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Last updated on Sep 22, 2023

8 min read

Using the SBA 7(a) Loan for Startups

SBA 7(a) loans can help startups with funding research, employees, technology, and advertising expenses, among others.

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The SBA 7(a) Loan as a Start Up Business Loan

Starting a business is exciting — but it often comes with major financial challenges. Thankfully, there are many start up business loans, like the Small Business Administration's 7(a) loan, which have been helping entrepreneurs for decades.

This guide will walk you through the SBA's 7(a) loan, with a nod to other financing options that may be at your disposal as well as how to ensure your loan application is a success.

Explore All Your Loan Options

Before you apply for an SBA 7(a) loan, there may be other financing options you may wish to consider.

Many of these won't be right for every entrepreneur and every startup, of course, but SBA lenders will typically look to see if you have exhausted other options before moving forward with a 7(a) loan. (You can read more about alternative sources of capital a bit further down.)

After you've explored your options, an SBA 7(a) loan can offer a low-cost, low-interest solution for your startup or small business.

SBA 7(a) Loans for Startups

The SBA 7(a) loan is a government-backed loan designed to help small businesses without sufficient external funding. These loans don't come directly from the SBA, but they guarantee a portion of the loan, reducing the risk for banks.

Start Up Business Loan Uses

The SBA 7(a) loan can be used for a variety of startup costs, including the following.

Land and Construction

Note that a 7(a) loan can't be used for investment land — it needs to be tied to your startup business in some way. If you're looking to build a warehouse for your products or even a new headquarters, you can generally finance it with a 7(a) loan. These loans can be used for both land acquisition and construction costs.

Existing Debt

An SBA 7(a) loan can be a useful way to refinance your existing debt obligations. This can be particularly useful for consolidating several different smaller loans into one larger package — generally with a longer term and a lower interest rate.

New Equipment or Furniture

Whether you need new desks or manufacturing machinery, the SBA 7(a) loan can be extremely useful. They can offer great ways to finance, say, the purchase of multiple washers and dryers for a laundromat, or furniture for rooms at your hotel or motel.

SBA 7(a) Loan Terms to Keep in Mind

See the table below for a high-level view of SBA 7(a) loan terms.

Loan Amount	Up to $5 million
SBA Guarantee	85% for loans under $150,000 ⁠75% for loans above $150,000
Interest Rate	Typically between 1% and 1.75% above the WSJ Prime
Term Length	Up to 25 years for real estate ⁠Up to 10 years for equipment, working capital, or inventory loans
Fees	Guaranty and servicing fees depend on the loan amount
Prepayment Penalties	Loans with more than 15-year terms are subject to a step-down penalty for the first three years

Finding the Right SBA 7(a) Loan Lender

The ideal lender understands your business model and works with businesses like yours. At SBA 7(a) Loans, we connect you with lenders to help you maximize your loan and get your business off the ground successfully.

Grab a free quote from us — just fill in the form below.

Improving Your Start Up Business Loan Application

Applying for a start up business loan can be daunting, but following these tips will increase your chances of approval.

Create a Solid Business Plan

Lenders want to see a well-prepared business plan that includes financial projections, market analysis, and a clear outline of your goals and strategies. A strong plan demonstrates your commitment and credibility to potential lenders.

Build Your Credit Score

A good personal and business credit score is essential when applying for start up business loans. Pay off any outstanding debts and ensure timely payments to improve your credit score. It's also a good idea to review your credit report and correct any errors before applying.

Prepare Financial Statements

Lenders will want to review your financial statements to assess the health of your business. Be prepared with organized and up-to-date balance sheets, income statements, and cash flow statements.

Show Your Industry Experience

Demonstrate your knowledge and experience in the industry you're entering. Lenders are more likely to approve loans for entrepreneurs who have a proven track record of success in their chosen field.

Calculate the Amount You Need

Determine the exact amount of funding you need and explain how you'll use it. Lenders appreciate a well-researched and justified loan request. The more detail you can provide, the better.

Explore Collateral Options

Collateral can help secure a loan and increase your chances of approval. Consider offering assets like real estate, equipment, or inventory as collateral for your start up business loan.

Research Lenders

Not all lenders are the same. Research various lenders, their loan products, and requirements to find the best fit for your startup. Look for lenders with experience working with businesses in your industry.

Be Persistent

Applying for a start up business loan can be challenging, and you may face rejection. Don't get discouraged; use the feedback to improve your application and try again with another lender.

Seek Professional Advice

Consult with financial advisors, accountants, or experienced entrepreneurs to help you navigate the start up business loan process. Their guidance can improve your chances of securing funding.

Navigate Your Closing Successfully

After you've applied, your work isn't quite done yet. Depending on your business, your lender, and your background, there may be some additional paperwork needed. Or, your lender just may have some additional questions for you.

Read our comprehensive, 10-step guide to ensuring a smooth close with your SBA 7(a) loan.

Alternate Financing Options

As we discussed at the beginning, the SBA 7(a) loan isn't the only way to finance your startup. Be sure to consider some or all of the following options, too, to ensure your business has the greatest shot at success.

Business Credit Cards

Business credit cards offer an accessible way to finance short-term expenses and manage cash flow. They often come with rewards programs and can help you build your business credit score, though be aware that interest rates are often sky high — so be sure you can pay off your card balance quickly.

Lines of Credit

A business line of credit provides flexible access to funds, allowing you to borrow and repay as needed. This option is suitable for managing cash flow and covering unexpected expenses.

Equipment Financing

Equipment financing is a loan specifically designed to help businesses purchase or lease the equipment they need. The equipment itself often serves as collateral for the loan, reducing the need for a down payment.

Invoice Factoring

Invoice factoring involves selling your unpaid invoices to a factoring company for immediate cash. This option can help improve cash flow for businesses with slow-paying customers.

Venture Capital

Venture capital firms invest in startups in exchange for equity in the company. Securing venture capital requires a strong business plan and potential for high growth.

Angel Investors

Angel investors are individuals with high net worths who provide financial support to startups in exchange for equity or debt. Networking and pitching your business idea to potential angel investors can lead to valuable partnerships and funding.

Crowdfunding

Crowdfunding platforms like Kickstarter and Indiegogo allow you to raise funds from a large number of individuals. Successful crowdfunding campaigns often require a compelling story and strong marketing efforts.

Microloans

Microloans are small loans offered by nonprofit organizations and alternative lenders. They can be an excellent option for startups needing a smaller amount of funding and may come with lower interest rates and more flexible terms. Note that there are also SBA 7(a) microloans.

Grants

Grants are non-repayable funds offered by government agencies, foundations, and corporations to support businesses. While competition for grants can be fierce, they can provide valuable funding without the need for repayment.

By exploring these alternative financing options, startups can find the best solutions to meet their unique needs and circumstances. Remember to carefully evaluate each option, weighing the costs, benefits, and potential impact on your business.

Case Study: Scaling a Startup in Salt Lake City

Luke, a passionate entrepreneur, founded a biotech startup in Salt Lake City with a mission to develop an affordable, portable water purification device that could quickly and efficiently remove harmful pathogens from contaminated water sources. The device, designed to be used in remote and disaster-stricken areas, had the potential to save countless lives and improve overall public health.

Although Luke had a comprehensive business plan and a talented team of researchers and engineers, securing funding for his ambitious project proved to be a major challenge. Initially, he turned to angel investors who recognized the potential impact of the product and decided to invest $750,000. This investment allowed the team to develop a prototype, but they required additional funding to conduct field tests and scale up manufacturing.

Several venture capital firms expressed interest, but their proposed deal terms would significantly reduce Luke's ownership stake in the company. Determined to maintain control over his vision, Luke began exploring other financing options.

That's when he discovered the SBA 7(a) loan program, which offers loans for small businesses, including startups. After presenting his business plan and financial projections to a local bank, Luke was approved for a $1.2 million SBA 7(a) loan at a low, fixed interest rate. The loan provided the vital capital needed to initiate field tests and begin scaling up production.

The SBA 7(a) loan had a transformative impact on Luke's biotech startup. It allowed him to secure the necessary funding without sacrificing too much control, enabling him to focus on perfecting the portable water purification device. With the support of the SBA 7(a) loan, Luke's company successfully conducted extensive field tests, demonstrating the device's efficacy in various real-world scenarios. As a result, they were able to secure partnerships with NGOs and government organizations, putting them on the path to making a significant global impact.

This is a fictional case study provided for illustrative purposes.