Getting a Small Business Administration Loan for Your Small Business Startup

Getting a Small Business Administration Loan for Your Small Business Startup

Part three of our "Guide to Financing Your Startup"

2006 was a banner year for the Small Business Administration, which set a lending record of 100,197 loans for a total value of $19.1 billion. In this guide, we’ll show you how to get your piece of that pie to jumpstart your business venture with a little – or a lot – of financial help from the United States government.

SBA Basics:


If you’re looking to the federal government to help finance your startup, there are three Small Business Administration programs that offer funding for your business venture.

Micro-loans, which are small loans of $35,000 and under, are available for startups or newly established small businesses. The SBA provides funds to non-profit community lenders who then make the loans to business borrowers with the credit decision made locally.

A second option is the 7(a) loan program. These loans are made by commercial lenders with partial guarantees from the SBA.

There is also the CDC/504 Program, which allows entrepreneurs to approach a local Certified Development Company for financing. A CDC, which is a nonprofit, is designed to assist companies that can aid in the economic development of a local community.

You should understand that the SBA is primarily a guarantor of loans made by private and other institutions and does not directly offer loans to small businesses. Even though the SBA doesn’t shell over the money directly, they are looking to invest – through middlemen lenders – in great business plans like yours. So if you strike out on obtaining a traditional loan, take aim at one of these federal loan programs.


Micro-loans are small loans granted by micro-lenders, who receive funding from the SBA. If you’re looking for a modest infusion of cash to launch your startup, applying for a micro-loan is a good first step. The average micro-loan distributed to entrepreneurs is $13,000, but it’s possible to secure as much as $35,000 through this federally-backed program. There are a few exceptions—such as gambling and gaming businesses—but nearly all for-profit businesses can apply for and benefit from a micro-loan. Be aware that collateral is typically a must, and that loan terms vary.

To apply, you will need to contact your local micro-lender. Visit the SBA’s Web site at: to learn more about the program and to find a list of micro-lenders near you.

Before approaching this micro-lending intermediary, it’s important that you develop a persuasive business plan, and be sure you have basic business and accounting processes already in place. For more detailed tips on getting ready for this step, check out this informative link:

Finally, keep in mind that the more professional and thorough your loan proposal is, the better your chances of getting the money you need. Your best bet is to anticipate and address the main concerns the lender will have up front.

Section 7 (a) Loans

For entrepreneurs with larger financing needs—Section 7(a) loans can reach a maximum of $2 million—to finance a startup or grow their small business, this SBA program is a viable option. It offers a financing alternative to individuals whose credit prohibits them from obtaining a traditional bank loan. To offset the trepidation of bankers that your brilliant idea won’t flourish, the SBA guarantees the payback of up to 85% of a Section 7 (a) loan. But be ready to present your balance sheet, business history, financial statements and other paperwork. Also keep in mind that Section 7 (a) loans are designed to help finance significant investments, such as real estate, expensive equipment or to provide larger amounts of capital.

A significant benefit of the Section 7 (a) program is that it allows you as many as 25 years to pay back the loan, albeit for fixed assets only. Traditional lenders do not generally make loans that fully amortize over a period longer than 10 years.

Section 504 Loans

Section 504 loans are granted to businesses that plan to contribute to the economic development of their community. Your first step is to approach a local Certified Development Company (CDC), which is a nonprofit made up of local leaders in business and government who are seeking to finance community-oriented business endeavors. In a Section 504 loan, you will be responsible for putting up 10 percent of the amount you’re seeking. Fifty percent of a Section 504 loan comes from your local bank and the other 40% is provided by the CDC. The SBA guarantees the entire CDC portion of your loan.

In all, there are 270 CDCs nationwide that receive support from the Small Business Administration. (Alaska is the only state without any CDCs.) To learn more, visit

Securing Your SBA Loan with Collateral

As with commercial bank loans, the SBA will want you to have some collateral to put up against any loans.

The value of collateral is not based on the market value of the assets. It is discounted to take into account the value that would be lost if the assets had to be liquidated. The following table gives a general approximation on how different forms of collateral are valued by a typical bank and the SBA 

HOUSE: Market Value x .75 – Mortgage balance Market Value x .80 – Mortgage balance
CAR: nothing nothing
TRUCK & HEAVY EQUIPMENT: Depreciated Value x .50 same
OFFICE EQUIPMENT: nothing nothing
FURNITURE & FIXTURES: Depreciated Value x .50 same
INVENTORY (Perishables): nothing nothing
JEWELLERY nothing nothing
OTHER 10%-50% 10%-50%
RECEIVABLES Under 90 days x .75 Under 90 days x .50
STOCKS & BONDS 50%-90% 50%-90%
MUTUAL FUNDS nothing nothing
IRA nothing nothing
CD 100% 100%


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