Entrepreneurs hoping to secure startup funding with an SBA loan can look to the following programs backed (and, in some cases, funded) by the U.S. Small Business Administration: SBA microloans, Community Advantage loans, 504 loans and 7(a) loans.
Startups are a risky bet for lenders — you don’t have a track record of success yet — and SBA loans are competitive. Targeting the right SBA loan program will improve your chances of success.
The SBA 7(a) and 504 loan programs typically require good personal credit (a FICO score of 690 or above), solid business financials and at least two years in business.
SBA microloan and Community Advantage loans, on the other hand, are designed for true startups. Both programs are available to new businesses and cater to business owners with bad credit (a FICO score of 629 or lower) and low income.
Best SBA loans for startups
Best for: Starting a business
Can be used for: Working capital, inventory, supplies, furniture, fixtures, machinery or equipment
Targeted specifically to startups, the SBA microloan program provides loans of up to $50,000 to help you start or grow your business. The maximum term length is eight years.
The SBA microloan program is administered by a network of community-based lenders, which can set their own rates and eligibility requirements. Those requirements are less stringent than other SBA loans, though, and small-business owners with poor credit or lower incomes can qualify.
SBA Community Advantage loans
Best for: Starting a business
Can be used for: Normal business purposes, including inventory and working capital
SBA Community Advantage loans are available to startups in underserved communities. Borrowers have typically been in business for less than three years and don’t qualify for funding elsewhere. Collateral and profits are not deciding factors for Community Advantage loans, making them a great option for new businesses.
You can borrow up to $250,000, and loans mature after 10 years (working capital) or 25 years (fixed assets). SBA Community Advantage loans are offered by mission-focused, community-based lenders.
SBA 7(a) loans
How much: Up to $5 million
Best for: Growing your business
Can be used for: Working capital, equipment, supplies and real estate
The SBA 7(a) loan program is actually composed of several loan types, each with its own terms and caps. You can borrow up to $5 million with a standard 7(a) loan, for example, or up to $1 million with an SBA Express loan.
SBA 7(a) loans are the most popular, and most competitive, type of SBA loan. You typically need a personal credit score of at least 690 or must be able to show several years of annual revenue. Most 7(a) borrowers have been in business for at least two years.
SBA 504 loans
How much: Up to $5 million
Best for: Growing your business
Can be used for: Real estate, machinery and other major business purchases or upgrades
Startups can use an SBA 504 loan to fund large equipment purchases or facilities upgrades to “promote business growth and job creation.” You can borrow up to $5 million (some projects can qualify for up to $5.5 million) with a term length of 10, 20 or 25 years, depending on the loan.
Small-business owners need to put up 10% of the loan (up to 20% in some cases), which is a steep hurdle to clear for many startups. Each SBA 504 loan is funded by a Certified Development Company and a bank or credit union.
How to get an SBA loan for a startup
1. Calculate startup costs. You can’t apply for a startup business loan until you know how much you need to borrow. Factor in one-time costs, such as permits, licenses and equipment purchases, as well as recurring expenses like payroll, rent and inventory for at least the first year. This will give you a realistic picture of how much money you need to get your business off the ground.
2. Write a business plan. A solid business plan shows lenders you’ve thought of things like your target market, pricing structure, marketing costs, potential challenges and industry competition. Include your startup cost calculation and a detailed funding request, along with projected income. The goal is to show lenders your business will be a success, especially if you do not have multiple years of profits to lean on.
3. Choose a loan and lender. Determine which SBA startup loan option makes sense for your business, then find a participating lender.
You can use the SBA’s Lender Match tool to find a bank, credit union or community-based lender that participates in your chosen loan program. Remember, the SBA backs the loan, but it’s the lender that processes your application and ultimately makes the call on whether to approve your loan.
4. Prepare your loan application and apply. The paperwork needed to complete your SBA startup loan application will depend on the loan program and lender.
In addition to your business plan and loan application, you’ll likely need to supply the following documents:
Contracts, quotes or purchase agreements.
If your business is already up and running, you’ll also need to show business financials, including:
Balance sheet and income statement.
Business licenses and permits.
List of current business assets.
The full loan process, from application to funds in your bank account, can take 30 to 90 days, depending on the loan type.
Frequently asked questions
Find and compare small-business loans
If an SBA startup loan isn’t right for your business, or if you’d like to compare loan options, NerdWallet has a list of small-business loans that are best for business owners. All of our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.
Is There a Difference Between No Credit and Bad Credit?
The short answer is yes, and understanding the difference could be instrumental in getting better credit.
No credit and bad credit often get grouped together. It’s understandable why, as they both sound similar enough. And if you have either, the next step forward is to focus on improving your credit.
The two situations aren’t the same, though. It’s important to know the difference, because the right way to build your credit often depends on whether you have no credit history or bad credit.
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The difference between no credit and bad credit
Having no credit means that there’s not enough information on your credit file to calculate a credit score for you. It’s also known as being credit invisible. Sadly, this is an issue that affects millions of Americans.
There aren’t any problems on your credit file; the credit bureaus just don’t have enough data on you. That means when a lender or any other third party checks your credit, there’s nothing to go on.
Meanwhile, “bad credit” is a common term used to describe a low credit score. That low score is because of negative items on your credit file, such as not paying your credit card bill.
When you have no credit, the solution is to build your credit. When you have a low credit score, the solution is to rebuild your credit. Now, let’s look at how you can do each one.
How to build credit for the first time
Here’s the simplest way to build credit:
- Open a credit card.
- Use the credit card for at least one purchase per month.
- Always pay your credit card bill on time and in full.
It’s that easy; that’s all you need to do to get a good credit score. When you use a credit card and pay the bill on time, you establish a positive payment history. That’s the biggest credit scoring criteria.
The tricky part when you have no credit is finding a credit card you can qualify for. Secured credit cards are one of the most common options for consumers in this situation. You pay a security deposit for this type of card, so it’s possible to open a secured card even if you have no credit.
If you’re in college, credit cards for students are available. These are often an option for applicants without any credit history.
How to rebuild a low credit score
It’s a little more complicated to rebuild your credit. First, you need to find out what negative items are affecting your credit score. Here’s how to start:
- Use an online credit score tool to check your score and learn about any items damaging your credit. If you have a credit card, there may be a credit score tool in your online account. If not, there are plenty of free ways to get your credit score.
- Request your credit report from the three consumer credit bureaus (Equifax, Experian, and TransUnion). You can pull a free annual credit report from each bureau, and through April 2022, you can get free weekly credit reports. Your credit report will show you exactly what’s affecting your credit.
Once you know what’s affecting your credit, you can work on correcting it. Below are a few of the most common issues and how to fix them.
Problems with your payment history
This includes anything related to not paying a bill on time, from late payments to having accounts go to collections.
The first step is catching up on your payments. If you can’t pay in full, contact your creditors and see if you can set up a payment plan with them. They may be willing to work with you if that means you’ll be making regular payments.
Next is rebuilding your payment history. The easiest option is to use a credit card at least once per month and pay in full by the due date. Why do you need to use a credit card? Credit card companies report on-time payments to the credit bureaus, which helps your credit score. With other types of bills, your on-time payments typically don’t get reported to the credit bureaus. That means you may not be able to improve your payment history with rent, utilities, or other monthly bills.
If you already have credit cards, you can continue using them to rebuild your payment history. If you don’t, look for secured credit cards and apply for one you like.
Using too much of your credit
A big factor in your credit score is your credit utilization ratio — your credit card balances divided by your credit limits. If this number gets too high, it can lower your credit score. The standard recommendation is a credit utilization ratio of under 30%.
Let’s say you have one credit card with a $4,000 balance and a $5,000 credit limit. That would put your credit utilization at 80% ($4,000 divided by $5,000 is 80%), a very high number that would decrease your credit score.
Fortunately, only your current credit utilization matters. Once you pay down your credit card balance, your credit score will bounce back.
Errors on your credit history
A low credit score may be due to an error and not any action on your part. This is why it’s so important to pull your credit reports from each credit bureau. By reviewing those, you can see if there are any mistakes.
If there are errors on your credit report, you can go to the credit bureau’s website to dispute them online and get them removed.
A low credit score and a nonexistent credit score are both things you can change. After you determine exactly what the issue is, you’ll be able to choose the best solution to fix it.
‘There is no new normal’: Worcester small business owner pivoted during COVID-19 and expects only more change after pandemic
It took about eight minutes for the bank to reject Natalie Rodriguez’s application for a loan through the Small Business Administration.
Rodriguez opened Nuestra, a Puerto Rican inspired restaurant in Worcester, in January of 2020. When COVID-19 arrived months later she discovered Nuestra wasn’t eligible for the federal or state funding that thousands of other establishments received.
To qualify, restaurants were required to show payroll and salary for years before 2020. Those figures didn’t exist for a restaurant that weren’t open in 2019.
“[I was] determined and knew that ‘no’ is not an OK answer,” Rodriguez said. “A door may close but you may need to kick down another door.”
Rodriguez then applied for conventional loans only to be led to more closed doors. Less than 10 minutes after applying for an Economic Injury Disaster Loan, she received notice that her poor credit score resulted in her application being denied.
Rodriguez used the dead end with the SBA to create a new path for herself and Nuestra.
She not only learned how to improve her credit but wanted to ensure others didn’t have to follow her journey as an entrepreneur.
Rodriguez extended the “Nuestra” brand to include financial advising. She started Nuestra Financial in April of 2020.
“Now I’m helping others. I’ve been able to restore my credit,” Rodriguez said. “I’ve been able to help others restore their credit and be able to help them make a business themselves if they so choose. I’ve been able to survive.”
Without grants and other funding, Rodriguez managed to keep her restaurant open through funds generated from Nuestra Financial.
“I was very quiet about it in the beginning. I didn’t want people to be like, ‘Oh look at this girl, she just opened a restaurant in the middle of a pandemic,’ and talk smack,” Rodriguez said. “About a month or two later, a light bulb hit and I was like, nobody pays my bills but me. I needed to mind my own business and not worry about what other people thought.”
In creating Nuestra Financial, Rodriguez said she’s helped Worcester residents restore their credit and purchase new vehicles and homes.
Rodriguez said financial literacy is rarely taught to children in school and wasn’t something she learned. When a situation arises like a rejection notice for an economic disaster loan, many don’t know how to respond or where to find answers.
Rodriguez said she’s helped young and old people, along with those who have bad credit or no credit.
“We lack the confidence, including myself, because we weren’t taught,” Rodriguez said. “So if you don’t know something, you weren’t taught, you’re not going to be confident about it.”
Coming out of the pandemic, Rodriguez remains confident about both her businesses. Nuestra, the restaurant, while closed for daily service continues to provide catering services. Rodriguez is still preparing what the future holds for the restaurant but plans to announce an update soon.
As masks start to become less a part of daily routines, Rodriguez, as a small business owner, doesn’t envision many differences from this year to last.
So many aspects of life remain uncertain from rising food costs to a potential third booster for vaccines and whether the country will ever reach herd immunity for COVID-19.
The pandemic arrived with Rodriguez immediately pivoting. As it approaches its potential end, Rodriguez will continue to do what helped her to navigate it.
“I feel like there is no new normal just yet,” Rodriguez said. “I think we’re all just trying to adjust and pivot at the same time and getting creative. I think it’s where we all are.”
Columbus Mattress Wholesale moves to newer, larger Gahanna store
More than four years back, Cathryn Clark’s boyfriend, Christopher Robbins, was on the hunt for a new mattress. He just couldn’t find one at an affordable price.
Clark, 29, and Robbins, 34, who are now engaged, were living in Franklinton, where they still live today.
They had no experience owning or operating a small business; Robbins worked as a retail assistant for SAS Retail Services while Clark worked as the communications director for two Methodist churches.
But in 2017, Robbins, with Clark at his side, took the leap and opened Columbus Mattress Wholesale on the West Side, with the goal of helping low-income consumers secure mattresses and other bedtime products.
“We really wanted to bring a store to people that, you know, they weren’t paying an arm and leg, but they still could get a good night’s sleep,” Clark said.
Customers at Columbus Mattress Wholesale can pay cash or credit, for example, but the business also works with financing companies that serve people without credit scores, with bad credit or who are lower income.
Last month, the business made a big move. It expanded from its original location on Harrisburg Pike to a store double the size at 435 Agler Road in Gahanna.
Clark said she and Robbins saw a need in the broader area, with many of their customers coming from outside the Hilltop, such as Linden.
Nestled between Dollar Tree and the Ohio BMV in Gahanna, the new storefront opened Memorial Day weekend and sells mattresses, bed bases, bed frames and pillows. Mattress prices range from under $100 to more than $1,000, depending on the size and brand, which includes some well-known names such as Serta, Beautyrest and Casper.
Clark said while she and Robbins originally sold solely Ohio-based brands, they’ve branched out to national brands as business has grown.
Columbus Mattress Wholesale also offers free same-day delivery on most orders from customers living in Columbus.
Clark does a little bit of everything for the business, from running communications, to working on the sales floor, to managing the sales team, to ordering what they sell.
She said a big mission for herself and Robbins, beyond doing business, is aiding the community.
“We’ve seen a lot of people struggle,” Clark said.
Clark said she and Robbins work to mentor other people who are hoping to open or currently own a small business. She added that the store starts employees at $17 per hour.
She and Robbins haven’t decided yet what they will do with the original location — which is currently closed — but said they might shift it into an accessory store.
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