Companies of all shapes and sizes need extra capital at some point—it’s simply par for the course in business. Unfortunately, while new startup entrepreneurs often have the highest immediate need for financing to launch their businesses, startups tend to have a tougher time getting financing than small businesses at other stages of growth.
Typically, this is because new startups have little or no business history to point to, and banks perceive that lack of history as an increased risk. Fortunately, the U.S. Small Business Administration (SBA) offers programs that can help startups obtain financing, even with limited or no business history. However, qualifying for these programs may require startup entrepreneurs to take additional steps that are unique to this particular financing opportunity.
If you are interested in financing your business through an SBA startup loan, you’ll need to follow these important steps:
1. Build a Solid Business Plan
The good news about SBA startup loan programs is that they tend to have lower requirements for your company’s cash on hand and time in business. However, to make up for lack of financial eligibility, you’ll need to prove your worth to the SBA and its intermediary lenders with a spectacular business plan.
If you haven’t already, take the time to sit down and write out exactly how your business will succeed. Consider using a business plan template to guide you through the process and address relevant questions, such as your goals, financial projections, and marketing strategy. The more detailed and realistic your business plan it, the better chance you will have of qualifying for an SBA startup loan.
2. Monitor Your Personal Credit Score
Without a long track record of revenue history, SBA-approved lenders will look to your personal credit score to tell the story of your creditworthiness.
It’s always a good idea to keep tabs on your personal credit score, but if you’re in the position of seeking capital to grow your new startup business, you’ll want to pay particularly close attention. Regularly check your credit score and monitor your credit report at all three of the major credit bureaus: Experian, Equifax, and TransUnion.
To secure a startup loan from an SBA approved intermediary lender, you’ll likely need a personal credit score of between 680-700 or higher. The higher your credit score, the more options you’ll have available to you—and at better prices.
3. Analyze Your Needs
When you’re just starting out, it may feel as though you need financing for everything! However, when applying for an SBA startup loan, you’ll want to carefully consider which items or resources are a priority for generating revenue and growing your business.
Some loan programs will have stipulations on how you can use borrowed funds. For example, equipment, real estate, staffing, extra capital for cash flow coverage, materials and office supplies may be categorized differently for different types of loans.
Analyzing your business needs will help you prioritize expenses, come up with the desired loan amount, and pinpoint the particular SBA startup loan that will meet your qualifications.
4. Know Your Options
While the SBA offers a variety of loan programs, there are two products, often referred to as SBA startup loans, which are particularly well suited for brand new businesses.
The Microloan Program
When you’re just launching a new business, a little bit of financing can go a long way. If your funding needs fall below the $50,000 mark, a microloan may be the perfect SBA startup loan for you.
Microloans are very small, short-term loans that come with a low interest rate—usually between 8 and 13 percent. The average value of an SBA-backed microloan is $13,000, but loans of as little as $500 are available.
You can use your SBA microloan for a wide variety of business needs, including stocking up on inventory or supplies, purchasing equipment, furniture or fixtures, or even working capital for day-to-day expenses.
To apply for an SBA startup loan through the microloan program, you’ll need to start by finding an approved intermediary provider in your local community. Exact requirements vary between providers, but you may be expected to complete a certain number of business trainings or other development requirements before applying for your microloan.
Community Advantage Loans
In partnership with the U.S. Department of Commerce, the SBA’s Community Advantage Loan program was created with the goal of encouraging more community-based lenders to provide low-dollar loans to small businesses in disenfranchised communities. These SBA startup loans are long-term loans—with average maturities of 7 to 10 years—and carry interest rates ranging from 7 to 9 percent.
To apply for a Community Advantage Loan, reach out to an approved intermediary lender in your local community to learn more about specific application requirements.
5. Put Your Best Foot Forward
After you’ve gone through the exercise of assessing your needs and analyzing your loan options, you’ll want to put your best foot forward to secure an SBA startup loan. Applying to a program that matches your needs and qualifications is an important first step to success.
You can pull your credit score from any of the three bureaus to know where you stand. If you are applying for a more involved loan, you’ll need bank and financing records—the more organized you are, the better for both you and the lender.
Once you know what to expect in applying for an SBA startup loan, creating your action plan is relatively straightforward. Best of all, by building your business credit and history, you will increase your available options for additional small business loans in the future.
Meredith Wood is the head of content and editor-in-chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and many more.