Government Business Loans: Funding to Start or Grow a Business

Where to find government small business loans and how to apply.
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The Ultimate Guide to Finding and Applying for a Government Business Loan

Government business loans are offered primarily through banks and direct lenders that partner with government agencies, such as the SBA (U.S. Small Business Administration). These are long-term, low-interest small business loans that entrepreneurs can use to start a business, buy real estate or equipment, expand, or for other business purposes.

The most popular type of government business loans are SBA loans and should be on the radar of any entrepreneur in need of business financing. SBA loans have the lowest interest rates that you’re likely to come across in your search for business financing, and the qualification requirements are easier compared to traditional loans.

That said, these aren’t a good fit for every business owner, and there are several SBA loan programs, so it’s important to understand how each one works. Learn everything you need to know about SBA government small business loans, and how to apply.

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How Government Loans Help Small Businesses

Banks and other traditional commercial lenders offer affordable interest rates, but they are reluctant to lend to small businesses because they’re risky investments. Only about half of small businesses survive their first five years. And if the business goes under before the owner has finished repaying the loan, it’s unlikely the lender will get their money back.

To protect themselves from this situation, lenders prefer lending only to the most qualified, established businesses. The SBA expands access to affordable financing to more business owners by offering a government loan guarantee—of up to 85% of the loan size—on the loan. If you default on the loan, it’s on the SBA to fulfill their guarantee—and pay back the lender.

Since the SBA absorbs some of the risk of default, lenders can work with riskier borrowers who otherwise wouldn’t have had access to the capital. The SBA works with a host of partner banks and lenders to get funds into the hands of small business owners.

How to Qualify for Government Business Loans

Government business loans are an excellent option for small business owners, but not everyone can obtain one. When borrowers default on their SBA loans, the SBA (because of the guarantee they provide) pays back the lender. This money comes from fees that borrowers pay at the outset, as well as from taxpayer dollars.

To reduce the cost to U.S. taxpayers, the SBA and banks set strict qualification requirements for SBA loans.

In general, you must meet the following requirements to qualify for a government business loan:

  • Strong personal credit score (over 650 preferable)
  • You must have invested your personal time and money in the business
  • You must have tried, unsuccessfully, to obtain other financing options (e.g. a local bank turned you down for a regular loan)
  • Business is profitable
  • Business is over two years old

SBA microloans, which we’ll discuss in a minute, have slightly easier requirements, but the one thing that doesn’t change across the different programs is strong personal credit. That’s a prerequisite to getting almost any type of government business loan.

Next up, we’ll provide specific details about each kind of government small business loan.

Government Business Loans: The Most Common Types

Banks and lenders provide government business loans through a variety of SBA loan programs, varying primarily in terms of the loan size and what you can use the loan for.

SBA 7(a) loans, 504/CDC loans, and microloans are the three main government loan programs for small businesses.

The SBA 7(a) Loan Program

The 7(a) loan program is the most popular SBA program that provides government loans for small businesses.

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How 7(a) Loans Work

7(a) loan is a term loan that can fit a wide variety of financing purposes. Many business owners use 7(a) loans as general working capital loans. The bank will lend you a lump sum of money, which you’ll pay back (plus interest) over a fixed repayment period.

Every year, the SBA facilitates over 60,000 SBA 7(a) loans. Business owners can borrow up to $5 million in capital, but in 2018, the average 7(a) loan size was $420,401.

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SBA 7(a) Loan Interest Rates

The SBA sets maximum interest rates on SBA 7(a) loans and assesses some fees. Both the interest rate and fees depend on your loan’s maturity and the size of the loan.

Interest rates may be either fixed or variable, but the maximums are tied to the prime rate. The prime rate is a market rate that fluctuates based on economic conditions.

For loans over $50,000, your interest rate cannot exceed the following:

  • Loans under seven years maturity: No higher than prime rate + 2.25%
  • Loans over seven years maturity: No higher than prime rate + 2.75%

The most common SBA 7(a) loan is a 10-year loan over $50,000. In that case, given the current prime rate, the SBA loan interest rate can’t exceed 7.5%.

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SBA 7(a) Loan Fees

The primary fee on an SBA 7(a) loan is the SBA guarantee fee, which varies as follows:

  • Loans under $150,000: 2% of the guaranteed amount of the loan
  • Loans $150,000 and up (loan maturity of one year or less): 0.25% of guaranteed amount
  • Loans $150,000 to $700,000 (loan maturity of more than one year): 3% of guaranteed amount
  • Loans $700,000 and up: 3.5% of guaranteed amount plus 3.75% on guaranteed amounts over $1 million

Note that the fee is assessed on the portion of the loan that the government guarantees, not on the entire loan amount.

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When to Get a 7(a) Government Business Loan

The SBA 7(a) Loan Program offers small business owners flexible and multi-purpose government small business loans. Use these loans for working capital, refinancing existing debt (in some circumstances), purchasing equipment or real estate, as a business construction loan, and more.

This federal business loan is best if you have general business financing needs and need a large loan to cover that need. Business owners in a more specialized situation, however, might want to check out some of the SBA’s more specific programs.

The SBA CDC/504 Loan Program

The SBA CDC/504 Loan Program offers specialized small business government loans for business owners who want to purchase or upgrade commercial facilities. You can use these loans to buy or renovate commercial real estate, warehouses, manufacturing facilities, equipment, heavy machinery, and other capital-intensive assets.

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How CDC/504 Loans Work

There are three different parties involved in an SBA 504 loan:

  • A Certified Development Company (CDC): CDCs are nonprofit, SBA-approved community lenders who support economic development and business development within the community. The CDC lends and guarantees 40% of the loan.
  • The bank: The bank lends 50% of the loan.
  • The borrower: The borrower puts down the remaining 10% as a down payment. For startups and certain types of projects, the borrower might have to put up a larger down payment.

These loans can reach over $13 million in funding depending on your industry and how many jobs you’ll help create along the way (or other public policies your project will benefit).

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SBA CDC/504 Loan Cost

Government small business loans from the CDC/504 program are subject to processing fees and origination fees, amounting to about 3% or 4% of the loan amount. Sometimes, you can roll the fee into the loan.

As for interest rates, the CDC and bank can charge different rates on each portion of the loan. The bank loan interest rates are negotiated between the bank and the borrower. The rates on the CDC portion of the loan are tied to the five-year and 10-year treasury notes. Currently, the interest rates are around 4% to 7% on the CDC portion.

The CDC portion of the loan is fixed-rate, but the bank might charge a variable interest rate on the bank portion of the loan. Generally, interest rates are low even on the bank portion because the property serves as valuable collateral for the loan.

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When to Get a CDC/504 Government Business Loan

These government business loans are a great option for businesses looking to buy or upgrade commercial real estate, equipment, machinery, or other capital intensive assets. SBA 7(a) loans can also be used for these purposes, but you’ll save a significant amount of money if you opt for a 504 loan for major asset purchases and upgrades.

One caveat is that these small business government loans can really take a long time to qualify for and fund. This is mostly due to the fact that local CDCs only accept a certain number of 504 loan applications, and the underwriting process through the CDC takes a fair amount of time. For instance, you’ll need to have a professional appraisal on the property before the loan closes.

SBA Microloan Program

With the SBA’s Microloan Program, the name says it all: These government small business loans are small—providing up to $50,000 in capital. This might be just enough to give your new company or a very small business a jump start. In fact, they’re probably your best option if you’re looking for a government loan to start a business.

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How SBA Microloans Work

If you’ve just started a business or have a nontraditional business—such as a food truck, freelancing business, or consultancy—it’s very difficult to qualify for business loans.

Lenders are wary of lending to young, new businesses because they’re riskier to lend to than older, more established businesses. There’s a big risk that the business will fold, and the owner will default, leaving the lender empty-handed.

If you’re in this boat, then a microloan from the SBA might be the right government small business loan for you. The SBA provides funds to nonprofit community-based organizations, and they determine which businesses qualify for microloan funds. With the microloan program, lenders provide loans as small as $5,000 and as large as $50,000 for small business owners. On average, though, an SBA microloan is about $14,000. If you’re looking for a government loan to start a business, a small-dollar microloan from the SBA could be a good fit.

As for repayment terms, the SBA sets a cap of six years for microloans.

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SBA Microloan Cost

Since the intermediary nonprofit lenders are making these loans, they will negotiate the repayment terms, interest rates, and fees with the borrower. But generally, you can expect an interest rate between 8% to 15%.

These lenders care less about your credit history and more about your business’s cash flow, other sources of income, and ability to afford the loan.

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When to Use an SBA Microloan

These government loans for small businesses are tailored to business owners who need a very small amount of capital. You can use them for working capital, to buy equipment or inventory, or to refinance existing debt. Another common use of microloans is to start a business.

SBA microloans are great government business loans for startup owners and self-employed individuals with very low capital requirements.

If you think this government business loan is right for you, check out the SBA’s list of intermediary microloan providers to find one in your area.

Additional Government Business Loans

The typical small business owner should apply for the SBA 7(a) loan, CDC/504 loan, or SBA microloan. However, there are some other specialized government loan programs that might also apply to your business.

And don’t forget, the SBA isn’t just about lending. They have a wealth of training and mentorship resources available to startups and small businesses, including women-owned businesses and minority-owned businesses.

Here’s an overview of other types of government loans.

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SBA Disaster Loans

Another type of government small business loan are SBA Disaster Loans, which are low-interest, long-term disaster loans for businesses that experienced physical damage or economic hardship due to a natural disaster.

Within these government loans, there are a few different types of SBA disaster loans. There are home and personal injury disaster loans, business physical property disaster loans, economic injury disaster loans, military reservists economic injury SBA disaster loans, and more. Obviously, each type of these government loans will be available to you depending on your specific need.

To apply, your business must be located in an office disaster zone. Refer to the SBA’s declared disaster index to make sure that you are, in fact, recovering from a declared disaster.

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SBA Import/Export Loans

These government loans provide financing for the suppliers, inventory, or production of export goods.

With these loans, the SBA works through a network of SBA Senior International Credit Officers located in U.S. Export Assistance Centers. These centers have experts in trade finance, which can be helpful for explaining the ins and outs of government loans for exporting.

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SBA Lines of Credit

From contract loans and seasonal lines of credit to working capital lines of credit, there are many CAPLines available to businesses that also meet 7(a) eligibility requirements.

These SBA lines of credit are great options for borrowers who can qualify for a 7(a) loan, but would like the flexibility of having access to a credit line.

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SBA Community Advantage Loans

The SBA Community Advantage Loan Program provides low-interest government business loans to businesses in underserved markets. You can qualify if more than half of your company lives in designated low-to-moderate income communities. This type of loan is also available to businesses that are owned and operated by women, minorities, and veterans.

Community advantage loans go up to $250,000. The maximum repayment term is 10 years if you’re using funds for working capital, and 25 years for fixed assets like real estate. The Community Advantage Program is a pilot program with funds available until September 30, 2022.

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USDA Government Loans

If your business is located in a rural area, defined as a location with 50,000 or fewer inhabitants, then you should consider applying for a business loan with the U.S. Department of Agriculture. Like SBA loans, USDA business loans are partially guaranteed by the government. A network of lenders and banks issue these loans to small business owners.

Government Small Business Loans for Bad Credit

You might be wondering if you can qualify for government small business loans with bad credit. As we mentioned earlier, you’ll qualify easiest for an SBA loan if your personal credit score is 650 or higher. That said, if other parts of your application are strong, it’s possible to get a government small business loan or government startup loan with bad credit.

Here are some tips if you’re looking for a government small business loan for bad credit:

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Provide More Collateral

If you have collateral to offer the lender, that can sometimes mitigate the effect of bad credit. This is particularly true if you have borderline bad credit. Lenders will be more willing to work with you if you can pledge valuable assets in exchange for the funding.

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Bring in Business Partners

The SBA requires any business owners who own at least 20% of the business to sign for the loan. However, if the primary applicant is a business partner with strong credit, that sets you up to qualify more easily for the loan.

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Improve Your Credit

Work on steadily improving your credit to increase your chances of qualifying for a government small business loan. Payment history is the biggest determinant of credit, so by paying all debts on time, you can improve your credit score. By paying your bills on time, you can sometimes see a positive change in your credit within a few weeks or months. Remember to regularly check your credit report. Building business credit can also help your company qualify for government financing if your personal credit is struggling.

Preparing Your Government Business Loan Application

As you know by now, government loans are a bit of a misnomer. The SBA doesn’t actually make the loans. Rather, the SBA guarantees loans that banks make. Both the SBA and the bank that issues the loan have specific paperwork requirements.

Banks are notorious for requiring a lot of paperwork. And the SBA sets regulations that require more paperwork. So, you can expect to spend a fair amount of time gathering documents for your government loan application. The processing time usually takes somewhere between four to 12 weeks.

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Government Business Loan Application Checklist

Here’s what you’ll need to prepare for a government small business loan application.

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Your Personal Background

You’ll be asked to provide previous addresses, names, criminal record, educational background, and personal financials. Certain types of crimes can disqualify borrowers from receiving an SBA loan, or delay the process.

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Resume and Business Background

You must provide a resume for yourself and anyone who owns 20% or more of the business. Resumes give the SBA an idea of how experienced you are in your small business’s industry and any previous business management experience you’ve had.

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Business Plan

No matter which government business loan program you apply to, you’ll need a well-thought-out business plan in your application. Your business plan should give three to five years of financial projections (future sales, profit and loss, cash flows, balance sheets, etc.) and qualitative, overarching goals for your business.

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Personal and Business Tax Returns

Most government loans for small businesses require borrowers to submit personal and business tax returns for the past three years (startups can provide fewer). As with your personal credit score, your personal tax returns might play a bigger role than you might have expected in the government business loan process.

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Financial Statements

After credit history, the most important part of your government business loan application is your financials. Lenders will want to see recent profit and loss statements, bank statements, balance sheets, and cash flow forecasts.

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While SBA loans don’t require collateral, your application will be stronger if you do have valuable personal or business assets (e.g. equipment, real estate, valuable inventory) to offer as collateral. And as we mentioned earlier, collateral may help you obtain a government small business loan with bad credit.

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Legal Documents

You’ll need to provide certain legal documents to prove that you’re operating your business legally and have all the certificates you need to conduct business. For example, you might need to show your articles of incorporation (for corporations), articles of organization (for LLCs), copies of your business license, or copies of important contracts with other parties.

Lenders might require additional paperwork beyond this. While paperwork might feel like the biggest pain point in receiving an SBA loan, it will be your friend in the end. By taking the time to gather all the required information, you secure an affordable loan product from the SBA.

Government Business Loans vs. Other Types of Business Loans

Small business government loans are some of the most desirable loan products on the market. A government business loan is almost always a small business owner’s lowest-cost, best option.

Small business owners have a hard time securing the financing they need to grow their companies, and government small business loans open a door to capital they couldn’t otherwise access.

But how do government loans for small business compare to other loans for small business?

Here’s a run-through of other business loan options.

Regular Bank Loans

Traditional bank loans are similar to SBA loans in terms of interest rates, repayment periods, and the application process. However, regular business loans don’t come with the government guarantee.

As a result, you might find that it’s harder to qualify for traditional bank financing. That’s because the SBA’s guarantee encourages lenders to make loans to business owners who otherwise wouldn’t qualify for capital.

Medium-Term Loans

Medium-term loans are similar to SBA loans, but offer the advantage of speed. These come from online lenders, such as Funding CircleLending Club, and Fundation.

Online term loans fund much more quickly than government small business loans, but they offer less capital than SBA loans, shorter repayment periods, and higher interest rates.

Loan amounts on online term loans go up to about $1 million, have interest rates ranging from 7% to 30%, and have terms of one to five years.

Lines of Credit

If you’re looking for a little more flexibility than what a government small business loan can offer, then a business line of credit might be a better product for your business.

A line of credit gives you access to a pool of funds you can use for your business—whenever you need to. You’ll only pay interest on what you draw, when you draw, so if you don’t tap into your line of credit right away, it will sit in your account until you decide to use it.

Once you do draw from it, you’ll repay what you drew over a set amount of time. When you’ve repaid what you drew in full, your line of business credit resets to its original amount. If your line of credit is a revolving line of credit, you can use your funds again after you repay fully.

This type of loan product offers flexibility that government business loans generally don’t have, (unless you go for an SBA CAPLine).

Plus, depending on how qualified you are as a borrower, business lines of credit can offer similar loan amounts and only slightly higher interest rates than what you’d get with a federal small business loan. The SBA, banks, and online lenders offer business lines of credit.

Short-Term Loans

If you’re considering a government loan to buy inventory or supplies or to cover seasonal cash flow gaps, then a short-term loan might be an alternative option for you.

Short-term loans, like medium-term loans, fund very quickly, and the application process is very easy. These lenders work with less creditworthy borrowers, so they might be a choice if you’re having trouble qualifying for a government business loan with bad credit.

Amounts range from $5,000 to $500,000, and the repayment term ranges from three to 18 months. Just be prepared to pay much higher interest rates compared to government business loans.

The Bottom Line on Government Business Loans

Government business loans should be top of mind for every business owner during the search for financing. These loans offer long repayment terms and some of the lowest interest rates around. However, government-guaranteed business loans are not right for everyone and do have some disadvantages. For instance, the application process is long, and it’s really difficult to qualify. At the end of the day, whichever type of loan you decide to get, it should be right for your business and help you meet your goals.

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