Can a startup get an SBA loan?
Short answer
Yes. SBA has no general ban on start-ups, which it defines as businesses in operation for 1 year or less. A 7(a) start-up needs equity of at least 10% of total project costs, and lenders rely on projections. Source: SOP 50 10 8.1, Sec. B, Ch. 1, Para. C.
Yes. SOP 50 10 8.1 does not bar start-ups, and it sets specific equity and projection rules for them. The core tests in Sec. A, Ch. 1 still apply. 13 CFR § 120.100(a) requires an operating business, and the SOP does not define how far along a pre-revenue company must be.
How SBA defines it
For equity purposes, a business is a start-up if it has been in operation for 1 year or less. In operation means generating revenue from intended operations (Sec. B, Ch. 1, Para. C; Appendix 3). A New Business has operated 2 years or less at approval (Appendix 3).
Equity
A 7(a) or 7(a) Small loan to a start-up requires at least 10% of total project costs. Project costs include all costs required to become operational, regardless of the source of funds, except lines of creditA credit limit you can draw on, repay and draw on again. and 504 loans. For SBA Express, equity is left to the lender's business judgment. 504 borrowers contribute at least 10% of the financing, 15% for a new business or limited or special purpose property, and 20% for both.
Projections
Standard 7(a) loans need detailed projections with supporting assumptions. They must reflect debt service coverageCash available for loan payments, divided by those payments. Above 1 means the cash covers them. Full definition of at least 1.15:1 within 2 years of funding. For construction projects, the clock runs from the end of construction.
Credit elsewhere
A lender may state that its conventional policy does not allow new businesses. That is an accepted reason under Sec. A, Ch. 1, Para. H.
Whether a given lender finances start-ups varies by lender.
Sources
- SOP 50 10 8.1, Sec. B, Ch. 1, Para. C (pp. 118-121)
- SOP 50 10 8.1, Sec. B, Ch. 2, Para. C (pp. 127-133)
- SOP 50 10 8.1, Appendix 3, Start-Up Business and New Business (about pp. 302, 307)
- SOP 50 10 8.1, Sec. C, Ch. 1, Para. B (p. 221)
- SOP 50 10 8.1, Sec. A, Ch. 1, Para. H (about p. 38)
- 13 CFR § 120.100(a)
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