SBA Startup Loan: What to Know Before Applying

Applying for an SBA Loan will be a similar process to other large loan options. You’ll need to dedicate some time to the process, especially if you want to get the best terms possible. Here’s every step you’ll encounter during the process. 

Calculate Startup Costs

Before you ever start looking for lenders, you’ll need to come up with a realistic total of what you’ll need to borrow. There’s no need to take out a huge loan just to have the money on hand. You’ll just end up paying extra for it (in interest) later. When calculating costs, make sure to consider the cost of:

• Any property you need to rent/buy 
• Any renovations you’ll need to do to that property 
• Equipment you need to purchase
• License fees (business, liquor, food, etc.)
• Inventory to create your products 
• Marketing, including ads and websites, to get the word of your business out 
• Office furniture
• Utilities to keep your business running 
• Payroll for any employees
• Insurance needs
• Taxes, since many businesses are subject to corporate taxes 

This is a fairly comprehensive list, but make sure to consider any extra costs specific to your industry as well.

Develop a Business Plan  

Lenders will want to see your full business plan. They’re lending you, often, very large amounts of money and want assurance that you’ll pay it back. A business plan shows them your path to success and how long it might be until you see a profit. In your business plan, include the following:

• Description(s) of your startup costs and how you plan to use funding. 
• Describe your business and the products and/or services you provide. 
• Your goals as a business. 
• Your marketing plan. 
• Descriptions of how much of your personal assets are going into your business. 

Research Your Loan Options

The SBA offers a number of different types of loans. Your next step is to research each of these options (we’ve provided descriptions above) and decide which one is right for you. Start with the loan amounts each offers. If you need a larger loan, stick with options like the SBA 504 and SBA 7(a) that offer millions. From there, consider collateral and credit requirements and how fast the funding is. 

Select the Right SBA Lender

Once you understand the type of SBA loan you need, you’ll need to narrow down your lender choices. Many lenders offer SBA loans, so the options are vast. Luckily the SBA has a Lender Match tool that can help pair you with options closest to what you’re looking for.

In general, you’ll have a couple of lender types to go with. These can include:

• Online lenders: Online lenders that offer SBA loans will offer shorter turnaround times and some may have more relaxed requirements. In exchange, you may have to put up collateral. 
• Banks: Most big-name banks offer SBA financing in some capacity. If you already work with one of these banks, using them could potentially help speed up the process, since much of your financial info is already in their system. 
• Credit unions: Local credit unions tend to offer SBA Loans. While the application process may be longer, the perk of working with a local credit union is that they already know you as a banker. You can more easily argue your case, and many credit unions are more lenient on credit requirements. 

Prepare the Required Documentation

When you’ve selected your final lender, before you go through the application process, you’ll need to gather a lot of paperwork. The exact paperwork you need will vary from lender to lender, but generally, you should be prepared to present the following:

• Your business plan.
• Personal and business tax returns. 
• Financial projections for the business you’re funding. 
• Collateral options, if applicable. 
• Copies of business licenses you’ve already acquired. 
• Explanations of how you’ll use financing. 

Complete and Submit Your Loan Application

If you have your documents prepared ahead of time, the application process shouldn’t take too long. Again, this will vary by whether or not you’re doing your application online or in-person with a local bank or credit union. 

Alternative Startup Financing Options

SBA Loans are favored among startups because they often offer more flexibility than other options. That said, for some borrowers, there are other options that may work better. Here are some startup financing alternatives: 

• Traditional Small Business Loans: The same types of lenders that offer SBA loans also offer their own forms of small business loans. These don’t always come with the best interest rates, but you have more options when it comes to terms. While you’re looking through SBA lenders, take a moment to see if they also offer their own financing. You might also consider dedicated startup business loans offered by online lenders.
• Equipment Financing: If you're mainly looking to finance equipment, many in-person and online lenders offer equipment financing options. With potentially lenient credit and collateral requirements, equipment financing definitely has its perks. 
• Business Line of Credit: Business lines of credit work similarly to credit cards in that you can draw on a credit line to make purchases for your business, pay down that line, and reuse it again. These are best for small purchases, say during renovations, that you can quickly pay down. 
• Small Business Credit Card:  Business lines of credit are different from business credit cards. While they both provide the same function, small business credit cards often have smaller credit lines. These aren’t necessarily recommended for funding major startup costs, but can be used to make small purchases you can’t otherwise cover right away. 
• Personal Loans: Many lenders require you to have a few months in business before finding funding, but personal loans can be used to initially start your business. These loans can be used for any general purpose (with the exception of purchasing property) and you can secure hundreds of thousands in funding from online lenders. 
• Crowdfunding: Crowdfunded loans, often called peer-to-peer loans, are funded by private investors. For you, though, the loan process is similar. You get a repayment schedule and an interest rate determined largely by your credit score. You can find these loans on sites like Prosper and LendingClub. 
• Small Business Grants:  The SBA provides a few small business grants to eligible entrepreneurs. The COVID-19 relief program is a prime example. Note that these are NOT for startups, but for those with a limited time in business. 
• Friends and Family: If you don’t have the best financial track record and don’t want to take your chance on lenders, consider asking friends and family for financing. Approach this like any other business financing option, though. Present a business plan, set a repayment schedule you can actually stick to, and make sure they know how you plan to use their money. 
• Personal Funding: While it’s not best to mix personal and business financials, it is a last-resort option. If you must, you can consider using personal credit cards, home equity loans, and retirement account loans.

Video: How To Get a Startup Business Loan

Starting a business can take a lot of money, and many business owners don’t have all of that cash upfront. An SBA startup loan can help ease the burden of having to purchase retail space, order inventory, and purchase equipment all at once. Head to the SBA’s website to get the full details on these loans and find lenders that offer them. 

• https://www.sba.gov/funding-programs/loans
• https://www.sba.gov/business-guide/plan-your-business/fund-your-business
• https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs
• https://www.startupgrind.com/blog/9-realistic-ways-to-fund-your-startup/