SBA 7a Loans: Start Up Business Loans for Bad Credit

The SBA 7a Loans for Start-Up Funding

If you start a new business, it means you go your own way and become free to innovate in any industry you want. However, this also often leads to having to face funding challenges and severe money shortages. One of the best ways to get start up business loans for bad credit problems is the SBA 7a loans. The SBA (Small Business Administration) has for decades been making loans to startup companies. Even if an entrepreneur lacks the start-up funding their competition may have access to, they deserve to see their dreams come true.

The SBA’s most common loans guaranteed for startup companies are SBA 7a loans. Although start up business loans for bad credit are not made by the SBA directly, they guarantee a portion of the balance. Banks are willing to make these loans therefore face reduced risk, and this makes it easier for a business to be approved with lower financial and credit standards. This is a win-win scenario for all parties concerned as start-ups often face extremely difficult financial challenges!

Top 4 Financial Challenge Areas Start-Ups Have to Face

Provided they can secure funding, the owner of a start-up has the freedom to innovate and create with virtually no boundaries. Keeping money flowing and books balanced are some of the biggest challenges for start-ups. This is why 50% of start-ups don’t make it past four years, and 71% go out of business in the first decade.

Start-ups that succeed do so due to what they manage to bring to customers. Plus, what they continuously work on to keep the business side of things running. Part of this may mean getting an SBA 7a loan to keep business operations funded properly. Or to tackle one or more of the biggest problem areas such as:

  • Contingency planning. Although every start-up owner starts their business with hope, that doesn’t mean that you shouldn’t also have a plan in place to cater to things going wrong. There are things that can’t be controlled that will have a massive repercussion for your business. Contingency planning should always include some type of financial cushion that will help you to weather the worst storms, even as your competition gets blown over by the wind.
  • Sales and marketing. Hanging out your shingle and waiting for customers to discover you may work, but you’ll likely have to start pounding the pavement and pay for advertisements. The first may result in a few customers that leave you with enough money to only pay the electricity bill. Although the second could very well result in you landing in serious debt, it may also ultimately pay off big time.
  • Human resources. A start-up most often begins without having an HR department, but as the business grows, you’ll need the services of a third party to evaluate new candidates, enforce company policies, and mitigate workplace disputes. The owner can’t possibly do everything by themselves, and hiring is a process that takes a massive amount of time. Just like sales and marketing is a critical function to generate new leads, HR is crucial for getting the right people to handle those sales leads.
Digital marketing is a necessity and just one reason to get start up business loans for bad credit borrowers.
Digital marketing is a necessity and just one reason to get start up business loans for bad credit borrowers.
  • Scaling up. Any start-up has to at some point get out of the garage. Scaling up should be a goal, whether you’re still using some spare space at home or leasing a small commercial space. Explosive growth is very dangerous for any business, but there is always a level to which it should expand so that profits are maximized. It’s going to take some money to reach that sweet spot, and possibly even to determine where it is by using big data.

Funding Sources for Entrepreneurs

If you have tried securing a loan from an SBA lender previously, you may have been turned away. Told you first had to seek alternative financial resources before you would become eligible for an SBA 7a loan. This is a problem for many start-up owners, as they don’t really want to ask grandma for help.

Although you have to demonstrate that you’ve made a fair attempt to secure funding for start up business loans for bad credit, there are several avenues you can explore. These include:

Credit cards. Although it’s not always a good idea to max out your credit cards, using them as a stop-gap to buy equipment and supplies, while being able to afford the payments once you start bringing in revenue is one self-funding method that should be considered.

Friends. Although it may be difficult to ask your grandparents to buy in, you likely have friends that work to make a living. Some of them may be willing to take a risk on your start-up. It may even be possible that they’ll eventually get a big return if the company does well.

Grants. There are several private organizations that offer start-ups free money, as does the government. Spend a few hours doing research on the internet and you will likely find numerous grant opportunities. You’ll really have to sell your idea for a service or product, but the payoff may be worthwhile.

Personal loans. You already have your checking and savings accounts with a bank and they might be willing to give you a small personal loan to cover a few of your business expenses. Often only based on a bank’s internal policies, signature loans can be used to help good customers.

Other sources. There are a number of other sources for start up business loans for bad credit that may be able to fill your requirements, including crowdfunding and microloans. Some micro lenders have a maximum and minimum sales requirement. So, be sure you have profit and loss statements! If your product or brand voice is really unique, crowdfunding can work. However, you’ll be surprised how difficult that can be.

Man holding a fan of $100 dollar bills in front of his computer that he received from a personal loan from an online lender.

Personal loans for business purposes are available online.

Once you’ve investigated these funding sources and don’t manage to secure funding, the SBA will be willing to work with your start-up business. They make low cost loans with relatively low interest, aimed at being easy for a small business to manage.

SBA 7a Loans: Start Up Business Loans for Bad Credit 

The SBA 7(a) loan can be an excellent option for start up business loans for bad credit. These loans are backed by the government and are aimed at helping small businesses that don’t have enough external funding sources to succeed. Money shouldn’t be standing between you and your start-up’s success.

How SBA 7a Loans Work

SBA 7a loans are not made directly by the SBA. Instead, they guarantee a percentage of a loan that is made by an online lender or other lending institution.

Once you’ve demonstrated that you require the funds, and have shown the lender a business plan that’s seen to be both sound and reasonable, they’ll process the loan and provide the funding. You should draw up a budget for using the funds to prevent ending up in trouble that’s difficult to get out of!

What Start-Up Costs Can an SBA 7a Loan Can be Used For?

SBA 7a start up business loans for bad credit can be used for a wide range of start-up costs. Many of which you may not even have thought of. Together with paying employees and buying merchandise, the following items can be financed in many cases:

  • Equipment. Whether you want to buy office cubicles or a box truck, an SBA 7(a) loan can be used for this.
  • Existing debt. When existing debt has become a crushing burden, an SBA 7(a) loan can help you bring it under control. Instead of having to make numerous payments, you’ll only have to make one, and it’ll have a longer term and a lower interest rate.
  • Land. This land has to be used for some aspect of your business and it can’t be investment land that you buy and sit on. Your SBA 7(a) loan can be used to finance for example a new HQ or warehouse. You can also include construction costs into the loan.
Woman using a calculator while a man points to a business pie chart.

SBA 7(a) Loan Terms

There are a number of things to consider before approaching a bank to take out an SBA 7(a) loan. Although they are great for some businesses, they aren’t suitable for all. Here is what you need to know:

  • Loan Amount. The maximum SBA 7(a) loan is $5 million, but not many start-ups qualify for this much. However, if you can prove that you have the income potential, the bank may consider giving you $1 million.
  • Guarantee Percentage. Unlike a home mortgage, you’ll have to put up substantial capital with an SBA 7(a) loan to help minimize any loss the bank may incur. The SBA guarantees loans of less than $150 thousand for up to 85%, and you have to provide the extra 15%. Loans of more than $150 thousand are only guaranteed for up to 75%, and you have to provide 25%.
  • Interest Rates. SBA loans are made as per SBA interest rate maximums and tied to the London Inter-Bank Offered Rate (LIBOR), prime rate, or any other optional peg rate.

If the loan is less than $25 thousand and matures in less than seven years, the interest rate is the base rate plus 4.25%. So, a $50 thousand loan that lasts more than seven years will be charged at base plus 2.75%.

Rates can be either variable or fixed, so make sure you know which it is before you sign for it. Even if the payment is initially higher, a fixed-rate loan is normally safer, as the payment stays the same.

  • Maturity Term. Maximums are set even though the loan’s maturity rate is based on your ability to repay the loan and how much you borrow. Equipment loans are capped at 10 years, as are loans for inventory or working capital, while real estate loans are 25 years.
  • Fees. A servicing fee and a guaranty fee may be charged for SBA 7(a) loans. Loans of less than $150 thousand currently have no guaranty fee. Loans from $150 thousand to $700 thousand will be charged a 3% guaranty fee. Loans bigger than $700 thousand will be charged a 3.5% fee. Any loans bigger than $1 million have an extra 0.25% guaranty fee for the amount more than $1 million. An ongoing service fee of 0.520% of the outstanding balance is charged for all loans for the duration of the loan.
  • Prepayment Penalties. Loans that are longer than 15 years are subject to prepayment penalties. This occurs when a borrower prepays more than 25% of the loan within the first 3 years. It is 5% of the prepayment amount in the first year; 3% in the second; and 1% in the third.

Finding an Online SBA 7(a) Loan Lender

Online SBA 7(a) loan lenders include credit unions and banks that work with other businesses like yours. Most lenders do not provide loans to all types of businesses. Rather, they tend to specialize in businesses that they understand. It’s crucial that they understand how you make money and how your business model works. If the lender doesn’t understand how the business makes money, their perceived risk is higher. Which increases the probability that the loan will be denied.

At Heritage Business Loans, we specialize in connecting you with suitable lenders to help you in maximizing your SBA 7(a) loan and get your start-up going. You shouldn’t be worrying about money but should be focusing on all the new customers that want your product or service.

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