If you’re an entrepreneur with a great idea and a sound business plan, but you’re stuck on how to find the funding to grow your business, you’ll be glad to know that an SBA 7(a) loan is an ideal first time business loan for startups. Explore all the benefits that make the SBA 7(a) loan program a great option for your business.
The SBA 7(a) program makes it easier for new businesses to launch and grow
To understand why SBA loans are great for new businesses, it helps to understand the purpose of the SBA.
First, the SBA was created by the U.S. government specifically to help small business owners who may not qualify for conventional commercial loans. Such as new businesses and business owners who have found it harder to gain access to funds. This can include business owners with less-than-perfect credit scores, limited credit histories, or not enough collateral to meet traditional commercial loan requirements. SBA options are also designed to help if you don’t have the higher amounts of owner equity that’s typically required with conventional business loans.
Second, the SBA doesn’t make loans directly. Instead, the SBA works in partnership with lenders. This means that as long as your business meets the SBA’s more flexible lending criteria, then it has a higher chance of getting approved, no matter what stage it’s in.
Flexible criteria make it easier to qualify for an SBA 7(a) loan
The SBA 7(a) loan program is the SBA’s most popular loan option because of its flexible eligibility, the huge range of uses that qualify, the loan amounts, and the competitive terms that make it easier to repay.
Additionally, the Community Advantage option is a part of the SBA 7(a) program that’s specifically developed to help business owners working in underserved areas. For qualified businesses, Community Advantage can offer even more flexible eligibility and loan approval criteria, for loans up to $350,000.
While some lenders may have additional criteria, overall, here’s what’s required for startup businesses to qualify for an SBA 7(a) loan:
- Your business has positive projected cash flow
- You have available equity to contribute to the business
- You have assets or real estate that can be used as collateral
- You have a fair to good personal credit score
- You have experience in the industry you’re looking to start your business in
- Your business is in an industry that has positive growth and business trends
Also, you’ll need a business plan that includes the following:
- Which products and/or services you’ll offer, how you’ll obtain or provide them, and your target customers.
- Research on your competitors and how your business offers something either different than what’s currently available or meets an ongoing need in your community and/or marketplace.
- How you’ll reach your target customers and how you know that it’ll be effective.
- If a physical location is needed, include in-depth research on the costs to acquire your space and finish it with renovations, equipment, furniture, and fixtures.
- Information about you and your management team’s experience. What training or experience do you have in your industry? If you have partners or managers in place, what makes them right for the job? Do they have applicable knowledge in the field or specialized experience in a critical area? You’ll also need to show how your management team demonstrates financial-management skills and responsibility handling credit and debt.
- Details about your staffing needs. Will you hire employees immediately or only as you grow? Include what kinds of skills are required and what costs are involved, including salary, benefits, space, equipment, training, and uniforms.
- Owner equity of at least 10% of estimated total project costs (some lenders may require more), although the sources for this are flexible.
- Two years of monthly financial projections.
Your business plan doesn’t have to be very long. However, it should be detailed enough to demonstrate that you understand your business idea, your industry, your audience, your competitors, and your costs.
Why an SBA 7(a) loan is great for a first time business loan
The SBA approves loans for many types of businesses and industries, including some that are traditionally harder to fund like restaurants, retail, and childcare. Here’s an example of how an SBA 7(a) loan could help an entrepreneur get startup funding for their business:
Lauren wants to start her own daycare. She feels that with her education and professional experience in the industry she would be able to successfully start her own. She knows that there’s demand for additional daycares in her area, which she knows is currently underserved.
She began researching startup financing options and found that her local Small Business Development Center would help her become “finance ready.” They not only helped her prepare her business plan and projections, but they also worked with her to outline her cost structure and research potential locations and vendors.
Lauren’s SBDC rep tells her about the SBA 7(a) program and provides her with a list of lenders who offer this financing option in her area. They explain that the program is designed to provide financing for businesses that might not necessarily fit traditional lending requirements.
After reading over the requirements, Lauren estimates her total project cost to be $250,000 and she has $25,000 available to put towards it. She was also able to get an additional $30,000 from her parents to help. She’s also prepared to pledge her home as collateral if she needs to.
The SBA lender was impressed with Lauren’s well-outlined business plan and projections. Additionally, her funding contribution towards the business loan made the lender more comfortable with Lauren’s commitment to the business’s success.
The SBA lender agreed to the loan and Lauren successfully started her daycare program through the SBA 7(a) loan program!
The SBA 7(a) program can be used for more than just a first time business loan
In addition to funding startups, an SBA 7(a) loan can also be used to acquire an existing business. This can include an existing, independent business and franchises. If you’re looking to take over a franchise, a good starting point is to check the SBA franchise directory. This provides a current listing of franchises that have been approved for SBA financing.
If the franchise that you’re interested in isn’t on the list, talk to your lender to see. This way you can find out if the brand hasn’t been added yet (in which case, an SBA loan may still be available) or if it was declined.
Pursuit can help with your first time business loan
Small businesses form the basis of entrepreneurship and job creation in the U.S. and the SBA exists to help you access the funding needed to launch and grow their ventures. Pursuit is an SBA-certified lender with more than 15 loan options, including SBA 7(a) and Community Advantage loans.
Every day, we help small business owners gain access to the funds they need to grow their businesses and achieve their dreams. If you’re planning a new business or even just want to talk about possible funding options, contact us today to learn more about how we can help you.
