SBA 101: Small Business Loans for Startups
Startup companies are reliant on capital. Reason being, capital is considered the way startups grow and expand. This is not always the case, but over the course of three years, I witnessed hundreds of startup companies turn to venture capital and venture debt for capital. In my humble opinion, not every startup should pursue venture capital. There may be better ways to seek out capital if you are an entrepreneur with a dream.
For instance, if you operate a startup, the SBA loan program is available to you. However, a big downside to an SBA loan as a startup company is the down payment, yet the down payment in the long-run is much cheaper than forking over 10%+ to venture capitalists.
SBA loans are frequently used by established businesses, but there are specific advantages for startups that are worth the consideration. For example, the SBA guarantees 80.0% of an SBA loan for banks if the borrower defaults on payments. This guarantee, as part of the SBA program, incentivizes banks to consider funding business that are inherently riskier due to the lack of collateral, lack of established operating history, etc.
The SBA offers an array of loans for startups, each with its own strengths to meet your startup’s needs.
SBA 7(a) Loan
The SBA 7(a) loan is one of the most versatile loans available and is used to fund startups, equipment and machinery purchases, partnership buy-outs, business acquisitions, etc. The maximum loan amount for the 7(a) loan is $5 million.
SBA 504 Loan
An SBA 504 loan program provides an opportunity to buy or build owner-occupied commercial real estate. The bank funds a portion and a Community Development Corporation (CDC) funds the other or another a portion, along with a down payment from the borrower. Maximum loan amounts range from $5.0 million to $5.5 million, depending on the type of business or project.
SBA CAPLine Loan
An SBA CAPLine loan can meet your short-term cash flow and working capital needs, allowing you to transition between busy and slows seasons in cash flow. SBA CAPLines are best utilized when used as a revolving line of credit to make recurring payments or to prepare for unexpected expenses. Maximum CAPLine loan amount is $5 million. Typically, the SBA CAPLine is offered in conjunction with SBA 7(a) loans and SBA 504 loans. However, SBA CAPLines can be issued as a standalone product.
SBA Express Loan
An SBA Express loan excludes excess paperwork with a streamlined approval process for an easy-to-use line of credit or a term loan. The SBA Express loan can put as much as $350,000 in your hands within a 36-hour period.
SBA Veterans Advantages Loan
The SBA Veterans Advantage loan is available to businesses that are at least 51%+ owned by veterans or military spouses. These loans offer the same terms as SBA 7(a) loans and SBA Express loans, but with reduced fees.
Startups have several financing options available to them. Remember to do your research so you can find the most beneficial financing for your business’s needs.
Feel free to share other strengths and benefits of the SBA loans documented above in the comments.
If you need assistance, selecting an SBA lender, feel free to reach out. I am always happy to assist. Contact me at ryan@peakbusinessvaluation.com or visit our website at peakbusinessvaluation.com.
