How to Apply for a Government Small Business Loan
In short, government business funding can make a huge difference for your business—if you can navigate the process of obtaining it.
To help you with that, in this post we’ll review what these loans are, how they work, the most popular options, and their pros and cons. We’ll wrap up with a discussion of alternative financing options.
What Are Government Small Business Loans?
Government small business loans include any type of financing that’s guaranteed by the Small Business Administration (SBA). Note that, with government business loans—also called SBA loans—the government isn’t actually lending the money.
Instead, the SBA partners with banks and credit unions. These financial institutions are the ones that lend the money to small business owners and the SBA partially guarantees the loan. Depending on the loan program, the guarantee covers between 50 and 90 percent of the loan amount.
Therefore, if the borrower defaults, the SBA reimburses the small business lender for the guarantee amount. However, the borrower is still obligated to repay the full amount due.
Because the SBA guarantee reduces the lender’s downside risk, business lenders are more willing to approve the loan.
Popular Government Business Funding Options
There are a wide variety of federal government business loans that provide the financial assistance you need to start a new venture or expand an existing one. Some of the most popular government lending programs include:
- Standard 7(a) Loans: the SBA’s standard loan program that provides loans of up to $5 million.
- 7(a) Small Loans: 7(a) loans with a maximum loan amount capped at $350,000.
- SBA Express: an expedited program designed to provide small businesses with loans and lines of credit up to $350,000.
- Export Express: a streamlined financing option for exporters to obtain loans and lines of credit up to $500,000.
- Export Working Capital: for businesses that can generate export sales and need additional working capital to support these sales.
- International Trade: for export business expansion or exporters adversely affected by imports.
- CAPLines: for short-term and cyclical working-capital needs
How the Government Business Loan Application Process Works
If you’re familiar with the private business loan application process, the government loan application process will look familiar. The main difference is that, with a government loan, you need to choose an SBA program, find an SBA lender, and submit documentation to the SBA.
1. Pick your program and determine eligibility
To choose the program(s) that might be right for you, use the SBA’s Funding Programs page to learn more about their various programs. Once you’ve chosen a program, look through its eligibility requirements and ensure you meet the requirements.
2. Find and vet an SBA lender
Not every lender is an SBA partner, so to find one near you, we recommend starting with the SBA’s Lender Match. Ideally, you’ll compile a few options, then you can read our post, 6 Things to Look for in the Best Business Lenders to narrow your choices to the best option.
3. Gather documentation and submit loan application
Just like a private loan, government business funding requires documentation specific to the loan program. To determine which forms you’ll need for your program, read our Ultimate Guide to SBA Loan Forms. Also, you should ask your lender what documentation or forms they’ll need from you.
The Pros and Cons of Government Business Funding
The Pros of Government Business Funding
1. Easier to Qualify For
Generally speaking, government business funding is easier to qualify for. According to the SBA, to be eligible, a business must:
- Operate for profit.
- Be engaged in, or propose to do business in, the U.S. or its territories.
- Have reasonable owner equity to invest.
- Use alternative financial resources, including personal assets, before seeking an SBA loan.
2. Special Programs for Veterans and Exporters
Also, there are government programs designed especially for businesses that export goods or otherwise engage in international trade. These programs are specifically designed to help develop or expand export activities. Similarly, through the Veteran’s Advantage program, servicemembers can access SBA loans with reduced fees.
3. Lower Interest Rates and Down Payments
Since the SBA loan guarantee reduced the lender’s downside risk, SBA loans have some of the most competitive interest rates you can find. Also, while the down payment requirement varies by program, SBA loans have lower down payments than most other loan options.
For example, SBA 504 Loans require a down payment of 10 percent and the Export Working Capital Program requires no down payment.
The Cons of Government Business Funding
1. Extra steps in the application process
As you can see in our section on how to apply, there are a few extra steps involved in government funding applications. Both your lender and the SBA need to approve your application. Plus, the SBA requires documentation that you might otherwise not need to provide to a non-government lender.
2. Less flexible funding options
While government agencies offer several loan programs, that doesn’t mean they have the one for you. Government business programs don’t offer many popular financing options such as merchant cash advances, invoice financing, bridge loans, and more. Also, depending on the loan program, your use of funds may be heavily restricted.
3. Personal guarantee required
Anyone who owns 20 percent or more of your small business, must provide an unlimited personal guarantee. When you provide a personal guarantee, your lender has the legal right to pursue your personal assets (including your home) to recoup their losses if you default.
Conclusion: Explore Alternative Financing Options Too
There’s certainly nothing wrong with government business funding. If you can get approved for government-backed funding, you simply won’t find a lower-cost loan.
Still, the loan application and funding process are slow. Plus, certain eligibility requirements of different programs may disqualify you. Yet even if you are eligible for a government loan, you should at least explore alternative financing.
Generally speaking, alternative financing encompasses any type of financing that comes from an institution other than a credit union or bank. These lenders offer more accessible and flexible financing. You can read more about the pros and cons of various alternative financing options by clicking the links below:
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.