SBA Startup Loan: Which Program is Right for You? Microloan vs. 7(a) vs. Express

Many traditional banks are hesitant to lend to startups. This makes it difficult for many new business owners to secure the capital they need to grow their business. If a bank does lend to startups, it may demand a large down payment or significant collateral that a startup owner wouldn't have. Fortunately, the U.S. Small Business Administration (SBA) offers a powerful alternative for small businesses. The SBA doesn't offer a specific “startup loan” product, but several of their products may be used by new businesses as startup capital. These SBA-backed loans provide a partial guarantee to SBA lenders, lowering their risk and making it easier for entrepreneurs to qualify for SBA startup loans.

Picking the right SBA startup loan will have a big impact on a business' debt structure and growth trajectory. There are several types of SBA loans, but the main programs for new businesses are the Microloan, 7(a) Standard, and Express programs. Each has different available loan amounts, interest rates, eligibility requirements, and processing times.

Option 1: The SBA Microloan Program

Unlike other SBA startup loan programs, the SBA Microloan program isn't directly administered by banks. Instead, the SBA provides funds to designated non-profit intermediary lenders, such as Community Development Financial Institutions (CDFIs). These SBA-approved intermediaries then lend small amounts directly to entrepreneurs.

SBA Microloans offer a maximum loan size is $50,000, but the average amount borrowed is around $13,000. Microloans are best for funding small, essential purchases like initial inventory, office equipment, and working capital during the startup phase. Since the lenders are mission-driven, they place a heavy emphasis on the applicant's character, business plan viability, and repayment capacity than creditworthiness. (Although a good credit history and strong collateral can certainly help the application process.)

As part of the loan terms, many Microloan lenders require or strongly encourage the borrower to participate in business training or technical assistance. For new business owners, this makes the Microloan a particularly appealing SBA startup loan since they'll get the support they need to effectively manage funds. These SBA-guaranteed small business startup loans offer fast funding and greater accessibility without putting a business in significant debt.

Pros and Cons of SBA Microloans

Pros

• Accessibility: May be easier to qualify for, especially for startups and those lacking collateral.

• Supportive lenders: Offers required technical assistance and business mentorship.

• Quick processing: May be the fastest funding source after approval.

Cons

• Low Maximum: Capped at $50,000, limiting its use for major equipment or real estate.

• Higher interest: Intermediaries can charge slightly higher interest rates due to the increased administrative costs of servicing small loans.

• Slightly limited use: Funds cannot be used to pay off existing debt.

Option 2: SBA 7(a) Standard Loan

The 7(a) program is the SBA's most common and flexible loan program. The program offers a partial guarantee for approved loan funds, reducing the risk for both lenders and borrowers.

The maximum 7(a) loan amount is $5 million, making them useful for major business expansions like purchasing real estate, financing large equipment purchases, or restructuring significant amounts of business debt.

SBA eligibility is stricter for 7(a) loans than Microloans. Lenders require a solid business plan, a down payment, strong cash flow projections, and a good personal credit history. While they may serve as an SBA startup loan, applicants with a more extended operating history have a stronger case.

SBA 7(a) loans take a long time to process. Standard applications may take several months due to the extensive underwriting and documentation processes. If you have urgent financing needs, a 7(a) loan isn't the best SBA startup loan option. But, if you have substantial capital needs and the time to wait, it may be an outstanding business loan for startup companies.

Pros and Cons of SBA 7(a) Standard Loans

Pros

• High loan amounts: Up to $5 million, suitable for major capital expenditures.

• Low interest rates: Interest rates are competitive, capped based on the prime rate.

• Long repayment terms: Up to 25 years for real estate, 10 years for equipment.

Cons

• Slow processing: Lengthy application and approval timeline (often months).

• Collateral required: Loans over $350,000 must be secured by collateral.

• Difficult application process: High documentation burden; requires detailed historical financial statements.

Option 3: The SBA Express Program

The Express program is essentially a fast-track version of the 7(a) loan. It's designed to help entrepreneurs get access to funds quickly. The SBA gives a streamlined guarantee to the lender. The lender uses its own documentation and processes rather than the SBA's, which speeds up the process.

The Express program has a maximum loan amount of $500,000, and the SBA guarantees a response to lenders within 36 hours of application submission. While the funding may still take a month or more, the initial decision is very fast, making it a suitable SBA startup loan option. If you have urgent capital needs, like covering an emergency expense or needing a bridge loan, Express loans can be useful business loans for startup companies.

The Express loan is basically a middle-ground SBA startup loan. It provides a higher maximum loan amount than the Microloan program, but a faster decision time than the Standard 7(a).

Pros and Cons of SBA Express Loans

Pros

• Fast decision: Approval process is faster than standard 7(a) loan.

• High loan amounts: Up to $500,000, covering most major startup needs.

• Revolving option: Express loans can be structured as a revolving line of credit, offering financial flexibility.

Cons

• Lower guarantee: The maximum SBA guarantee is 50%, which may make some banks slightly more cautious than with the 75-85% guarantee on a standard 7(a). (Plus, you'll owe more if you default on the loan.)

• Higher interest rates: Interest rate caps are generally higher than the standard 7(a) rate to compensate for the speed.

• Strict eligibility: Requires the business owner to have a relatively strong credit profile to meet the fast-track requirements.

When to Get Each Type of SBA Startup Loan

Before submitting an SBA startup loan application, it's important to understand where you are in the process so you know which type of loan may be most appropriate.

Seed Stage

If your business is less than a year old and lacks significant collateral, a Microloan may be the best option. Not only are the eligibility requirements less strict than those of other SBA startup loans, but they can also be funded faster, too. If you have relatively small capital needs to get off the ground, a Microloan can provide the money you need as well as the mentorship necessary to get through the bumpiest startup stage.

Growth Stage

Established businesses that have had stable cash flow for a few years may be ready to grow. That could mean opening a new location, creating a new product, or increasing production capacity. In any case, successful growth often requires capitalizing on an opportunity. That means you need money fast. The speed of an Express loan can combine both efficiency and a high loan amount to support your needs.

Major Expansion

If you're ready to purchase long-term assets like commercial property or heavy machinery, you're likely best served by an SBA 7(a) Standard Loan. Although the process is slow, the lower rates and longer terms associated with this SBA startup loan structure make it ideal for major, long-term capital investments.

Final Thoughts

Although the SBA does not offer an official startup loan product, several of its loan products can help startups get off the ground or grow. The right SBA startup loan for your business isn't necessarily the biggest one. Different loan products can serve a variety of needs, so it's more important to find a loan type that helps you meet your immediate business needs and is within your ability to repay.

Remember, access to capital is a strategic tool. By carefully evaluating the terms, speed, and eligibility requirements of SBA startup loans, new business owners can find the right financing for them.