Can Startup Businesses Qualify for an SBA Loan?

May 17, 2016 Marc Prosser

Starting a business? Financing can’t be too far from your mind. Depending on your business model, startup costs can range from $3,000 to $300,000 or even more. Unless you’re willing and able to bootstrap your business, you’ll probably need to secure a loan. You’ve heard that the Small Business Administration (SBA) offers inexpensive financing to small businesses, and you’re hoping to get approved for an SBA loan for your startup, but is it even possible?

The short answer is no.

At least, it’s ‘no’ when it comes to new businesses. Unfortunately, the SBA does not guarantee loans to startups. Instead, the SBA prefers to lend to established small businesses with a proven income. If you’re expecting an easy loan, you’ll find SBA loan requirements to be surprisingly high: you’ll need to have been in business for two or more years, generate at least $100,000 revenue in the past year, and have a strong personal credit score, in the high 600s or above.

If you’re just starting a business, does that mean all hope is lost? That answer is no, too. Fortunately, there are a few lending options available to you even if you’ve been in business for less than one year. Here are the best lending options for startup businesses who cannot qualify for a SBA loan:

Use a Peer-to-Peer (P2P) Site

Peer-to-Peer (P2P) sites allows small business startups to receive loans from peer investors. Borrowers apply for a set loan amount, and investors decide whether or not to invest money into the loan. Once you’re approved, you’ll make monthly payments that are dispersed to each of the investors.

Should you go with this option?

P2P is an alternative to borrowing with a credit card. These loans carry an interest rate between 12-25%, which depends on length of the loan and your credit rating.

Speaking of which, P2P lending requires a good personal credit rating. If your credit rating is anywhere below 620, it’s better to go with another option on this list.

Acquire a Microloan

Despite its name, a microloan can actually be quite sizable– up to $30,000 for startups. Microloans are used for working capital or to purchase furniture, equipment, and inventory or supplies.

The Annual Percentage Interest Rate for microloans ranges from 18-35% which makes it a cheaper alternative than some lenders on this list.

Should you go with this option?

Even with a less than stellar credit rating, you can still receive funding in the form of a microloan. Qualification is relatively easy. You only need a credit rating of 525 or above.

However, you’ll also need to personally guarantee your loan and get a cosigner to do the same. This cosigner must have a steady income and not be involved in your business. If you default or don’t pay back your loan on time every month, your credit rating (along with your cosigner’s) will be negatively impacted. The microloan lender may also seize your personal property.

Be sure to consider these factors before choosing this option.

Fund with a Rollover as Business Startups (ROBS)

Do you have a 401K, IRA, or retirement account? You can use invest that money into your startup business while avoiding early withdrawal penalties. Through an arrangement called Rollover for Business Startup (ROBS), you can buy stock in your own startup using retirement funds.

Should you go with this option?

ROBS requires that your small business be set up as a “C” corporation. It may be a great option if you have a sizeable retirement fund and you’re happy to invest in your own startup.

Setting up a ROBS arrangement can be complicated, and if done wrong, can get you in trouble with the IRS. That’s why it’s important to do your research and seek out a specialist to help you out in case you decide to opt for ROBS financing. You’re also risking your retirement – if the business wipes out, there goes your nest egg.

Use Credit Cards to Fund Your Startup

Last, but not least, consider going with a credit card company. Credit cards allow you to finance a startup relatively inexpensive. Expect to pay around 16% APR along with an annual fee of between $50 to $100.

Should you go with this option?

There are pros and cons to using credit cards to fund your startup. On the positive side, credit card funding is relatively inexpensive compared to other forms of startup financing, averaging around 16% APR. You can also participate in cashback and reward programs your credit card. Finally, using a credit card responsibly will positively impact your credit rating, making it possible to qualify for lower rates in the future.

On the negative side, late payments will ding your personal credit rating. Also, credit card companies can lower your credit limit at any time without giving you prior warning. Because of this reason, credit cards are not a stable source of funding. They can be useful to fill in short term revenue gaps, but in the long term, you probably don’t want to rely on credit cards to fund your business.

Final Thoughts

While it’s not possible for a startup to qualify for a SBA loan, you can set yourself up for an SBA loan in the future – not a bad move, considering SBA loans are one of the least expensive ways to finance a business. Build your revenue and improve your personal credit rating to qualify for an SBA loan after your business has met at least one anniversary. In the meantime, use one of the above funding options to improve your lending worthiness if you need to fund your business now.

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Marc Prosser

Marc Prosser


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