The 3 Small Business Administration Loan Options for Startups

The 3 Small Business Administration Loan Options for Startups

Funding a new business venture is generally the hardest part of the entire startup process. Sure, you have done your market research. You have your business plan tested and in place. You have customers lined up. But how do you pay for it all?

Fortunately, what may at first seem daunting is not an insurmountable obstacle to startup success. Loans for startup businesses do still exist, and thousands of entrepreneurs really do go through the process of obtaining that money every month. Most of them, in fact, are beneficiaries of the U.S. Small Business Administration (SBA) and its lending programs. The SBA is a U.S. government agency that is tasked with supporting American entrepreneurs and small business owners with a wide range of education and support services, everything from business plan counseling to employee benefits training. The SBA is also the Federal government’s conduit to small business owners, helping place the more than 20% of government contracts that are earmarked to small businesses every year.

The mission of the Small Business Administration is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.”

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More to our point, however, the SBA is also a lending agency that backs several different loan programs, all aimed at providing new business owners with access to startup capital and growth funding. The agency is not a bank, so it lends no money on its own, but it does function as a guarantee organization that partially backs loans from banks, credit unions and other traditional lenders that partner with the SBA. Basically, it is the backstop that allows your bank to write you a loan for your business idea and will be there to protect the bank in the event that you cannot repay the debt. Without that support, it would likely be far more difficult for entrepreneurs to obtain loans from lenders, and the terms of loans would likely be far more onerous.

So what are the options? There are three primary programs available from the SBA for new companies.

[Note: Eligibility for these programs can be restrictive for startups depending on their industry. Check out the rules on the SBA’s website here.]

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7(a) Loan Program

The 7(a) program is the SBA’s largest and most popular lending program in that it offers access to the most working capital at the most reasonable rates.

Can be used for:

  • Working capital
  • Inventory
  • Machinery
  • Furniture

Key features:

  • Borrow up to $5 million (average loan is $337,000)
  • Interest rate: 6.5% (2014)
  • Down payment: 10%
  • Collateral required? Yes
  • Term: Up to 25 years

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504 Loan Program

Unlike the 7(a), which can be used for general business expenses, the SBA’s 504 loan program is targeted specifically at asset purchases and improvements, such as buying land or building facilities. This excludes many types of startup services businesses and others that do not deal in physical plants or have a need for that type of infrastructure.

Can be used for:

  • Buildings / Land
  • Facility improvements
  • Equipment

Key features:

  • Borrow up to $5 million (average loan is $400,000)
  • Interest rate: 4.99% (2014)
  • Down payment: 10%
  • Collateral required? No
  • Term: Up to 20 years

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7(m) Microloan Program

This is one that many startup entrepreneurs will want to investigate closely when looking at seed stage funding options. True, the maximum loan amount is only $35,000, and there are some unusual hurdles that potential borrowers have to go through in order to qualify (such as taking business classes administered by the lenders), but SBA microloans are, on the whole, very startup friendly. For one, the funds can be used for almost any business purpose, and the loans themselves are issued directly by the SBA, taking the banks out of the equation entirely. In this case, nonprofit community intermediaries manage the SBA’s microlending program.

Can be used for:

  • Working capital
  • Inventory
  • Machinery
  • Furniture

Key features:

  • Borrow up to $35,000 (average loan is $10,000)
  • Interest rate: 8-13% (2014)
  • Down payment: None
  • Collateral required? Varies
  • Term: Up to 6 years

What do you think? Does an SBA loan sound like a good option for you? Let us know in the comments section below, or @sgengine

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