The Ultimate Guide to Government Business Loans

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Government Small Business Loans Overview

If your business has been affected by the coronavirus outbreak, refer to our guide to coronavirus business loans.

If you’re looking for a small business loan, you might find yourself asking: How do I get a business loan from the government? Although the U.S. government doesn’t do much direct lending, there are government programs available that help small business owners access affordable financing solutions. The most common of these programs is the SBA loan program, where the Small Business Administration partners with banks and lenders to provide long-term, low-interest government loans that business owners can use for a variety of purposes.

In this guide, we’ll explain how these government small business loans work, what the best options are, and what you need to qualify and apply.

Best Government Small Business Loans

  • SBA 7(a) Loans: Best for business owners to fund a variety of purposes
  • SBA CDC/504 Loans: Best for business owners looking to finance a large real estate or similar project
  • SBA Microloans: Best for smaller needs and great for startups and new businesses
  • SBA Disaster Loans: Best for business owners who have experienced physical or economic damage due to a declared disaster
  • Additional Government Loans: Best for business owners with very specific needs
See Your Loan Options

How Government Small Business Loans Work

As we mentioned above, the government doesn’t typically lend directly to small businesses. However, there are instances where government agencies partner with banks and other lenders to provide funding. The most common of these programs is the SBA loan program.

As the name implies, the Small Business Administration (SBA) is a government organization designed with the purpose of supporting and assisting small businesses. In addition to their loan program, the SBA offers events, training, and other resources to help small business owners succeed.

Therefore, if you’re interested in government small business loans, you’ll want to turn your attention to SBA loans. With SBA loans, you’ll find financing with low interest rates, high loan amounts, and long terms—and, although these loans aren’t necessarily easy to qualify for, they are a top option for business owners who have been denied for traditional bank loans.

Overall, bank lenders are hesitant to lend to small businesses because they consider them risky investments. The SBA, therefore, 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.

Therefore, since the SBA absorbs some of the risk of default, lenders can work with riskier borrowers who otherwise wouldn’t have had access to that capital. However, it’s important to remember that (with the exception of the SBA disaster loan program) the SBA doesn’t directly lend these government business loans.

Instead, they work with partner banks and other lenders who offer loans within their programs.

The Best Options for Government Business Loans

Let’s explore your best options for government small business loans.

Ultimately, banks and lenders offer these loans through a variety of SBA loan programs, varying primarily in terms of the loan size and what you can use the loan for.

On the whole, SBA 7(a) loans, 504/CDC loans, and microloans are the three main government loan programs for small businesses—and therefore, will be your top choices if you’re looking for financing.

This being said, however, there are other government business loan programs worth considering depending on the specific needs of your business—including the SBA disaster loan program, Community Advantage program, and more.

Let’s learn more about each of these programs.

SBA 7(a) Loan Program

The SBA 7(a) loan program is the most popular SBA program.

The SBA 7(a) loan is a term loan that can fit a wide variety of financing purposes. These government small business loans can be used for working capital, buying equipment, buying an existing business, and more.

You can apply for an SBA 7(a) loan in amounts up to $5 million and repayment terms will range from seven to 25 years, depending on the purpose.

This being said, there are actually a variety of different types of 7(a) loans, however, overall, they each work like a typical term loan—the bank will lend you a lump sum of money, which you’ll pay back (plus interest) over a fixed repayment period.

As part of the way these government business loans work, the SBA sets maximum interest rates on 7(a) loans and assesses some fees. Both the interest rate and fees, however, will depend on your loan’s maturity and the size of the loan.

Overall, 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. Therefore, the interest rates you’ll see on these loans will range from prime rate + 2.25% to prime rate + 4.75%.

Ultimately, the SBA 7(a) Loan Program offers small business owners flexible and multi-purpose government small business loans. This loan will be one of your best options 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.

SBA CDC/504 Loan Program

Next, you might look into the SBA CDC/504 Loan Program as one of your best options for government small business loans.

This program offers specialized 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.

With this in mind, it’s important to explain how SBA CDC/504 loans work. Unlike SBA 7(a) loans, which come directly from a bank or other SBA-lending partner, SBA CDC/504 loans have three different parties involved: A Certified Development Company (CDC), a bank, and the borrower.

CDCs are nonprofit, SBA-approved community lenders who support economic development and business development within the community. The CDC lends and guarantees 40% of these loans. Next, the bank lends 50% of the loan, and finally, you, the borrower put down the remaining 10% as a downpayment.

These loans can come as high as $20 million, with repayment terms of 10 to 25 years. Due to the way these loans work, interest rates will depend on both the CDC and the bank you work with. Each of these parties can charge different rates. This being said, however, the bank loan interest rates are negotiated between the bank and the borrower, whereas the rates on the CDC portion of the loan are tied to the five-year and 10-year treasury notes. Currently, the SBA loan rates are around 4% to 7% on the CDC portion.

As you might imagine, these government business loans are a great option if you’re 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 to keep in mind, however, is that these small business government loans can 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.

SBA Microloan Program

If you have smaller financing needs, you might consider the SBA Microloan program for your government small business loan. These loans, as their name suggests, provide small amounts of capital, up to $50,000.

With the SBA Microloan program, the SBA provides funds to nonprofit community-based organizations, and they determine which businesses qualify for these microloan funds. Therefore, if you were interested in this program, you’d apply with a nonprofit community lender in your area and they would work with you to determine your qualifications, loan amount, terms, and interest rates.

This being said, however, the SBA does set a maximum of six years for repayment terms for microloans. Additionally, although interest rates will vary, you can generally expect them to fall between 8% and 15%.

Ultimately, the microloan program is well-suited for business owners who need a very small amount of capital. These government business loans can be used for working capital, to buy equipment or inventory, or to refinance existing debt. Moreover, these loans are great options for newer businesses and are likely an ideal choice if you’re looking for a government loan to start a business.

SBA Disaster Loans

Another type of government small business loans to consider is SBA disaster loans, which are low-interest, long-term loans for businesses that experienced physical damage or economic hardship due to a declared disaster—like an earthquake, hurricane, or global pandemic.

Unlike the other types of government business loans we’ve discussed thus far, SBA disaster loans are actually funded and issued by the SBA. Therefore, whereas other SBA loan programs require you to work with an SBA lending partner to apply and receive funds, eligible businesses can apply for disaster loans with the SBA directly.

This being said, within this government loan program, there are actually a few different types of SBA disaster loans:

  • Home and personal injury disaster loans: Available to homeowners and personal property owners who need funding to repair or replace their primary residence or other personal property that was damaged or destroyed in a disaster
  • Business physical property disaster loans: Available to businesses who need financing to repair or replace their physical property that was damaged or destroyed in a disaster
  • Economic injury disaster loans: Available to small businesses who have experienced a severe slowdown in business as a result of a declared disaster and therefore, need financial assistance; businesses who have been affected by the coronavirus outbreak can apply for EIDLs
  • Military reservists economic injury disaster loans: Available to businesses who are unable to meet their ordinary operating expenses because an essential employee has been called to active duty as a military reservist

As you can see, each of these loans accommodates a specific need due to a specific set of disaster circumstances. Overall, however, excluding the home and personal injury disaster loans, the remaining three types of SBA disaster loans are available to affected businesses in amounts up to $2 million and repayment terms up to 30 years.

The interest rates on these loans are generally not higher than 4%.

With all of this in mind, however, to qualify for this specialized subset of government business loans, your business must be located in an official disaster zone. You can refer to the SBA’s declared disaster index to make sure that you are, in fact, recovering from a declared disaster.

On the whole, the qualification requirements of an SBA disaster loan are similar to any other SBA loan program, although there will be disaster-specific information you’ll have to provide in your application. Overall though, if you’re looking for funding to recover from a disaster, you’ll find that these types of government small business loans are going to be one of your most affordable options.

    SBA Express Bridge Loans

    Although not technically part of the SBA disaster loan program, it’s worth mentioning the SBA Express Bridge Loan program as another type of government small business loan.

    Unlike the other types of SBA disaster loans, SBA Express Bridge Loans are funded by participating SBA Express program lenders. This being said, these government business loans are designed to provide interim financing to businesses that are located in disaster areas.

    As an example, businesses looking for government loans for coronavirus can apply for an SBA Express Bridge Loan to receive faster financing while they’re in the process of applying for an EIDL or other longer-term loan.

    Express Bridge Loans are available in amounts up to $25,000 with terms up to seven years. The interest rates on these loans will vary based on the lender, however, SBA guidelines prevent the rates from exceeding the prime rate + 6.75%.

Additional Government Business Loans

Finally, although these SBA programs will likely be your top options for government small business loans, it’s also worth exploring some of the more specialized programs that are available.

There are additional SBA loan programs, designed for very particular purposes, as well as a USDA program that you might consider based on your business’s financing needs.

Let’s learn more.

    SBA Import/Export Loans

    These government small business 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.

    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) loan 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 revolving credit line.

    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.

    USDA Government Loans

    If your business is located in a rural area, defined as a location with 50,000 or fewer inhabitants, then you might 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 government loans to small business owners.

How to Qualify for Government Small Business Loans

There are a number of different factors that will determine whether or not you can qualify for an SBA or other government loan—including the program you’re interested in, the lender you’re working with, and of course, your business qualifications.

Because SBA loans offer such affordable financing (and are partially guaranteed by the government) there are overarching SBA loan requirements you’ll need to meet to qualify. Overall, although these loans are easier to qualify for than bank loans, they’ll still call for good credit and strong business financials—and therefore, not every business will be able to qualify.

In general you can expect to need to meet the following requirements to qualify for any of these government business loans:

  • Strong personal credit score (over 650 preferable)
  • For-profit, U.S.-based business in an eligible industry
  • Be considered a “small business” by SBA standards
  • Have invested your personal time and money in the business
  • Have tried, unsuccessfully, to obtain other financing options (e.g. a local bank turned you down for a loan)
  • Have two or more years in business (the SBA has no official requirement here, but usually lenders will require two or more years)
See Your Loan Options

How to Apply for Government Small Business Loans

If you think you can qualify for any of these government small business loans, the next important thing to understand is the application process.

As a reminder, you’ll likely be working with a bank or other lender to submit and process your application—the SBA doesn’t actually make loans. Once again, the exception to this rule is the SBA disaster loan program, in which the SBA will issue loans and directly accept applications. This being said, however, in most cases, both the SBA and the lender that issues the loan will have specific requirements for your application.

On the whole, SBA loans will require significant documentation and are known for their time-consuming application processes. Plus, even after you submit your application, it will likely take time for the lender to underwrite your loan, present you with an offer, and close the deal. Overall, SBA loans can take 30 or more days to fund.

Nevertheless, the SBA loan application process should not deter you if you think you can qualify—after all, these government business loans will offer some of the most desirable terms and rates on the market.

With this in mind then, although the specifics of your application will largely depend on your loan program and lender, you can expect to provide the following:

    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.

    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.

    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.

    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 application process.

    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.

    Collateral

    Although SBA loans don’t require collateral, your application will be stronger if you have valuable personal or business assets (e.g. equipment, real estate, valuable inventory) to offer as collateral.

    Along these lines, it’s also important to mention that regardless of if you do or don’t provide physical collateral, you’ll need to sign an SBA loan personal guarantee to secure your loan.

    Legal Documents

    Finally, you’ll need to provide certain documents to prove that you’re operating 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.

Frequently Asked Questions

The Bottom Line

At the end of the day, government small business loans should be top of mind for every business owner during their search for financing.

These loans, namely SBA loans, offer long repayment terms and some of the lowest interest rates on the market.

This being said, however, due to the necessary qualifications and lengthy application process, government-guaranteed business loans will not be right for everyone. Therefore, if you don’t think an SBA loan will work for your business, you may consider other funding avenues—like exploring term loans, lines of credit, or asset-based financing from online, alternative lenders.

Ultimately, you’ll want to consider your business’s financial needs and goals before applying to any type of loan. If you compare all the options to see what you can qualify for, what you can afford, and what will help you grow, you’ll find the best solution for your business.

See Your Loan Options
Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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