Most SBA loans are for businesses that have been operating for a while, but new businesses still have options. This guide will cover loan types, qualification requirements for founders, and other financing options available to startups.
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Let’s dive in.
What Is an SBA Loan?
The SBA exists to help small businesses access financing they may not otherwise qualify for.
It’s commonly thought that the SBA lends money, but that isn’t true. Rather, the SBA guarantees loans issued by other lenders. By reducing risk, the SBA incentivizes banks to finance businesses that may be considered too dangerous under traditional standards.
The bottom line for borrowers is that, if you qualify, SBA loans often carry better repayment terms, lower interest rates, and lower down payments compared to other options on the market.
Types of SBA Loans
In 2024, the SBA supported over 100,000 loans totaling ~$56 billion in capital.
| Program | Purpose | Loan Maximum | Average Loan Size | Best For |
| 7(a) | General-purpose loan for working capital | $5 Million | $443,000 | General business needs, flexible |
| 504 | Long-term financing for purchasing fixed assets | $5.5 Million | $1,060,000 | Real estate or major equipment purchases |
| Microloan | Small loans for startups, working capital, and inventory | $50,000 | $16,200 | Startups and very small businesses |
How to Qualify for an SBA Loan
The basic SBA eligibility requirements are:
- Be in business for profit
- Headquartered in the USA
- Have fewer than 500 employees
- Post less than $7.5 million annual revenue
- Be unable to obtain reasonable credit elsewhere
- Demonstrate a reasonable ability to repay the loan
Nearly every startup founder would satisfy these general criteria. The key is how a “reasonable ability to repay the loan” is evaluated.
Existing profit is the surest test of a business’s creditworthiness. Lenders look for a positive debt service coverage ratio, which means that monthly profit substantially outweighs monthly debt obligations.
But what if you’re a startup founder with no profit or revenue? It’s possible to be funded through the SBA, but not easy. Lenders who work with pre-revenue startups will look for the following:
- Outside income—Do you have a source of income outside of the startup that covers your personal expenses without drawing from the business?
- Outside repayment ability—Do you have a source of income other than the startup that can make the annual loan payment?
- Full collateralization—Do you have assets that can secure the loan in the event of default?
Having great credit, a solid business plan, and market projections are good starting points. But unless you can secure your startup loan with outside assets and income, it’s unlikely for an underwriter to approve you.
SBA Loan Approval Process (Step-by-Step)
Depending on the complexity and size of your loan, an SBA application can take 30 to 90 days before being funded. Here’s the step-by-step process you can expect along the way:
Choose a Loan Servicer
Not all banks and lenders offer SBA loans. Moreover, you’ll need to decide which program (7a, 504, microloan) you’re interested in pursuing.
The SBA offers a lender match program that connects business owners to qualified lenders. After answering a brief questionnaire, they’ll connect you with a curated list of companies that express interest in your loan.
Alternatively, you could use the SBA Lender Report to research options in your state. For instance, Northeast Bank approved the highest number of loans of any provider in 2024, while Live Oak Banking Company boasts the highest average loan size of any frequent SBA partner.
Consult With Your Lender and Submit Documents
Your lender will let you know what they need in order to process your application. In general, you can expect to provide the following:
- A business plan
- Recent personal and business tax returns
- Business financial statements (P&L, cash flow, balance sheet)
- Existing debt schedule
- Credit report
- Resume
- Statement of intent
- Collateral documentation
- Legal documentation
Review, Approval, and Loan Disbursement
Your lender will evaluate your application and request any additional documentation they may need. If approved, you’ll have to sign some paperwork, and funds will be disbursed according to agreed-upon terms.
The Role of SBA-Approved Lenders
Choosing the right lender can make a big difference in your SBA loan application. The SBA guarantees these loans, they’re issued by SBA-approved lenders, including banks, credit unions, and specialized financial institutions.
An experienced SBA-approved lender can simplify the process by guiding you through the requirements and helping choose the program that fits your needs. Since they work with SBA loans regularly, they understand the complexities and can improve your chances of approval.
To find SBA-approved lenders, use the SBA Lender Match tool. It’ll connect you with lenders based on location and financing needs.
When choosing a lender, consider their experience and the specific SBA loan program you’re applying for. Some lenders focus on particular sectors or loans, so it’s worth asking about their specialties in advance. And while the SBA sets general loan guidelines, each lender may have different criteria and procedures. Speaking with multiple lenders can help you find the best match.
Common Reasons Startups Get Rejected
Applying for an SBA loan as a startup can feel like an uphill battle, and for many founders, rejection is a frustrating reality. The challenge comes down to a fundamental issue: lenders need to feel confident they’ll get their money back, and without a history of revenue, startups have to work harder to prove their creditworthiness.
Something as simple as an incomplete or poorly structured business plan can sink an application. Lenders want to see projections, market research, and a realistic path to profitability. Without clearly communicating your vision to lenders, it can be difficult to convince a bank your startup is worth the investment.
Weak credit scores, typically anything below 680, also raise red flags for lenders. Even if your business concept is solid, a history of late payments can make it difficult to secure a loan.
Collateral is another sticking point. Even for businesses with strong track records, SBA loans require businesses to offer assets as security. Without substantial collateral, approval can be difficult.
To improve your chances of success:
- Use the SBA lender match tool to find an approved lender. They will have a track record of working with small businesses and will understand the nuances of SBA-backed loans.
- If you can’t meet the financial requirements independently, consider finding a co-signer or investor.
Other Funding Sources for Startups
Remember, you won’t have to rely on a single funding source when growing a startup. Odds are good you’ll use several sources as you get off the ground.
In addition to SBA-backed loans, you could pursue traditional short-term loans or even credit cards. If you’re confident you’ll be able to pay it off and avoid major debt, these risks can pay off.
Friends and family may be willing to provide loans in exchange for equity, future lump sum payouts, or even something as simple as a thank you. While it’s important not to strain relationships by persistently soliciting help, you should at least consider asking.
Venture capital is another option. If your startup has potential to scale exponentially, it’s possible that a VC firm could be interested in you. Similarly, your city may have a network of angel investors actively looking to invest in local startups. These high-net-worth individuals often accept equity in exchange for their investments.
The Role of Accounting in SBA Loan Approval
Now is the time to lay the financial groundwork that will make securing funding easier in the future.
More than anything, SBA loan servicers are looking for two things:
- Businesses with enough profit to cover additional debt service payments
- Business owners with enough outside income and/or assets to cover additional debt service payments
Lenders don’t just want to hear about a business idea; they want hard numbers that show your startup’s financial health and repayment ability. That’s where solid accounting practices come in. Even if you’re not yet eligible for an SBA loan, keeping your finances in order will save you time and stress down the road. Accurate records, tax compliance, and well-documented cash flow all improve your odds of success on future loan applications.
Whether you’re interested in optimizing cash flow or improving your startup’s budget, indinero is here to help. Our team of expert bookkeepers, CPAs and CFOs are eager to work with you to build a foundation that supports your growth. Book a consultation today.
