A lot of first-time founders have a good business idea but aren’t necessarily financially secure enough to expand and grow their companies. Yes, you can get an SBA 7(a) loan to start your first business. Whether you’ve just started or you’re just planning to start your first business, SBA 7(a) loans are one of the best options for financing. There are a few things to keep in mind about how this works, though.
Understanding a bit of history on the SBA is important, especially if you want to use one of its loans to help fund your new business.
The SBA is a government program established to help small business owners who may not otherwise qualify for a commercial bank loan.
It’s actually a federal agency that doesn’t lend money itself; it partners with lenders. And if you can meet the loose requirements they set, you’re more likely to get approved, for a new or established business.
You probably already know this, but just in case - an SBA 7(a) loan is the most popular and widespread SBA loan. They’re the most common because they have wider eligibility requirements than many other loans, they can be used for a ton of things, they can be relatively large or small, and they’re easier to repay than other loans because the terms are often much more affordable.
Community Advantage is a part of the SBA 7(a) loan program. It’s for businesses in underserved areas, and it has looser approval rules. Borrow up to $350,000 with a Community Advantage loan if you qualify.
Qualify for an SBA 7(a) Loan
Here’s what you’ll generally need to qualify for an SBA 7(a) loan. Note that your lender may add additional requirements to this list.
- If you are starting your first business, having a positive projected cash flow is required.
- Show you have some equity, your own money, to invest in your business.
- Put together a list of assets or real estate that can be used as collateral for the loan.
- Get your personal credit scores checked. If they’re below fair/good, start working on them now, and fast!
- Have some experience working in whatever industry your startup business will be. The industry should also be growing rather than shrinking.
Business Plan
If you’re going to start your first business, you’ll need a business plan. Here are some things to put in it.
- Product description: What product(s) or service(s) the business provides. How the business obtains or delivers the products/services. Who the business’s target market or customers are.
- Identify competitors and outline how they are different from or have an advantage over your business or how your business has an advantage or meets a local or market need.
- Marketing plan: a plan of how you’ll attract customers. How many, how you’ll reach them and why.
- The location you’ll need if you need a brick-and-mortar location, along with details like where you’d find it, costs to renovate it, equipment and furnishing it.
- Management: you and your team’s education and experience with the business, market or industry; why each member or leader is a good fit for the role; you have the ability to manage a budget and handle a debt responsibly.
- Staffing: state if you will or won’t have employees and if you’ll have employees now, or in the future. If you will have employees, briefly outline the skills you’ll need; cost of salaries and benefits, costs of space, equipment, training, uniforms.
- Equity: You should have at least 10% of the total project costs of your loan, which can be from a variety of sources; some lenders want a higher amount.
- Financial projections: monthly figures projected for the next 2 years.
Your business plan doesn’t have to be overly long, but it needs to be detailed enough that lenders and others know you understand the idea, the industry or market you’ll be competing in, the customers you’ll have, the competitors you’ll have and the costs involved.
The SBA approves loans in many industries, including those that are hard to finance - restaurants, retail and childcare.
Say Lauren wants to open a daycare. She has a related degree and experience. There’s demand in an underserved part of town.
Lauren goes to her local Small Business Development Center. Here she’ll work with a counselor to fine tune her business plan, projections, cost structure, and research vendors and a location for her daycare.
The SBDC’s counselor tells Lauren about the SBA 7(a) loan. He tells Lauren she can apply to several lenders near her and gives her a list of lenders.
Lauren’s going to need $250,000 to start her business. She’ll invest $25,000 of her own money. Her parents will kick in $30,000. She’ll put up her home as collateral.
The lender is impressed by her business plan and projections. Lauren’s put her own money in the company. Many lenders will take that as a sign of commitment, which is reassuring.
She’s approved for the SBA 7(a) loan and opens her new daycare business!
Buy an Existing Business
If you want to buy an existing business, either independent or franchise, the 7(a) loan is for you. Start by checking the SBA’s list of approved franchise brands.
Have your heart set on a brand that you don’t see on the list? Every brand of franchise isn’t on the SBA’s franchise registry, but that doesn’t mean a particular franchise is automatically disqualified. If the franchise isn’t in the directory, ask your lender if it just isn’t in the list yet, or if it’s been declined.
Small businesses are a cornerstone of the nation’s economy, especially in job creation. The SBA exists to help small businesses like yours get funding to start and grow.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
