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Being your own boss can offer freedom and flexibility. Yet self-employment also comes with many challenges—especially where business funding is concerned. Fortunately, SBA loans can offer a pathway to affordable financing for freelancers, independent contractors, and other small business owners. But there are drawbacks to this type of funding as well. 

This guide covers how SBA loans work for self-employed business owners along with eligibility requirements and application tips. Plus, learn about alternative financing options available for self-employed individuals in case an SBA loan isn’t the right fit for you.

Understanding SBA loans for self-employed individuals

SBA loans are government-backed loans designed to help small businesses access critical funding to start, grow, and expand. Because the federal government helps guarantee SBA loans, they involve less risk and lenders can offer borrowers better terms including:

• Lower interest rates 
• Reduced fees
• Longer repayment terms
• Lower down payments. 

Both traditional and self-employed small business owners—such as sole proprietors, independent contractors, and freelancers—can apply for SBA loans. 

However, self-employed applicants may find it harder to qualify due to inconsistent revenue, limited collateral, or difficulty satisfying other eligibility requirements on SBA loan applications. (See below.)

Eligibility requirements for self-employed SBA loan applicants

As a self-employed business owner, especially a sole proprietor, banks may be hesitant to lend you money according to the SBA. Keep this detail in mind when you choose your business structure if you think you might want to access financing—now or in the future.

All borrowers, self-employed or otherwise, need to satisfy certain criteria when they apply for an SBA loan which can vary by loan program and lender. Typical minimum SBA loan requirements include:

• Own a legally registered, for-profit business located in the U.S. (or U.S. territories)
• Operate a business that doesn’t exceed SBA small business size standards (based on revenue or employee count)
• Have good credit scores (personal and business) 
• Provide enough collateral to secure loan
• Demonstrate you’re unable to access similar financing elsewhere
• Prove you don’t operate an ineligible business type for SBA loans
• Provide a personal guarantee from anyone with 20% or more ownership

SBA lenders often add borrowing requirements in addition to those above. For example, your business may need a minimum amount of revenue to qualify for certain SBA loans. Many lenders also require applicants to have at least two years in business for an SBA 7(a) or 504 loan, though some SBA startup loans may be available after as little as six months.

Types of SBA loans available for independent contractors

If you’re considering an SBA loan as a self-employed business owner, here are some financing options to research further. 

SBA Microloan

SBA microloans could be a solid funding resource for self-employed business owners who don’t need access to particularly large loan amounts. Highlights of these loans include: 

• Loan amount: Up to $50,000
• Average loan size: Around $13,000
• Interest rate: 8%-13% (at time of writing)
• Repayment term: Up to 7 years

Microloans are available through nonprofit intermediary lenders—community-based organizations that help eligible small business borrowers access vital financing for working capital, inventory, supplies, equipment, and other essential business needs.  

SBA 7(a) small loan

Another affordable financing solution to consider as a self-employed business owner is the SBA 7(a) small loan. Key features of the loan include:

• Loan amount: Up to $500,000
• Collateral: May not be required for loans of $50,000 or less
• Interest rate: Negotiable between lender and borrower

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Your creditworthiness and other factors help determine your APR and other loan terms. But lenders can’t charge you more than the SBA maximum. So, the loans should still be affordable compared to other business loans.

SBA Express loan

The SBA Express loan is a type of 7(a) loan that could work well for self-employed business owners who need access to fast funding. Loan highlights include:

• Loan amount: Up to $500,000
• Collateral: Typically not required for loans of $50,000 or less
• Approval time: Potentially within 36 hours

SBA Express loans also feature less paperwork compared to other SBA loan applications. Applicants only need to fill out SBA Form 1919 and complete any other lender-specific paperwork and documentation requirements. If an application qualifies for the loan, the full SBA Express Loan process could take as little as 30 days to complete.

SBA 504 loan

The SBA 504 loan program might also be worth considering for certain self-employed borrowers that need financing to build, improve, or refinance owner-occupied commercial real estate. Key loan features include: 

• Loan amount: Up to $5.5 million
• Down payment: 10%-15% (for businesses established two years or less)
• Repayment term: Up to 25 years

SBA 504 loans involve both a Certified Development Centers (CDCs) and a private lender, making the loan process more complex and time-consuming. If you qualify for this type of financing, it could take several months to complete the loan process.

SBA loan application process for self-employed individuals

Whether you’re self-employed or own a more traditional small business, the SBA loan application process may be intensive. But if you’re willing to put in a bit of legwork, your effort could be worthwhile to secure competitive business financing. 

Below are the basic steps of applying for an SBA loan while self-employed. 

1. Choose the right SBA loan. The SBA backs multiple types of loans. Different loan programs may work better for you depending on your needs and the eligibility criteria. 

2. Review eligibility requirements. Get a general idea of the minimum loan requirements you’ll need to satisfy before applying.

3. Check your credit. Review your personal and business credit scores before applying. (Tip: the minimum FICO SBSS score for an SBA 7(a) loan is typically 155.)

4. Prepare documentation. Be prepared with your business plan, financial paperwork (bank statements, business and personal tax returns, profit and loss statement, balance sheet, etc.), list of collateral, and other supporting documents. Preparing key information ahead of time could improve your chances of a successful loan application.

‍5. Choose an SBA-approved lender. There are several ways to find an SBA lender including searching for an online lender, working with a local bank or credit union, or using the SBA’s lender match system. Remember to compare offers to find the best deal for your situation.

Alternatives to SBA loans for self-employed borrowers

If you can’t find an SBA loan that works for you, here are some alternative borrowing solutions to consider.

• Business credit cards: A business credit card is a type of credit card designed for business use rather than personal expenses. Even as a self-employed business owner, these flexible spending accounts may be easier to qualify for compared to business loans—especially if you have good personal credit. But beware of personal guarantees and higher interest rates with these accounts.
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• Personal loans: Personal loans may be used for startups and businesses with revenue challenges, a lack business credit history, or little time in business. On the negative side, lenders may restrict how you can use the money you borrow with personal loans and you’re personally liable for the debt. According to the Federal Reserve, around 86% of entrepreneurs rely on personal credit (including personal loans) to finance their small businesses when they can’t access business credit. 
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• Online lenders: Business financing from an online lender could offer a variety of funding solutions such as business term loans, equipment loans, business lines of credit, startup business loans, and more. However, while eligibility criteria tends to be more lenient compared to traditional banks and credit unions, you may also face higher interest rates and shorter repayment terms.

Facing an SBA loan default can be a daunting experience, but you aren't alone. In February 2025, a Senate Committee hearing was held to discuss the ballooning rate of early defaults in the SBA 7(a) loan program. In 2024, over 1% of small business owners defaulted on their SBA loans in the first 18 months.

If your small business is at risk of defaulting, or has already defaulted on your SBA loan, understanding the implications and exploring available options can provide a path forward. This guide will cover what happens if you default on an SBA loan, managing SBA loan defaults, and your options for next steps.

What is an SBA loan default?

An SBA loan default happens when a borrower has continually failed to make the agreed-upon payments, and hasn't come to any resolution with their lender. Defaulting on an SBA loan, or any loan, can have negative impacts on your business, and potentially lead to steep legal or financial consequences. 

If you're worried you may not be able to make your agreed-upon payments, reach out to your lender to explore your options before the situation progresses to a default.

The difference between SBA loan default and SBA loan delinquency

As mentioned above, a default happens when you missed your payments and haven't worked things out with your lender. However, an SBA loan doesn't go into default immediately. 

Before this stage, usually when you first miss payments, your loan will be classified as delinquent. Your lender will begin to reach out over missed payments. After a period of time, on average three to four months, your loan will default if you have not paid your past due amount or contacted your lender.

What happens if an SBA loan goes into default?

Once an SBA loan goes into default, things get serious. Although time frames will vary depending on lender and loan terms, usually a lender will issue a formal demand letter for the amount due. You will then have 30-45 days to pay the entire amount.

Failure to do so means the lender can use several other measures to collect the amount due.

Asset Seizure

Any collateral that you used to secure your loan, such as business bank accounts, real estate, inventory, or equipment, can be seized by the lender and sold to recoup their losses.

A lender can also seize and sell your personal assets if you’ve filled out an SBA loan personal guarantee. The personal guarantee form is required for most SBA 7(a) loans from anyone who owns 20% or more of the business. This also applies to any other owners or individuals who signed personal guarantees.

Depending on asset seizure specifics, or if the assets seized are not enough to cover paying off the loan in full, you may face lawsuits at this stage.

Lender files with the SBA

The lender will also file a claim with the SBA for the guaranteed portion of the loan, and turn the remainder over to the SBA, who will take over attempts to collect on the loan. Generally, a borrower must be in default for more than 60 calendar days before a lender can put in a loan purchase request with the SBA.

SBA takes over account and attempts to collect

The SBA will repay the lender the guaranteed portion of the loan to recover their losses, but will continue to attempt to collect payment from you. In most cases, the SBA will issue a 60-day demand letter, which details that you must respond within 60 days, or your account will be turned over to the U.S. Treasury Department. At this point, you can repay the loan, or submit an offer in compromise.

Submitting an offer in compromise (OIC) is an option when you have genuine financial hardship. It's a settlement that the SBA will consider for eligible businesses, but it's not guaranteed, and the amount of forgiveness that the SBA will consider is subject to a number of factors.

The U.S. Treasury will step in

If payment and settlement is not reached, the SBA can contact the Treasury Department with either a notice to the Treasury Offset Program (TOP) or an Administrative Wage Garnishment (AWG) notice to an employer. With the former, the TOP allows the government to take a portion of federal wages or social security benefits that you're owed, as well as seize vendor payments and/or income tax refunds. 

An AWG allows wages to be garnished for up to 15% of disposable income (net pay after deductions). There is no statute of limitations for either TOP or AWG methods, and they will remain in place until the debt is paid, including interest and collection fees.

Communicate with your lender if you can't pay back a small business loan

Taking immediate action is crucial when you face a situation where you can't pay back a small business loan, as the consequences can escalate rapidly. Communicating clearly and transparently with your lender helps you both explore alternative solutions, such as restructuring payment terms, or arranging a temporary deferment until you can resume payments.

Maintaining communications also demonstrates your goodwill, which can help prevent the situation from progressing to more drastic collection methods.

Usually, a lender can offer two main types of assistance in this situation. Loan modification, or loan deferment, to help you through the situation until your business is in a better state to manage payments.

Loan modification

A loan modification refers to changes to the terms of the loan. For example, your lender could give you a term extension to push back the loan maturity date. This approach can provide immediate relief by reducing the size of your periodic payments, which can ease the cash flow burden on your business. 

Lenders may temporarily or permanently alter interest rates, which can lower repayment costs. Some lenders may also consider offering a temporary reduction in interest payments, with any deferred amounts added to the loan balance. However, it's important to thoroughly discuss these options with your lender to understand the long-term implications. Modifications can extend the loan duration and affect your future business financial planning.

Loan deferment

A loan deferment can work as a short-term solution for businesses in a difficult period of cash flow. Typically, a lender can defer your loans for repayment for three, six or sometimes even twelve months.

Your lender often provides you with short-term solutions to bridge financial hardship when it comes to paying your SBA loan back. If this is simply not an option, then these solutions will only delay the inevitable. In this case, if you cannot repay your loan, then proactively pursuing an Offer in Compromise with the SBA is a route to settle your debt for less than the owed amount.

The bottom line

Defaulting on an SBA loan can have serious repercussions both personally and professionally. However, by understanding the default process and proactively seeking solutions, before the situation progresses too far, you can navigate these challenges more effectively. 

Explore all options, maintain communication with lenders, and seek professional assistance when necessary. These steps can lead to a resolution that aligns with your financial and business goals, helping you regain control and stability.

To learn more about managing SBA loan defaults and discovering potential pathways for debt relief or forgiveness, consider reaching out to financial advisors who specialize in small business loan challenges. Your journey to financial stability and business success is not one you have to navigate alone.

Need quick, flexible financing for your small business? An SBA line of credit might be your best bet.

SBA lines of credit offer low interest rates, government-backed security, and the ability to draw funds as needed. They're perfect for covering cash flow gaps, seasonal expenses, and unexpected costs.

How do you qualify? And which SBA line of credit is right for you? We'll break it down below.

What is an SBA line of credit?

The Small Business Administration (SBA) offers an SBA line of credit through its SBA CAPLines program—a subset of the SBA 7(a) program, which is designed to provide ongoing working capital to small businesses. The SBA offers both revolving and fixed lines of credit options to choose from.

Revolving line of credit

A revolving line of credit works much like a credit card. It offers a source of funds that the borrower can draw from as needed. The main advantage of a revolving line of credit is its flexibility. You can access the funds, repay the amount used, and then draw again, as long as you don’t exceed your credit limit. This type of line of credit is especially useful for businesses with fluctuating cash flow needs.

Fixed line of credit

On the other hand, a fixed line of credit—also known as a traditional or standard line of credit—works differently. Once the funds have been drawn and utilized, they can’t be accessed again, even after repayment. This type of credit is most suitable for businesses with predictable and steady financial needs. It provides a one-time lump sum of money that is repaid over a set term.

SBA loan vs. SBA line of credit

While both SBA loans and SBA lines of credit provide small businesses with the financing they need, they differ significantly in structure and usage. An SBA loan is a lump-sum amount borrowed at one time and repaid in fixed monthly installments, often used for significant, one-time expenses, such as purchasing equipment or real estate.

On the other hand, a line of credit offers more flexibility. It establishes a maximum loan balance and allows businesses to draw funds as needed, making it ideal for managing cash flows or unexpected business expenses. Because of this flexibility, an SBA line of credit often has a slightly higher interest rate than an SBA loan.

Types of SBA CAPLines

SBA offers four types of CAPLines up to $5 million to meet different business needs:

• Seasonal line of credit – This type of line is suitable for businesses that experience seasonal changes in their cash flow, such as retail or tourism businesses.
• Contract line of credit – This type is ideal for businesses that need funds to finance specific contracts or projects.
• Builders’ line of credit – This type is designed for businesses in the construction industry to cover the costs of labor, materials, and other expenses.
• Working capital line of credit – This general-purpose line of credit is built to support ongoing business operations.

SBA Express Line of Credit

In addition to the four types of SBA CAPLines, the Small Business Administration also offers an SBA Express Line of Credit. 

This type of funding offers expedited processing times, making it an ideal solution for businesses in need of quick access to capital.

The SBA Express Line of Credit provides a guarantee of 50% on loans up to $500,000, with a maximum term of 10 years. 

The key advantage of the SBA Express Line of Credit is its accessibility—with a simplified application process and faster approval times, businesses can have access to the funds they need when they need them.

SBA 7(a) Working Capital Pilot program

The SBA’s 7(a) Working Capital Pilot program was designed for modern small businesses—offering monitored lines of credit within the 7(a) program.

There are a number of more evolved features that the WCP program adds on top of the existing 7(a) line, including:

• A different fee structure: The fee structure for WCP is modeled after the SBA’s 7(a) Export Working Capital Program (EWCP).
• Support for transaction-based lending and asset-based lending.
• One-on-one counseling with SBA experts.
• The ability to provide working capital for domestic and international orders under a single loan.

To be eligible for the SBA WCP, you’re required to have been in business for at least one year. The maximum loan size is $5,000,000, with maturity up to 60 months. Interest rates for WCP loans are currently the same as the existing 7(a) rates (see below).

As of August 2024, all existing lenders approved to process 7(a) loans were able to begin providing Working Capital Pilot loans as well.

Interest Rates

The interest rates for an SBA line of credit vary but are typically lower than traditional bank loans. The rates are determined by the lender and depend on factors such as the borrower’s credit score, financial history, and the type of line of credit chosen.The interest rate for an SBA line of credit is usually expressed as Prime +.

The “Prime” refers to the current prime rate, which is a benchmark interest rate used by lenders. The “+” indicates a percentage that is added on top of the prime rate. This additional percentage varies depending on the amount of credit line and the lender’s assessment of the borrower’s creditworthiness.

Terms

The terms for SBA CAPLines also vary, with a maximum repayment period of up to 10 years.

However, there’s an exception for the builder’s line of credit. This specific CAPLine has a maximum repayment period of up to five years, or the time it takes to complete the construction or renovation project, whichever is less. This exception is designed to match the repayment period with the completion of the project, ensuring that businesses are not overburdened with repayments post-project completion.

SBA line of credit requirements

To qualify for an SBA line of credit, businesses must meet certain eligibility criteria, such as:

• Being a small business located in the United States
• Having good personal and business credit scores
• Being able to demonstrate the ability to repay the loan

While the general eligibility criteria apply to all SBA CAPLines, there are some specific qualifications depending on the type of CAPLine:

• Seasonal CAPLine – To qualify, businesses should demonstrate a definite pattern of seasonal activity, with an operating cycle of not more than 12 months. The business should also have been in operation for at least one year.
• Contract CAPLine – To be eligible, businesses must have specific contracts or orders that the funds will be used for. The repayment comes from the contract’s proceeds.
• Builders CAPLine – This CAPLine requires businesses to be involved in building or renovating commercial or residential buildings. The repayment comes from the conversion of construction loans into long-term financing or the sale of the residential or commercial property.
• Working CAPLine – Businesses must have inventory or accounts receivable.

For all CAPLines, you’ll need to provide collateral that can be liquidated by the lender if the loan is not repaid. The collateral requirements may differ based on the specific CAPLine, the amount borrowed, and the lender’s policies. Remember that every lender may have slightly different criteria for qualifying businesses, so you should always speak to your lender to understand the specific requirements.

How to apply for an SBA line of credit.

Applying for an SBA line of credit is similar to applying for any other loan. The first step is to find a lender that offers SBA CAPLines and meet their eligibility criteria.

Once you have found a suitable lender, you will need to gather the necessary documents, such as financial statements, tax returns, and business plans. You may also need to provide collateral for the line of credit.

After submitting your application and supporting documents, the lender will review your application and make a decision. If approved, you can start using your line of credit to support your business’ ongoing needs.

Conclusion

In conclusion, an SBA line of credit can be a valuable tool for small businesses looking for flexible and affordable financing options. With various types of CAPLines available and competitive interest rates, it is worth exploring as a potential funding source for your business. Learn more about SBA loans.

Every great business has to start somewhere. The founders of Apple and Amazon launched their business dreams in garages. Samsung began as a grocery store. Coca-Cola originally made its product in jugs and sold the now-famous soda for a nickel a glass at a local pharmacy.

Many businesses start from nothing before becoming something special. When the right moment arrives, securing the right funding for your startup can be pivotal in getting your business off the starting block and on the path to success.

The good news? Startup business loans exist, even if you have no revenue or a limited credit history.

While traditional lenders prefer established businesses, there are alternative financing options designed specifically for entrepreneurs starting from scratch.

Getting a startup loan with no money or revenue.

Getting funding as a brand-new startup with no money can be a challenge. The majority of small business loans have at least some minimum revenue requirements.

So, if you have the ability to wait until your business is earning some money, it could open the door to more financing options and more attractive borrowing terms. 

In the meantime, there are at least two potential ways to get a loan for your startup before it begins earning revenue.

Equipment financing

Some equipment financing lenders (though not all) are willing to work with startups. These lenders may have no minimum monthly revenue requirements and no minimum time in business requirements for applicants to satisfy.

The collateral your business is purchasing secures the loan and reduces the risk for the lender. However, you may likely need decent personal credit to qualify for this financing option, depending on the lender.

SBA microloans

An SBA microloan provides financing of up to $50,000 for small businesses. The loans are intended to support underserved communities and are distributed by nonprofit or community microlenders.

The requirements to qualify for a microloan will vary by the lender. Some will review your credit score and personal finances to qualify you for a loan while others will want to see a longer financial history for your business. While some of these lenders may not require positive business cash flow, they may still require a personal guarantee and/or collateral to secure the loan.

How to get a startup business loan with no money or revenue.

Decide how much you need

A key step in finding the loan that matches your business needs is identifying how much money you’ll need to borrow. Every lender has a different range of financing they are comfortable offering. Therefore, you probably wouldn’t search for a $5-million loan in the same place you’d search for a $5,000 loan.

Determine your timeline

Likewise, you should figure out how quickly you need the money you borrow to arrive. Some loan proceeds may be available in days or hours. For other loans, the funding process could take weeks or months.

Determine your budget

Next, crunch the numbers and see which loan gives you the best bang for your buck. There are plenty of easy-to-use loan calculators available online. So don’t worry if math isn’t your strong suit. (Note: It’s wise to compare multiple loan options to make sure you’re getting the best deal available for your small business.) 

Alternative forms of financing for your startup.

It’s not always easy to access business funding as a new startup. According to Gallup, 77% of small business owners use personal savings as a source of initial capital. Nonetheless, there are alternative ways to finance your business dreams that don’t involve potentially draining your personal bank account. 

Here are a few alternative business funding options to consider. 

• Crowdfunding - Crowdfunding is a way to raise money online for your young business—either by seeking loans from multiple investors (debt crowdfunding), asking for donations (donor crowdfunding), selling off small portions of your business (equity crowdfunding), or offering incentives for contributions (reward-based crowdfunding).
• Business Credit Cards - A business credit card could be a good financing option for startups with no revenue and no established business credit score. Depending on the type of business credit card you apply for, you may need good personal credit to qualify. But there are some options (including secured business credit cards) for small business owners with no credit or bad credit. 
• Family and Friends - Some small business owners are able to borrow money or raise investment funding from family members and friends. If you’re fortunate enough to have this option available to you, be sure to consider the risk up front. Should your business fail or if you’re unable to repay a loan from a loved one, these complications could damage important relationships. 
• Grants - For a startup, small business grants can be an appealing way to raise money since the business doesn't have to repay the money it receives. Yet with grants, you might also face a lot of competition. It can often be a challenge to stand out from other applicants where small business grants are concerned.

The information in this blog is for informational purposes. It should not be used as legal, business, tax, or financial advice. The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (July 26, 2022). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.

You might consider an SBA microloan if you’re trying to start or expand a small business.

But how exactly does getting a microloan through the SBA work? What do you need to meet the requirements? What do terms look like? How do you get started with an application?

We’ll answer  all these questions in more in our guide to SBA microloans. We’ll explain how it all works, highlighting requirements, current interest rates, microloan lenders, alternatives, and how you can apply today.

What is an SBA microloan?

The SBA microloan program consists of small loans funded by the Small Business Administration. However, these loans don't come directly from the SBA to the borrower. Instead, the SBA provides the funds to a network of intermediary lenders, such as community based nonprofit lenders.

This network then provides microloans to eligible small businesses and certain childcare centers. Participants in the nonprofit lender network are selected not only for their experience in lending, but in management and technical assistance as well, so that these intermediaries can administer the microloan program effectively.

SBA microloans provide financing to traditionally underserved businesses, such as startups, women-owned companies, and minority-owned businesses.

Eligible businesses can borrow up to $50,000, but according to the SBA, the average microloan is around $13,000.

What can SBA microloans be used for?

Microloans can be used for many purposes, affording small businesses flexibility when needing to rebuild, re-open, repair, or improve their business.

Seeking an SBA microloan might be a solution if you are looking to:

• Access working capital
• Purchase or replenish inventory or supplies
• Replace or purchase furniture or fixtures in your business
• Purchase new machinery, or secure equipment upgrades

However, you can not use an SBA microloan to pay existing debts, settlements of lawsuits, trade disputes, fines or penalties, or purchase real estate. You also can’t use the SBA microloan for personal, non-business use.

SBA microloan requirements

The SBA microloan loan program is geared for early-stage businesses and startups, but all for-profit small businesses and certain nonprofit childcare centers are eligible.

Because SBA microloans target early-stage businesses and underserved business segments, the requirements for qualification are less stringent than other types of traditional loans. Even if you have limited credit history or lower income, you may qualify.

Of course, each intermediary lender will have its own eligibility requirements, but most will ask for some or all of the following:

• Collateral and/or a personal guarantee from the business owner
• Minimum credit score - 620 or higher is good to have, but intermediary lenders may accept lower scores
• Owner’s Personal finance history
• Business finance history, with current cash flow or cash flow projections
• A certain location within the lenders geographic service area
• A minimum amount of time in business

SBA microloan rates, fees and repayment terms.

Although the SBA places certain restrictions on intermediary lenders, such as not exceeding $50,000 in loan amounts, interest rates and fees are up to your specific lender.

The interest rates will vary depending on your lender, but they typically range between 8% and 13%. And repayments terms are available for up to seven years.

SBA microloans also cannot be made as a line of credit - the microloan is structured as a term loan.

Pros and cons of SBA microloans

Pros

• Easier to qualify for: If you’re a startup or don’t have much business history, it can be hard to qualify for a business loan. Microloans, on the other hand, come with less stringent requirements, having been built to provide financing to businesses that traditionally struggle to find funding. 
• Faster funding: If you apply for a traditional SBA loan, the application and funding process can take months to complete. In comparison, you could receive funding through your microloan in just 30 days. 
• Low interest rates: Like all SBA loans, microloans come with low interest rates. The rates will vary depending on your lender, but the average rate is between 8% and 13%.
• Flexible loan terms: SBA microloans come with repayment terms of up to 7 years, so your monthly payments are more affordable. 

Cons

• Small loan amounts: If you need to borrow more than $50,000, the microloan program might not be the best option for you. 
• Spending restrictions: SBA microloans do come with certain spending restrictions. For instance, you can’t use the funds to pay down existing debt or purchase real estate. 
• Lenders may charge fees: The SBA caps its fees, but individual lenders can charge their own fees. For instance, you may have to pay an application fee, loan processing fee, or closing costs.
• Availability is limited: Since SBA microloans are offered by nonprofit intermediary lenders, these loans can be harder to find. These lenders don’t have the resources and staff that larger lenders have, so these loans might not be available in your area.

Finding SBA Microloan Lenders

The SBA has hundreds of lending partners located across the country, and provides a comprehensive list of microloan lenders to help you find a match. 

Most lenders will require you to either speak to a lending specialist over the phone or apply in person. 

The lender you work with will inform you about any necessary paperwork and documentation to apply. In addition, some lenders may require that you complete a workshop or training program as part of the application process. 

As part of your paperwork, you’ll need to provide a range of information, including:

• Proof of identity
• Description of collateral
• Balance sheet data (income and expenses)
• Personal and business tax records
• Business details (industry, licensing, assets, leases, etc.)

Once you’ve submitted all the required paperwork, your application is complete, and your lender will review and process the loan.

Alternatives to SBA microloans

If you’re not sure if an SBA microloan is the right fit for your business, here are some alternatives to consider:

• SBA 7(a) loans: SBA 7(a) loans are a good choice for businesses that need larger loan amounts. These loans are available for up to $5 million, but the qualification criteria are more strict. 
• Business credit cards: A business credit card can be used for any business purchase, and the application process is relatively easy. If you go this route, look for a card with an introductory 0% APR. 
• Invoice factoring: If you have a lot of cash tied up in your unpaid invoices, invoice financing allows you to leverage your outstanding invoices to get access to capital. 

The bottom line

SBA microloans can help startups and small businesses access the capital they need. These loans are a good option for traditionally underserved borrowers, like women and minorities, or low-income community businesses. If you’re interested in exploring your loan options, you can use Lendio to quickly compare loan offers from multiple lenders.

Understanding how small business financing impacts tax strategy and preparation is essential for business owners and financial managers seeking to optimize their tax strategy and improve financial planning. Business loans play a critical role in supporting small businesses by providing the necessary capital, but the associated tax implications can be complex.

Some of that complexity comes from different loan product types that a small business may obtain, and whether interest or payments can be deducted from taxes. In this article, we'll cover common business loan types and their tax implications, the criteria for claiming interest tax deductions, business loan payment deductions, and common mistakes to avoid when filing your taxes.

Are business loans taxable?

Business loans are not considered taxable income, because they represent borrowed funds that the business is obligated to repay. When a business receives a loan, the principal of the loan does not count as income for tax purposes, since the amount received isn't earned -- it's borrowed.

However, while the principal is not taxable, the interest paid on the loan might be eligible for tax deductions. Small businesses often deduct interest paid on a loan as a business expense, as long as criteria are met, which we will cover in section 2. By deducting interest payments, businesses can reduce their taxable income, lowering the tax burden.

What types of business financing are considered taxable?

There are situations where business financing becomes taxable income. For example, if a lender forgives or cancels a loan, the amount forgiven could be considered taxable income for the business. A recent example is Paycheck Protection Program (PPP) loans issued during the COVID-19 pandemic.

Many businesses applied for and received loan forgiveness for their PPP loans, becoming eligible to exclude the amount forgiven from taxable income. However, the IRS found recurrent instances where PPP loans were improperly forgiven, because the applicant did not meet the criteria for forgiveness through misrepresentation or omission. Businesses that were found to have improperly forgiven PPP loans were instructed to include the amount forgiven in their income and pay any additional income tax assessed.

Another situation where financing might be considered taxable is if it is used for non-business purposes. In this case, any interest paid on the loan would not be tax deductible and could be subject to taxes. These situations underscore why it is important for businesses to carefully consider tax implications when seeking financing, and ensure they are using funds appropriately, and in line with requirements set by lenders or government programs.

When in doubt, a professional tax filing service can be a big help. Lendio is proud to partner with Taxfyle, a real-time tax filing app that helps small businesses file taxes with the help of a dedicated CPA or EA professional.

Common business loan types and their taxability

Small businesses can find a wealth of loan types to increase their working capital and invest in growing their business. That's why it's essential to understand how each can impact your taxes and overall financial strategy. Below are some common types of small business financing, and considerations for their tax implications.

Business Term Loan

Business term loans are a lump-sum financing payment for small businesses that usually come with a fixed interest rate and repayment schedule over an agreed term. The interest paid on these loans is usually deductible as a business expense, reducing taxable income.

Business Line of Credit

Business lines of credit provide flexible access to capital. Small businesses can borrow as needed, up to a negotiated limit, and interest is paid only on what amount is used. The interest on the amount withdrawn is often deductible, provided it is used for legitimate business purposes.

Equipment Financing

Equipment financing is tied specifically to purchasing or leasing equipment, and the tax implications are two-fold. Both interest paid on the financing and depreciation of the asset may offer tax deductions to the business.

Revenue-Based Financing (BCA/ MCA)

Revenue-based financing, or cash advance, is a more unique form of financing, in that repayment is linked to future sales. Because of this model, these are not technically loans, and the associated fees may not qualify for interest deductions on taxes.

SBA Loans

Small Business Administration (SBA) loans provide favorable terms and low interest rates to borrowers, and these interest payments are generally deductible.

Deducting business loan interest: what's eligible?

An interest tax deduction is a valuable tool for small businesses looking to reduce taxable income. To claim these deductions, it is essential to first understand the criteria set by the IRS.

Conditions for interest payment deductibility

Small businesses can generally deduct some or all of the interest paid or accrued during a tax year on loans. However, you can only deduct the interest if you meet the following criteria:

• You are legally liable for the debt
• Both you and the lender intend the debt to be repaid
• You and the lender have a true debtor-creditor relationship

If you have received business financing and are using it for business-related expenses or purposes, this is fairly straightforward. There are some exceptions where deductibility is concerned to be aware of.

Exceptions to interest deductibility 

Gross Receipts over $29 million

The IRS provides a small business exemption for businesses with average annual gross receipts of $29 million or less over the past three years. If a business has more than $29 million in gross receipts, they may be limited on how many interest deductions they can claim. Form 8990 will help you determine if you must limit your business interest expense deductions and whether your business qualifies to elect out.

Part-Business, Part-Personal Loans

In some cases, a loan may be for both business and personal reasons. A common example is a car loan. If you use the car for business purposes and personal purposes, you can only deduct the interest on the percentage of business use for the car, not on the entire interest of the loan for the year.

Tracking and documenting business financing for taxes

Accurate tracking and documentation of business financing is important for small businesses to maintain, in order to optimize tax deductions and ensure compliance with the IRS. Record-keeping involves maintaining detailed accounts of all loan-related transactions, including:

• Original loan agreement
• Interest payment records
• Correspondence with lenders
• Repayment schedules
• Use of borrowed funds

By keeping these records organized and frequently updated, small businesses work toward managing business taxes well, and substantiate any deduction claims when filing their taxes. It also allows financial planning to maximize the potential for interest and payment deductions, as well as mitigate risks.

Expert tips for optimizing tax efficiency

Tax efficiency should be a goal of small businesses, especially during seasons when margins can be tight. Here are some tips to help you navigate some common financing-related tax mistakes that can affect your financial statements, and make tax season a real headache. 

Common Mistakes to Avoid

1. Misclassifying Expenses

A common mistake small businesses make when filing their taxes is mislabelling expenses, or categorizing them incorrectly. This can cause inaccurate financial records, and potentially disallow tax deductions that could reduce tax burden. The most common misclassification is classifying a personal expense as a business expense. Doing this can cause issues and potential penalties during an IRS audit. 

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Tip: Keep careful records with clear classification of expenses using accounting software or a dedicated financial professional. This will make reducing tax errors easier, and also give you more accurate insights into your operational costs and overall financial health.

2. Not reconciling loan interest correctly

As a practice, small businesses should keep careful records of each interest payment associated with a loan. When records aren’t properly updated or kept, discrepancies may appear on financial statements and in your tax filing, resulting in missing out on eligible deductions or even overpayment. Mismatched records may also be flagged during an IRS audit.

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Tip: Regularly update and review your financial records, particularly where loan interest payments are concerned. This provides clear visibility both for your business, and the IRS.

3. Reporting loan forgiveness incorrectly

If your business receives loan forgiveness, it is important to assess whether it needs to be reported as taxable income. Failing to do this can lead to serious tax implications, including penalties and interest owed. The PPP loan example above is a cautionary tale. Most cases of debt forgiveness or cancellation require you to include the cancelled amount in income, with some exceptions like bankruptcy or insolvency. IRS Publication 4681 offers guidance on canceled debts and exceptions. 

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Tip: Maintain accurate financial records and any correspondence or documents provided by the lender forgiving or cancelling the debt. Consult with a tax professional to determine if your forgiven loan should be reported as taxable income, and ensure compliance with IRS regulations.

Should you work with a tax professional?

Navigating business loan tax implications can be daunting for even the most experienced business owner. A tax professional can be an invaluable resource in optimizing your financial strategies, while ensuring you remain in compliance with IRS regulations.

But keeping a dedicated finance professional on the payroll can be a tough order for small businesses. That’s why services like Taxfyle, Lendio’s trusted partner,  can help small business owners immensely navigate tax filing, especially where business financing comes into play.

Taxfyle connects you to a licensed CPA or EA who will prepare and file your business tax return for you, looking for maximum eligible deductions, qualifying credits and filing with accuracy.

If you’re concerned about the state of your books, Taxfyle’s cleanup bookkeeping will organize your records, fix errors, and get your finances tax-ready before it’s time to file.

Want to learn more about Taxfyle? Visit www.taxfyle.com for more information. Lendio customers can get a discount on business tax filing services. Click here to get your code for 10% off!

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You might be worried your small business may face a huge tax bill, or perhaps you’ve received one already. Either way, if you feel you’re unable to pay your tax bill in full, there are options available to help you manage your tax debt and avoid high-interest penalties. Whether you explore an IRS payment plan, or seek a business loan to cover your tax debt, we’ll discuss your options in this article.

The tax dilemma for small business owners

Approaching tax debt can cause a dilemma for small business finances. On one hand, business owners want to keep their tax bill payments as low as possible to maximize profits, maintain cash flow, and keep growing their business. On the other hand, SMBs also need to ensure they pay off their tax debt quickly to avoid potential penalties from the IRS.

Tax payment options for small businesses

There are a few options to keep in mind when deciding how to pay your tax debt to the IRS. You can opt for an Installment Payment Agreement (IPA) with the IRS. Another option is an Offer in Compromise (OIC) with the IRS, if your business qualifies for the program. A third option is seeking a business loan to cover your tax debt.

IRS payment plan

Most business taxpayers can obtain a long-term payment plan (or installment agreement) from the IRS, as long as they have a total balance less than $25,000 in combined tax, penalties and interest from the current and preceding tax year. With a payment plan, business owners can make monthly payments for up to 24 months on their tax debt. 

Even if you have a payment plan, The IRS assesses interest every day that your payment is overdue. The 2025 rate for underpayment is 7 percent. Since interest compounds daily on IRS payment plans, you could pay much more than you originally owed.

Pros and cons of an IRS payment plan

Offer in compromise 

An offer in compromise is a program offered by the IRS to allow eligible individuals to settle their tax debt for less than the full amount owed. An offer in compromise is most often used when businesses cannot pay their full tax debt, or paying the full debt creates financial hardship.

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Eligibility requirements for an offer in compromise include:

• You’ve filed all required tax returns and made all required estimated payments.
• You aren’t in an open bankruptcy proceeding.
• You have a valid extension for a current year return, if you’re applying for the current year.
• You are an employer and made tax deposits for the current and past 2 quarters.

An offer in compromise application is more likely to be approved when small business owners offer the most the IRS can expect to collect within a reasonable period of time.

Obtaining a business loan for tax payment

A business loan can be a good choice for small business owners facing significant tax payments. While IRS payment plans have pre-set terms, business loans can offer greater flexibility in terms of a repayment schedule. For industries with irregular income streams, a business loan could also allow owners to align the repayment schedule with their cash flow cycles.

When is a business loan better than an IRS payment plan for paying tax debt?

For business owners with strong credit scores, a business loan might offer more favorable terms, such as lower interest rates compared to IRS underpayment penalties and interest rates. Many business loans can also provide immediate access to capital with a lump-sum payment, allowing businesses to take care of their tax obligations promptly, and potentially use additional funds for working capital and other business needs.

Best business loans to pay taxes

When business owners face the burden of paying taxes, assessing the best business loans for the task and their business profile is important. Factors to consider when borrowing are favorable interest rates and flexible repayment schedules, so that businesses can pay off their liability without straining cash flow.

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The length of the application process and approval process with each lender may be especially important too, especially with tax deadlines looming. Before applying for a loan, assess your financing needs, your businesses’ financial health, and IRS requirements for your repayment to determine the right loan option for you.

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Here are some loan options and financing structures that can help you tackle IRS debt repayment while freeing up working capital for your business. The terms and repayment options vary for each type of loan or financing.

Launching a startup business is exciting, but it can also be stressful if you need external money to keep the momentum going. While the U.S. Small Business Administration offers several small business loans for established companies, there are also some loan options available to new ventures. This guide will cover SBA funding for startups, as well as how to apply. We’ll also cover the SBA loan requirements for startups, and alternatives for capital if these loan types won’t work for your business.

SBA Loans For New Startups

While there’s no specific SBA startup loan, there are two financing options available to newer businesses: the SBA microloan and the SBA Community Advantage Program. Each one has its own loan terms and eligibility requirements, and can help serve brand new businesses that are just starting out.

SBA Microloan

An SBA microloan for startups allows businesses to borrow up to $50,000. The average loan size, however, is much smaller at $13,000. The maximum loan term is seven years. These smaller loans are geared towards early-stage businesses, so have less strict eligibility requirements than other SBA loans and traditional loan options.

Ideal for: Managing a new business and providing working capital.

Can be used for: Working capital, inventory, supplies, equipment, furniture or fixtures.

Cannot be used for: Paying existing debt, settling lawsuits, trade disputes, fines, penalties, or purchasing real estate.

Eligible businesses: For-profit small business or nonprofit child care center.

Application Process: Even when choosing to use an SBA loan to start a business, you’ll still need to apply directly through a lender. Lenders typically require collateral and a personal guarantee in order to get approved for a microloan. Read our guide to learn more about applying for an SBA microloan.

SBA Community Advantage Program

Historically underserved communities may be eligible for the Community Advantage Program for a SBA loan for their startup. It’s specifically designed to help new entrepreneurs in underserved markets obtain working capital. You can borrow up to $350,000 over the course of 10 years through Community Advantage Small Business Lending Companies (CA SBLCs)  Originally begun as the Community Advantage Pilot program that sunsetted September 30, 2024, the Community Advantage Program is now a permanent part of the SBA 7(a) loan program, through new licenses issued to previous lenders in the program who can now issue 7(a) loans to traditionally underserved businesses.

Ideal for: New businesses located in low-to-moderate income communities that are less than two years old.

Can be used for: Purchasing commercial real estate that the owner occupies, leasehold improvements or renovations, purchase of inventory, equipment, furniture, fixtures, working capital, business acquisition, or debt refinance for any of the above.

Cannot be used for: Illegal businesses or businesses that do not meet the eligibility requirements, delinquent taxes, investment real estate, or personal use.

Eligibility requirements: Eligible businesses must be part of an underserved market. There are several ways to qualify for this designation, such as:

• Businesses located in Low-to-Moderate Income Communities, Empowerment Zones and Enterprise Communities, Historically Underutilized Business Zones, Promise Zones, Opportunity Zones or Rural Areas
• New businesses that have been operating for less than two years
• Veteran-owned businesses that are 51 percent or more owned and controlled by one or more veterans
• Businesses where more that 50% of the full-time workforce is low-income or resides in LMI census tracts.

Interested in exploring loan options, including SBA loan products like microloans and 7(a) loans, for your new business? Compare loan offers from multiple lenders with Lendio. Applying is free, and won’t impact your credit. Apply now! 

SBA Loans For Established Startups 

Once your startup has reached two years old, the options for SBA loans expand. The following options have their own eligibility requirements.

SBA 7(a) Loan

SBA 7(a) loan funds can be used for a number of purposes. The maximum loan amount is $5 million, and any loan amount over $25,000 requires collateral. Loan repayment terms can vary depending on what the loan is used for, but the repayment period is usually 10 years.

Ideal for: Businesses who have reached the growth stage.

Can be used for: Working capital, equipment, supplies, real estate, debt refinancing and ownership changes.

Cannot be used for: illegal or unqualified business as defined by the SBA, delinquent taxes, investment real estate or personal use.

Eligibility Requirements: Each SBA lender's criteria may vary for an SBA loan. For example, some may require a higher credit score than other lenders. However, at minimum you must have owner equity and engage in for-profit operation in the U.S. or its territories. Read our guide for more information about SBA 7(a) loan requirements.

SBA 504 Loan

The SBA 504 loan is designed to help small businesses make major investments. Funds can be used for long-term assets such as real estate (including updates), land, equipment, machinery, or improvements to land, parking lots, and utilities. You can’t use the funds for working capital or inventory. If approved, you could borrow up to $5 million over a period of 10 or 20 years. 

Best For: Purchasing or upgrading major fixed assets for your business.

Can be used for: Real estate, land, equipment, machinery, or improvements to utilities, parking lots, and the above.

Cannot be used for: Working capital or Inventory purchase.

Eligibility Requirements: Like 7(a) lenders, 504 lenders may set more stringent criteria to access an SBA 504 loan. In most cases, you will need strong credit history, finances, and multiple years in business to qualify. Read our guide for more details on SBA 504 loan eligibility requirements! 

Explore Lendio to find the right SBA loan option for your startup, so you can start making the business moves you need to succeed.

How to Get an SBA Loan for Startups

In order to pursue an SBA loan for your startup and increase your chances of receiving a loan, you’ll want to do some preparation first. Here are the steps to take to prepare and submit an application for an SBA loan.

1. Calculate your Startup Costs

Knowing how much you need to borrow is your first step. Pull together the costs of starting your business, including one-time costs for permits, licenses, equipment, furniture and fixtures. You’ll also need to calculate recurring expenses, such as payroll, rent, and inventory for at least your first year in business. 

Calculating your business startup costs will give you an idea of how much money you will need to get your business off the ground.

2. Write Your Business Plan

Many lenders will want to see your business plan, including research on target market, pricing structure, marketing costs, challenges, and your industry competition. Your startup costs calculation also belongs in your business plan, as well as projected income.

Without multiple years of profits to lean on in your application, you’ll need to use these tools to show that your business will be a success, so spend some time writing a business plan to help you secure funding.

3. Review SBA Loan Qualifications

All your hard work will be for nothing if you start the loan application process only to realize you won’t qualify. First, review the standard SBA loan requirements. You’ll need to:

• Be a for-profit business operating in the U.S.
• Meet the Small Business Administration’s definition of a small business.
• Be able to show your ability to repay the loan.
• Have tried to find alternative forms of funding before trying to get an SBA loan.

Because SBA loans are issued through lenders, you’ll also need to review common requirements for underwriting loans to improve your chances. Your personal credit score and business credit score should be improved as much as possible before pursuing a loan, and you’ll need to gather cash flow, sales projections and any available collateral you may have for the loan.

4. Choose a Loan and Lender for Your Startup

After reading some of the available options above, you probably have an idea of which SBA startup loan option will meet your needs. From there, you’ll need to find the best SBA lender for your startup..

The SBA provides a Lender Match tool to help you find a bank, credit union, or community-based lender that participates in your chosen loan program. You can always double check with a financial institution you’ve previously had a relationship with to see if they participate in the loan program you’re searching for.

You can also apply through Lendio to be matched with funding options that best suit your business needs. It takes 15 minutes to complete the application, and you’ll be put in front of 75+ lenders, including those who offer SBA loan options.

5. Prepare Your Loan Application

After you’ve chosen a lender, you’ll be ready to start your SBA loan application. You’ll need a lot of documentation to support your application, but there may be some variations on specific documents you need based on your loan program and lender.

Prepare all your business and personal documentation, including tax returns, financial statements, certificates and licenses, business history, business plan, contracts and more. 

You’ll also need to complete some SBA forms, such as SBA Form 1919 Borrower Information Form, SBA Form 912, Statement of Personal History, and SBA Form 413, Personal Financial Statement.

Thankfully, your lender will be able to help you through the application process and make sure you have all the required documentation.

Online Business Loans

Many online lenders have flexible qualifications and multiple loan products for startups. If you’re looking for funding fast, exploring these options can be a great way to get funding, sometimes in as little as 24 hours. Curious what kind of loan options might be best for your business? Visit the Lendio Industry funding resource center to select your industry and see loan type recommendations for your business.

Small-Business Grants

Grants for small businesses are a way to avoid accumulating debt by offering capital that you don’t have to repay. The application process may be time-consuming, but if you can secure funds this way it may be worth it for your business.

Business Credit Cards

If you need help with everyday expenses while launching your business, business credit cards for startups are a great way to build your business credit score with responsible management and earn rewards that benefit your business.  

Get Funding for Your Startup

Now that you know the SBA loan options for your startup, as well as how to apply and some alternatives to consider, it's time to figure out which loan option you’re going to pursue. Let Lendio take some of the guesswork out of funding your startup with the Lending Marketplace.

Simply fill out an application, and receive offers from our network of 75+ lenders to compare your funding options. There’s no impact to your credit score, and once you accept an offer, you could receive the funds you need for your startup in as little as 24 hours.