What Are The Small Business Startup Loan Options For Emerging Entrepreneurs?
Whenever we discuss about Startup funding, the main sources of funding that comes to our mind are Startup Accelerators, Angel Investors, Venture Capital Firms, Incubators, etc. However, we often undervalue or dismiss the idea of traditional option where you can opt for a small business loan from a bank and fund your startup.
There are more than 5,00,000 small businesses launched in the United States every month. Not all of these businesses run smoothly. At some point of time, most of these businesses face financial issues and need the help of a third-party source for raising funds.
Many times a business couldn’t raise the funds from incubators, accelerators, VCs or Angel Investor due to different reasons. During such scenario, choosing the traditional option of small business loans can be a boon in disguise.
SBA Loans for Small Business
United States government has launched the Small Business Administration Loans Program in order to encourage entrepreneurship that would boost more employment opportunities in the country. Although traditionally speaking, the process of getting qualified for SBA funding is tough compared to other options mentioned above, this is one of the ideal choice where the company could get the funding without losing on equity or business share at lowest interest rates.
Basically, there are 3 types of SBA loans designed for startups as follows:
#1 – The SBA 7(A) Loan for Startups
The SBA 7(A) loan program is designed for both existing and emerging businesses. A Startup can apply for this loan which can be used as working capital, real estate or equipment related finances.
The SBA 7(A) loan is the hot favorite loan program among the startup entrepreneurs as it offers the lowest interest rates as compared to other loan programs offered by the SBA. The interest rates for SBA 7(A) starts with a base rate of 2.25 to 2.75 percent, which is based on either the prime rate, the London Interbank Prime plus 3% or an SBA peg rate. Although, it offers the lowest interest rates, 7(A) loans are mostly variable-rate. Last year, the interest rates for SBA 7(A) loan ranged in between 6.25% and 7%.
Because of such low interest rates, 7(A) is the most favored loan programs among startups and many emerging businesses apply for this loan. However, only 15% of these loan applications are approved while others are denied. In order to improve the chances of loan approval, the applicant must have a good number of assets and a good credit score. Above all, patience is the key while applying for 7(A) loan as the processing time could take months.
#2 – The SBA 504 Loan
Popularly touted as Real Estate & Equipment loans, SBA’s 504 loan program helps business to receive funds for real estate related to improvements to buildings, land acquisition or new constructions as well as purchasing new equipment or modernizing the current office space with new accessories. Startups can also use SBA 504 loan program for acquiring other businesses.
Similar to 7(A) loans, SBA 504 loan approval rate is quite low and takes a lot of processing time. However, with the current interest rates of around 5%, many startups apply for the SBA 504 loan program to fund their ventures.
#3 – SBA Microloans
Compared to the above, SBA 7(A) and 504 loan programs, the SBA Microloan program isn’t quite popular among the startup entrepreneurs as the loan is sanctioned through a network of intermediaries throughout the US. Startups can use this type of loan for buying new equipment, inventory or furniture as well as for raising the working capital.
The biggest downside of this loan program is its basic requirement of completing the business training and planning classes in order to be eligible for the loan program. Another major setback of the SBA Microloan program is again the processing time it takes for loan approvals.
Although, the approval rate for these SBA loan programs is minimal, you can always use these options to fund your startups when the other doors are closed. Always remember that, the US government launched the Small Business Administration loan program in order to develop the basic infrastructure for new employment opportunities in the country. If your startup can promise new jobs for the citizens of the United States, you can always increase your chances to get the loan application approved.
Simply prepare the best business plan for your startup and apply for any of these SBA loans for Startups. You can always explore other options for funding as it would take months for the loan processing.