How to Get a Small Business Loan from the Government

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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If you are a small business owner struggling with the impacts of the COVID-19 pandemic on your business, you can take advantage of the government small business loans to help put your business back on track. The government small business loans are offered through banks and credit unions that partner with Small Business Administration (SBA) and other government agencies.

Guide to Government Business Loans

The U.S. government doesn’t do much direct lending, but various government-supported programs are designed to offer small businesses access to affordable financing solutions. The most common program is the SBA loan program which offers small businesses long-term and low-interest financing than commercial lenders. Some of the commonly utilized best small business loans include:

  • SBA 7(a) Loans: This loan is ideal for business owners who are looking to fund several small-scale business operations.
  • SBA CDC/504 Loans: This product is ideal for business owners looking to finance large projects such as real estate.
  • SBA microloans: This product is best for funding the small needs of startups and new businesses.
  • SBA Disaster Loans: This loan type is ideal for business owners whose businesses are struggling due to a declared disaster’s physical or economic damage. If your business is affected by the COVID-19 pandemic, you could qualify for this funding.
  • Additional Government Loans: This product is ideal for business owners looking for financing for particular business needs.

Government Small Business Loans Overview

As we mentioned earlier, government agencies such as the Small Business Administration partner with banks and other lenders to provide much-needed funding for small business owners across the U.S. 

SBA is a government entity whose primary duty is to support and assist small business access timely and adequate financing that guarantees their operations doesn’t stall due to cash problems. Apart from their loan programs, SBA offers other services, including training and customized events designed to empower small business owners on the essential skills of running a business successfully.

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How Do Government Small Business Loans Work?

Commercial bank lenders are quite reluctant to lend to small businesses due to associated risks. If you are interested in government small business loans, you may consider going for an SBA-backed loan. These loans come with very low-interest rates, high loan amounts, and long-term repayment periods.

The SBA offers a government guarantee of 85 percent of your loan size, and should you default, SBA will have to pay back the lender. Because of the guarantee that SBA offers, lenders are more willing to finance borrowers who otherwise would have been forthwith denied access to credit. However, you should note that SBA doesn’t directly lend these government business loans, except for the SBA disaster loan program. SBA typically works with partner lenders to offer the loans within their program.

The Best Options for Government Business Loans

In a nutshell, The SBA 7(A) Loans, 504/CDC Loans, Paycheck Protection Program Loans, and SBA Microloans complete the list of the four most crucial government loan programs for small businesses. Therefore, one of these options will be your best option when looking for an ideal source of funding for your business. However, depending on your specific needs, you can leverage other government loan programs such as the Community Advantage ProgramSBA disaster loan programSBA microloan program, and many others. Let’s take a look at some of them:

  • SBA 7(a) Loan is undoubtedly the most popular loan program for a range of U.S. small businesses. It is designed to cover various financing purposes and can be used as working capital to buy existing businesses or to buy essential business equipment. You can qualify for SBA 7(a) loans of a maximum amount of $5 million, which you will repay for between 7 and 25 years, depending on your business needs. Typical interest rates for these loans range from a prime rate of +2.25% to +4.75%.
  • A 504/CDC loan is another best option for small business owners. The program is designed for entities looking to upgrade their commercial facilities or purchase new units. It is also best for business owners looking for funding for their capital-intensive projects like buying or renovating commercial real estate properties or purchasing manufacturing equipment and heavy machinery. The 504/CDC loan amounts can go as high as $20 million, which you will repay for a maximum of between 10 and 25 years. The interest rates range between 4% to 7% on the Community Lender (CDC) portion.
  • SBA Microloans is a program ideal for business owners looking for smaller financing solutions. These loans provide smaller amounts of up to $50,000, which you have to repay within a maximum set period of six years. The interest rates charged fall between 8 % and 15%.
  • Paycheck Protection Program Loans-(PPP) loan program is part of the CARES act and is designed to offer small business owners access to affordable funding that helps them maintain their payroll through the CORONA19 pandemic. The loan’s primary goal is to help employers maintain their payrolls and keep the business afloat through the shutdown caused by the pandemic.

How to Qualify for Government Small Business Loans

Several factors determine if you qualify for an SBA loan and other government loans designed for small businesses. There are also specific requirements that you should meet before your application is considered. Key requirements to qualify for any of the government business loans are:

  • Your business should be a For-Profit, U.S.-based entity in an eligible industry.
  • You must have a personal credit score of over 650 points and above.
  • You must be considered a small business by SBA standards.
  • You must have proof that shows you have invested your personal time and money in the business.
  • You must have proof to show you have tried unsuccessfully to get other financings, for example, from your local bank, which was turned down.
  • Your business should have existed for two or more years.

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How to Apply for Government Small Business Loans

Because you will be working with a bank or other lender (except for an SBA disaster loan), SBA loans typically require several documentation. The application process can take a lot of time, and from the initial stage, the loans take 30 days or over before you receive funding. The application procedures and requirements may vary depending on your loan program and lender, but generally, you need to provide the following details:

  1. Personal background information: Addresses, names, educational backgrounds, criminal records.
  2. Resume and business background: You will be asked to provide your resume and those of the other business partners owning 20% or more of your business
  3. The business plan: You may be asked to provide a business plan that provides three to five years of financial projections, including future sales, profit, loss, cash flows, and balance sheets.
  4. Collateral: Typically, SBA loans don’t require collateral, but if you want your application to be more robust, provide personal or business assets as collateral.

Other mandatory documentation includes:

  • Personal and business tax returns
  • Financial statements
  • Legal documents

Business Owners Also Asked

How To Get a Government Small Business Loan?

Depending on your business needs and the lender you are working with, you will be required to meet specified requirements before your loan is approved. Some of the standard documentation include:
– Legal documents.
– Financial statements
– Business plan
– Personal background information
– Collateral
– Resume and business background
Overall, from the initial stage, SBA loans take 30 days of over before you receive funding.

Are there government small business loans for bad credit?

SBA loans reject applications for businesses with a credit score under 640. For business owners who don’t meet the strict requirements of small government loans such as SBA loans, there are other funding options available from more flexible sources, including:
– National business capital services
– Microloan lenders
– FinTech lenders

The Takeaway

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The Small Business Administration agency (SBA) is not a direct lender. Instead, they partner with lenders to reduce their risk making it easier to access capital so they can provide loans to small businesses.

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