What You Need to Know About Using SBA Loans to Start a Small Business or Startup

How to Use SBA Loans to Start a Small Business

SBA are a type of financing that's partially guaranteed by the U.S. Small Business Administration (SBA). The SBA doesn't lend money directly, but it partners with banks, credit unions, and business lenders to secure loans for borrowers. This reduces risk for lenders.

Some of these entrepreneurs might not otherwise qualify for traditional small business loans through other types of lenders, so SBA loans open funding doors for many businesses. And because the SBA shares some of the risk, participating lenders may offer easier eligibility requirements, longer repayment terms, and lower interest rates than businesses might find elsewhere.

Not only are these loans more accessible, but they can be more affordable in the long run, too.

Key SBA Loan Programs for Startups

There isn't just one type of SBA loan to start a small business. In fact, the SBA offers many different loan programs designed to fit various businesses and funding needs.

Here are some of the best small business startup loans from the SBA and what they offer.

SBA 7(a) Loans

The most common SBA program is the 7(a) loan. This loan can be used for almost any business funding need, whether it's providing your company with working capital, helping you make equipment purchases, or even allowing you to acquire or renovate real estate.

SBA 7(a) loan amounts are capped at $5 million, but that doesn't mean you have to borrow that much. If you're a new venture or a smaller operation, a smaller 7(a) loans could be an ideal target. Taking out a smaller SBA loan to start a small business may also offer low down payments for added accessibility.

SBA 504 loans

The SBA 504 loan program offers long-term, fixed-rate financing that can be used to buy major fixed assets, like commercial real estate or heavy machinery. While it's not the most common type of SBA loan to start a small business, it can be very valuable for startups or smaller businesses that want to own a facility or buy their production equipment.

SBA 504 loans are a feasible alternative to equipment loans. While both funding options allow you to buy much-needed equipment or machinery, traditional equipment loans may have much lower limits than the 504 program (which is also capped at $5 million). While equipment loans are secured by the machinery you purchase, SBA loans to start a small business typically do not require additional collateral.

SBA microloans

If you're just getting started and only need to borrow a small amount, the SBA Microloan program could be a good fit. These loans of up to $50,000 are issued through nonprofit community lenders that specialize in helping small, up-and-coming businesses.

They can also provide you with hands-on guidance and more flexible credit requirements than traditional business funding or non-SBA startup loans. This makes them an especially great option for first-time entrepreneurs.

Benefits of SBA Loans for New Entrepreneurs

The appeal of using SBA loans to start a small business goes beyond just access to funds. These loan programs are structured to give small business owners a flexible foundation that encourages long-term success.

Higher borrowing limits

SBA loans let small businesses borrow up to $5 million. These funds can be used for working capital, purchasing equipment and supplies, refinancing debt, marketing your business, and more.

Entrepreneurs can also use SBA loans to start a small business from scratch, as long as they meet the lender's underwriting requirements and can prove their creditworthiness. (In some cases, this means providing a personal guarantee and leaning on your personal credit history.)

Lower down payments and interest rates

While down payments are still required on SBA loans, this type of business financing usually needs less money upfront than other financing options, like term loans or business lines of credit. Combine that with competitive interest rates and long repayment terms, and it's easy to see how using SBA loans to start a small business can be a good way to help keep monthly payments affordable.

More time to repay

Depending on your loan type and how you plan to use the funds, repayment terms on an SBA loan can stretch up to 10 or even 25 years. Having that long of a repayment period can be a big advantage for business owners, especially startups and those using SBA loans to start a small business. That's because this gives them more time to grow and stabilize cash flow before trying to scale further.

Freedom to use funds strategically

Unlike some types of business financing that limit spending to certain categories or even specific purchases, SBA loans give your business the ultimate flexibility. You can use SBA loan funds to hire staff, buy inventory, market your business, purchase or renovate real estate, or cover certain startup costs.

Of course, there are still requirements when working with an SBA preferred lender, such as being an eligible for-profit business (or, in some cases, select nonprofits).

Tips When Applying for SBA Loans to Start a Small Business

While getting a small business loan to start a business through the SBA is easier than it used to be, being prepared is still important if you want approval. Here are a few things to keep in mind before starting the application process, to better your chances of SBA funding:

• Build a solid business plan. Lenders will want to see that you've done your homework and know how you'll use an SBA loan to start a small business or grow your existing company. Be sure to research your market, estimate your expenses, and set up revenue projections. Then include all of that information in your business plan for review.

• Organize your financials. Even if you're not yet generating business revenue, be sure to gather all relevant personal financial statements and submit any startup cost estimates you have available. Being able to present as much financial information as possible can help improve your chances of getting approved.

• Work with SBA-approved lenders. Not all banks participate in every SBA program. Make sure to find a lender match per your business's needs, the amount you want to borrow, and the exact SBA loan you're interested in. Some SBA lenders are more familiar with startups and small-dollar loans, for example, so working with one of those can be a better option if that's the stage your business is in.

• Be ready to explain yourself. Lenders are more likely to back entrepreneurs who can clearly lay out their mission, market, and long-term plan. This is probably already a part of your business plan and/or company mission statement, but it can help make a good case for using an SBA loan to start your small business.

Final Thoughts

For many entrepreneurs, using an SBA loan to start a small business means more than just asking for cash. This loan can serve as a launchpad to turn entrepreneurial goals into real, sustainable businesses.

SBA loans offer access to affordable capital, expert guidance, and competitive repayment terms that promote sustainable growth. In many cases, borrowing smart matters more than borrowing big — in fact, even small SBA loans can help startups open doors, create jobs, and compete in their individual markets in a way that traditional business lending often can't.

Whether you're applying for an SBA loan to buy a business, want to expand your current operations, or need to fund your very first startup, SBA loan programs offer a smart path forward.