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What is an SBA Startup Loan?

An SBA Startup loan is an SBA-backed loan used to start a new business. The SBA (Small Business Administration) has lots of loan programs where they’ll insure your loan, promising to cover up to 85% of the balance if you’re unable to make your payments. This puts your lender at less of a risk, which leads to better terms for your loan, like lower rates and credit requirements. While most of these programs are aimed at helping young businesses grow, some can be used for starting a new business. Since new businesses are a riskier investment for lenders, it’s the smaller loans that are better suited for startups, like SBA Microloans (for amounts up to $50,000) and SBA express loans (for amounts up to $350,000).

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Rates (%)

SBA loans, in general, are known for their low-interest rates, varying from around 5% – 9% APR. Using an SBA loan to start a new business will mean your rates will be on the high end of this range, not only because startups are high-risk, but because smaller loans with shorter payment terms usually have higher rates generally. With an SBA Microloan, for example, you can expect to pay as high as 13% APR in interest. This might seem high compared to other business loans, but keep in mind that the amount of your loan and the length of your payment term also affect how much you’ll actually be paying in interest. Some SBA loans have rates between 4% – 5% APR, but can be for an amount of up to $5 million, while the average SBA Microloan is only around $13,000.

Credit Requirements

For most business loans, lenders will want to look at your business credit history to see that the business is profitable and a good investment. If you’re starting a new business and don’t have any business credit, you’ll want to make sure you’ve got a strong personal credit score of at least 700. If you have a lower score than this, you can improve it simply by paying off any outstanding debts. Even one late bill can bring down your credit score by quite a bit, so just making sure you’re on top of your payments should be enough to get your credit where it needs to be.

How to Get an SBA Loan as a Startup

Once you know your credit’s in good shape, you’re ready to start thinking about securing your loan. First and foremost you’ll need to make sure you’ve got the revenue to show your lender you can afford the loans payments. A startup loan will also need a down payment, likely around 25% – 30%. Usually, you could get an SBA loan without a down payment, but since startups are higher risk lenders want to see that you’ve got extra incentive to make your payments. Collateral is another way to show your commitment. Business loans, in general, are usually secured by whatever they’re used to buy (equipment, real estate, etc.). For a riskier loan like a startup, however, you may need to give some extra personal collateral. Finally, an important part of securing a startup loan is your business plan. Your lender will want to believe in your business as much as you do, and you can convince them by showing how well you’ve planned everything. A good amount of market research, with attention to how your business will stand out in the field, is a great way to help your lender feel good about investing in your business. Once you’ve got the credit, the funds, and a plan of action, you’re ready to get started on building the business you’ve always wanted.

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