources that will get you the capital that you need in order to expand or start your business. Within the last year, there was more than $50 million in SBA loans that were provided daily to businesses in the U.S. For this article, I thought that I would review the latest descriptions as well as eligibility for the most popular SBA loan programs.
7A Loan Program
The 7A is the most popular SBA loan program. You could get up to $750,000 for a local 7A lender, backed by a guarantee from the SBA. The SBA isn’t directly loaning you any money. They are making it less risky for local lenders to finance you. 7A loans are normally used for working capital, leasehold improvements, and asset purchases. All of the business owners who have a stake of 20% or more will be require to guarantee the loan.
Once the lender has made the decision that 7A money is what you need, you will be hearing the names of various 7A programs. If you plan to borrow less than $150,000 you may get into the Lowdoc program. A Lowdoc is a one page application that has your application on one side and the application for the SBA on the other side. The SBA will respond to a Lowdoc within 36 hours.
The SBA Express is for those lenders than have a good track record for SBA lending. It is aimed at getting money and in this case around $250,000 into the hands of entrepreneurs. Based on the success of the Express program, the SBA CommunityExpress was designed to improve the capital for low to moderate income entrepreneurs as well as provide both pre and post loan technical assistance.
Eligibility: The criteria for the 7A program are broad but they are restrictive for businesses and startups that are related to financial services. All SBA Loan programs are targeted to small companies or businesses that have less than $7 million in net worth and less than $2.5 million in net income, but the most lenders will not lend to a startup business that does not have at least 3 years of financial statements and some of the owners own equity within the business. There are some banks that will let you use money from any of the entrepreneur’s relatives as part of the equity but you are required to make these formal as small business loans that happen to have a repayment plan that is close to your bank debt.
504 Loan Program
The 504 loan program is made to supply the funds for asset purchases like equipment or land. Normally, the asset purchase is funded by a bank loan or other lender within your local area, as well as a second loan from a CDC or certified development company that has a SBA guarantee for up to 40% of the asset value – which is normally a loan for up to $1 million as well as contribution of 10% from the borrower’s equity. This type of financing structure will help the primary lender which is the bank, reduce the exposure by relying on the CDC and SBA to take most of the risk.
Eligibility: Just like the 7A program, the 504 program is only restricted to businesses that have less than $7 million in net worth and less than $2.5 million in net income. Although, since the funds from 504 loans cannot be used for working capital, inventory, repaying or consolidating debt, or even refinancing, this program will often exclude most service businesses that will need to buy equipment or land. There are personal guarantees that are required for a 504 loan.
7M Microloan Program
The microloan program is now under budgetary review, and the political winds are not blowing in favor of these types of loans. The program is supposed to provide small loans up to $35,000 that can be used for just about anything business related that will help to build or grow a business. Unlike the 7A program, the funds don’t come from banks but they come from the SBA and are given to business owners through nonprofit community based intermediaries.
Eligibility: The microloan is very much startup friendly. All new businesses can apply. Even though the maximum loan amount is $35,000, the average loan is normally only $10,000. There is a catch though, microloan borrowers will have to enroll in a technical assistance class from the micro-lender intermediaries. There is some entrepreneur out there that believe that this is a very helpful resources that gives cost effective business training, while others believe that it is a waste of time even though it is a condition of getting a microloan.
Even though I promised only three of the top SBA loan programs, I didn’t want to forget to talk about two other loan programs that are for certain types of businesses. The Export Working Capital Program will give short-term working capital to small export businesses and the DELTA program will give technical and financial assistance to businesses that are dependent on defense installations transitions to civilian markets.
Basically, if you need a small business loan capital, then there is most likely a SBA loan program out there for you.