Yes, Start-Ups Get SBA Loans
SBA loan data shows 16.6% of 7(a) loans approved from FY2019 through June 2026 went to businesses the loan would open. The SOP has its own start-up rules for equity and cash flow, so a business with no history is a case the rules plan for.
A start-up has no tax returns to show. The SBA's answer is a different set of tests: a minimum equity injection, projections in place of history, and a close look at the people running the business.[1]
How common start-up loans are depends on the industry. In childcare, more than one 7(a) loan in four funds a start-up. In accounting, fewer than one in twenty does.[2]
What the SBA Counts as a Start-Up
For the 7(a) equity rule, a start-up has been generating revenue from its intended operations for 1 year or less. A separate New Business definition covers 2 years or less at approval, and it sets the 504 contribution.
The SOP uses two clocks. The 1-year test decides whether the 7(a) start-up equity rule applies. The clock starts when the business earns revenue from what it was set up to do, not when the company was formed.
The 2-year test defines a New Business for both 7(a) and 504.[3] A business older than 2 years can still count as new when a change of ownership brings unproven owners or managers and more debt.
One carve-out helps existing owners. When an existing business starts another in the same 3-digit NAICS code with identical ownership, and the two are Co-Borrowers, the SBA treats it as an expansion, not a new business.
The 10% Equity Injection
SOP 50 10 8.1: "All 7(a) loans made to a Start-Up Business require a 10% equity injection based on the project cost." The project is "all costs required to become operational, regardless of the source of funds," except lines of credit and 504 loans.
The 10% is measured against the whole project. Equipment, build-out, permits, professional fees and opening working capital all count, whoever pays for them. On a $730,000 project, the minimum is $73,000.
Splitting the project does not shrink it. Loans approved within 90 days of each other count as one project, and only loans more than 90 days apart are separate.
The 10% is a floor. The SOP has the lender judge whether your equity is enough based on the type of business, the experience of management and the competition in your market, so some deals will need more. For the full rules on down payments, see SBA Loan Down Payment.
SBA Express start-ups
On SBA Express, the SOP leaves the decision on whether to require an equity injection to the lender's judgment, while the start-up rule calls for 10% on 7(a) start-ups.[4] The SOP does not say which line controls. On an Express start-up, expect your lender to ask for at least 10%.
What Counts Toward a Start-Up's 10%
Cash you did not borrow (gifts included), a personal loan repaid from outside the business, clawback-free grants, debt on full standby, non-cash assets with a proper valuation, verified prepaid expenses, and an outside investment with no early payback. Education, advisory and Agent fees do not count.
- Unborrowed cash, in the business or from elsewhere. A gift counts.
- A personal loan you can show will be repaid from something other than the business's cash flow. Your salary from the business does not qualify.
- A grant with no repayment or clawback during the 7(a) loan.
- Debt on full standby: no principal or interest for the whole loan term, on SBA Form 155 or the lender's equivalent.
- Assets other than cash. If you value fixed assets above net book value, an independent appraisal has to support it.
- Prepaid expenses the lender has verified with paid invoices, canceled checks or bank statements.
- An investor's equity, as long as nothing lets the investor recover it before the SBA guaranty is released.
A franchise fee you have already paid is a common question. The SOP does not name it as a prepaid expense, so your lender decides whether it counts.
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SBA 504 for a New Business: 15% or 20%
On a 504 project, a new business contributes at least 15%. When the project is also a limited or special purpose property, the minimum is 20%. The 504 contribution may be borrowed if it is subordinate to the bank loan and the debenture.
A 504 loan finances long-term fixed assets: land, buildings, machinery and equipment. Receivables and goodwill are not eligible, so a start-up's working capital has to come from somewhere else, such as a 7(a) loan.[5]
For a business operating 2 years or less, the bank's share of a 504 project must be at least 50% of project costs. For a new business, the CDC's debenture finances no more than 35%. Which program fits your project is its own decision, covered in SBA 7(a) vs 504.
Cash Flow: Projections in Place of History
On a Standard 7(a) loan, a start-up shows "detailed projections, including the supporting assumptions" that reach debt service coverage of 1.15 within 2 years of loan funding. For a construction project, the 2 years run from the end of construction.
Debt service coverage compares the cash the business produces with its loan payments. A ratio of 1.15 means $1.15 of cash for every $1.00 of payments.[6]
The rule's clock is 2 years, so year one does not have to reach 1.15. A start-up can lose money while it ramps up, as long as the projections reach 1.15 within 2 years and the plan has the cash to carry the gap.
Smaller programs use different tests. A 7(a) Small loan of $350,000 or less needs 1.10 within 1 year of funding, and a loan that misses it moves to Standard 7(a) or Express processing. On SBA Express, the credit decision is left to the lender.
What Lenders Look At Besides the Numbers
The lender's credit memo must cover the depth of management experience in the industry or a related industry, who runs the business day to day, and the personal credit of the owners and guarantors.
With no history to review, the people carry more weight. The SOP has the lender describe the management team, how involved the owners will be on site, and how much experience they bring from the same or a related industry.
The projections are where that experience shows. Assumptions about revenue ramp, staffing and costs read better when they come from someone who has run that kind of business. Many lenders also ask for a written business plan. What each lender wants varies, so ask early.
Collateral and Your Personal Guaranty
Every owner of 20% or more gives an unlimited personal guaranty. A Standard 7(a) loan that is not fully secured brings in equity in personal real estate you solely own, and the SOP says a loan "must not be declined solely because collateral is inadequate."
The guaranty rule is the same for start-ups and established businesses. Owners of 20% or more sign an unlimited full guaranty, and every loan needs at least one guarantor.[7]
Fully secured, and the shortfall
A Standard 7(a) loan should be fully secured by the business's fixed assets, valued at a discount. New equipment counts at no more than 75% of its price. A start-up in leased space can fall short, because much of the money goes into build-out and working capital.
When there is a shortfall, the lender must take available equity in personal real estate solely owned by 20%+ owners, co-borrowers and guarantors. It does not have to when the equity is less than 25% of the property's market value. A shortfall alone is not a reason to decline the loan.
Life insurance
On a Standard 7(a) loan that is not fully secured, the SOP requires life insurance in the amount of the collateral shortfall, not the full loan, when the business is a sole proprietorship, a single-member LLC, or otherwise depends on one owner.[8] On 7(a) Small and SBA Express loans, the lender follows its own written policy. A 504 loan requires it for a one-owner business that is not fully collateralized.
A Worked Example: Lena's New Laundromat
Lena is building a laundromat from an empty storefront. Her project is $730,000, her 10% is $73,000 of her own cash, and the SBA 7(a) loan is $657,000. Her projections show coverage of 0.65 in year one and 1.62 in year two.
Lena Park ran gyms for a regional fitness chain for eight years and has never owned a business. Her start-up is one of the deals in the FUNDED Laundromat guide. She has $95,000 saved and a 10-year lease offer on a 3,200 square foot former retail space.
Which program
At $657,000, her loan is above the SBA Express limit of $500,000 and the 7(a) Small limit of $350,000, so it is a Standard 7(a) loan. That sets her tests: 10% equity and projections at 1.15 within 2 years.
The projections
Her payments are $92,559 a year at an illustrative 7.25% rate on a 10-year term. She projects $60,000 of cash flow in year one, a coverage of 0.65, and $150,000 in year two, a coverage of 1.62. Year two clears 1.15.
Year one leaves a $32,559 gap. Her $45,000 of working capital is in the project to carry it. Her lender will test every line of those projections, starting with how fast customers come.
Fee and collateral
With a 75% guaranty, the FY2027 upfront fee is 3% of the $492,750 guaranteed portion, or $14,782.50. On the collateral side, her $420,000 of new machines count for no more than $315,000. Against a $657,000 loan she is likely short of fully secured, which brings in the personal real estate and life insurance rules above. It clears the SBA minimums, and her lender decides.
Franchise Start-Ups: Check the Directory First
If your brand meets the FTC definition of a franchise, it must be on the SBA Franchise Directory to get SBA financing. A lender cannot approve the loan or submit it to the SBA until it is.
A new franchise location opened by a new owner is a start-up, so the 10% equity and projection rules apply. The Directory check comes first, because a brand that is missing stops the loan before underwriting begins.[9]
The lender also reviews what the franchisor provides, such as the number of failed franchisees and the franchisor's cash flow projections. Check your brand with the SBA Franchise Directory check.
Your Choices: 7(a), 504, Express or a Microloan
Loan size and what you are paying for narrow the choice. Over $500,000 points to Standard 7(a) or 504. Real estate and equipment fit 504. Up to $50,000 for equipment and working capital fits a microloan.
SBA Programs for a Start-Up (SOP 50 10 8.1 and 13 CFR 120)
| Program | Maximum | Start-up equity | Cash flow test |
|---|---|---|---|
| Standard 7(a) | $5,000,000 | 10% of total project cost | Projections at 1.15 within 2 years |
| 7(a) Small | $350,000 | 10% of total project cost | 1.10 within 1 year, or move to Standard or Express |
| SBA Express | $500,000 | Left to the lender; the start-up rule calls for 10%, so expect at least 10% | Left to the lender |
| 504 (fixed assets only) | Debenture 35% or less for a new business (30% at the 20% tier); bank 50% or more | 15% new business; 20% new business plus special purpose | Set by the CDC under 504 rules |
| Microloan | $50,000, generally $10,000 or less | Set by the intermediary | The intermediary decides; SBA does not review credit |
SBA minimums and limits only. Your lender, CDC or intermediary may require more.
For detailed calculations and real examples, see FUNDED: How to Start a Business with an SBA Loan (coming soon).
For a side-by-side match of your situation to a program, use the free SBA loan chooser.
Standard 7(a)
The widest program. It funds equipment, build-out and working capital in one loan, up to $5,000,000. The SBA guaranty is 85% on loans of $150,000 or less and 75% above that. The trade-off is the full underwriting: projections, collateral and the shortfall rules.
SBA 504
Built for real estate and major equipment. A new business puts in more, 15% or 20%, and working capital needs a separate source. Rates and fees work differently from 7(a), covered in SBA Loan Rates.
SBA Express
More of the credit decision sits with the lender, up to $500,000. The SBA guaranty is 50%, against 75% to 85% on Standard 7(a), and the start-up equity question stays open in the SOP.
Microloan
A short-term, fixed rate loan of up to $50,000 from an SBA intermediary, such as a nonprofit community development corporation, repaid within 7 years.[10] It covers working capital, materials, supplies, furniture, fixtures and equipment, and the intermediary also provides management and technical help. Most microloans are smaller: the rule says intermediaries generally should not lend more than $10,000.
How to Prepare an SBA Start-Up Loan Request
- 1
Confirm you are a start-up
Count from when the business started generating revenue from its intended operations. One year or less is a start-up for the 7(a) equity rule; 2 years or less is a New Business, which sets the 504 contribution.
- 2
Add up the whole project
Equipment, build-out, permits, professional fees and opening working capital: every cost required to become operational, whoever pays for it.
- 3
Set aside the minimum equity
10% of the project on a 7(a) loan. On a 504 project, 15% for a new business or 20% with a special purpose property.
- 4
Check your sources
Unborrowed cash, gifts, clawback-free grants, a personal loan repaid from outside the business, standby debt and verified prepaid expenses can count. Education, advisory and Agent fees do not.
- 5
Build projections that reach the test
On a Standard 7(a) loan, show coverage of 1.15 within 2 years of funding, with the assumptions behind every line, and enough working capital to carry the early months.
- 6
Check the franchise Directory
If you are opening a franchise, confirm the brand is on the SBA Franchise Directory before you apply.
- 7
Ask your lender
These are SBA minimums. Ask early what your lender wants, including whether it expects a written business plan, and ask a second lender if the answer is far above them.
Want the full walkthrough, with real deals worked step by step?
Get the FUNDED SeriesRelated SBA Lending Guides
- Which SBA Loan Fits Your Situation?, the free 6-question loan chooser
- Can You Use an SBA Loan to Buy a Business?, if purchasing an existing business is your other option
- SBA Loan Down Payment, how much you put down by deal type
- SBA Loan Rates, 7(a) maximums, 504 rates and FY2027 fees
- SBA 7(a) vs 504, which program fits your project
- SBA Loan Requirements, credit, equity, cash flow and experience
- SBA Collateral Requirements, what lenders take and when your home is in play
- SBA Franchise Directory Check, confirm your brand before you apply
- SBA Salon Financing, starting a nail salon or hair salon, with a $300,000 start-up worked out
- SBA Coffee Shop Financing, opening your own coffee shop, with a $350,000 start-up worked out
- SBA Trucking Company Financing, starting a carrier under your own authority, with a $250,000 start-up worked out
- SBA Down Payment Calculator, your minimum and what counts
