Government Small-Business Loans: What You Need to Know

Small businesses employ nearly half the private sector work force in the U.S. and provide 66% of all new jobs.1 But without hundreds of billions of dollars in government small-business loans, those numbers would likely be much lower.

The U.S. government knows many potential entrepreneurs and small businesses don’t have the means to secure traditional financing for their business goals. They also recognize that small businesses play a vital role in our nation’s economic development—that’s why they help provide small-business loans. Whether you’re a veteran, a minority, an active member of the military, a victim of disaster, or even just a small-business owner looking to get ahead, there are government small-business loans available to help you increase inventory, hire employees, expand your business, and much more.

The money is there, but you have to do your part: to get guaranteed loans backed by the government, you need a U.S.-based business, a strong business plan, and decent credit, plus you must have exhausted all other available sources of funding. Specific loans may have additional eligibility requirements based on your business location or a minimum personal guarantee.

Hint

If you’re just starting to research small-business loans, try seeing if you qualify for commercial loans before exploring government small-business loans.

There are many types of government small-business loans, so let’s explore the options.

What Is a Government Small-Business Loan?

A government small-business loan is a last resort option for eligible small-business owners who can’t get financing from private lenders. Agencies like the Small Business Administration and the USDA guarantee a certain percentage of the loan amount and partner with qualified lending institutions to set guidelines and terms for the loans.

Government Small-Business Loans

Loan nameLoan purposeLoan minimum/ maximumLowest listed rateGet a loan
SBA 7(a) LoanGeneral working capital, debt repayment, business expansion$0–$5 million7.5%Apply now
SBA CAPLine ProgramShort-term cash flow for fast returns$0–$5 million5.75%Apply now
CDC/SBA 504 LoanExpansion, modernization, real estate and equipment$0–$20 million4.5%Apply now
SBA Export LoanFacilitating exports$0–$5 million5.75%Apply now
SBA MicroloanFacilitating smaller loans between nonprofit lenders and smaller businesses$0–$50,0008%Apply now
SBA Disaster LoanWorking capital or rebuilding and repair for disaster relief$0–$2 million4%Apply now
USDA LoansSaving or creating jobs in rural businesses $0–$5 million5%Learn more

SBA 7(a) Loan

As the SBA’s most popular program, the 7(a) Loan is designed to get you over whatever financial hurdle your business might be facing. It offers up to $5 million in funds for a wide variety of spending options. You can use the funding to expand your business or refinance debt, or you can use it as working capital. The 7(a) has lower down payments and longer terms than most traditional business financing, giving you lower upfront costs and lower monthly payments. Depending on the lender, you may have fixed-rate financing or a variable rate, and your monthly payments will include both principle and interest.

1. Express Loan Program

7(a) loans also have an Express Program, where your loan can be fast-tracked for a 36-hour response time if you’re okay with a capped loan amount ($350,000 max) and a higher interest rate.

2. Advantage Loan Program

If you’re operating your business in a low-income market, you may not qualify for a traditional 7(a), but an SBA Advantage Loan (also part of the Express program) can get you up to $250,000 to grow your business.

3. Veterans Advantage Lending Program

This program gives veterans access to small-business loans up to $350,000, with no upfront guarantee fees for loans over $150,000. To qualify for this loan, your business must be at least 51% owned by veterans who have been honorably discharged, active duty military, service-disabled veterans, reservists/active National Guard members, or a current or widowed spouse of any of the above. Loan applications are just two pages long and also have a quick turnaround.

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SBA CAPLine Program

The CAPLine program is another sub-program under the 7(a) umbrella, but it’s a line of credit for short-term needs. It’s a great option for when you need quick cash that you know will bring you relatively quick returns. It includes five different available credit lines:

1. Seasonal

The Seasonal line of credit is for expenses associated with replenishing inventory and covering additional labor costs during busy times of the year, so you can better handle the heavier financial load without too much strain on your bottom line.

2. Contract

A Contract line of credit offers funding to pay for specific, short-term contracted labor or freelance work small businesses may need.

3. Builders

A Builders credit line is for contractors renovating or constructing buildings. The funds can be used to pay workers and purchase materials, equipment, and real estate.

4. Standard Asset-Based

A standard asset-based line of credit is for small businesses that can’t get traditional long-term loans. Instead, businesses use this line of credit to invest in the business, and they continue to repay the revolving loan as their cash flow allows. This loan is primarily for small businesses that offer financing to clients.

5. Small Asset-Based

Small asset-based loans are also for small businesses who can’t get traditional long-term loans but don’t need as much money. These lines of credit have more relaxed requirements than the standard asset-based line of credit, as long as the business demonstrates a good repayment record.

CDC/SBA 504 Loan

SBA 504 Loans are for expanding your business through real estate or property improvement, which is why they’re supported by local community development corporations (CDCs). You’ll put down 10%, and a bank will split the remaining 90% with a CDC. If you use the 504 to purchase real estate, you’ll enjoy a longer 20-year term; for machinery and equipment, the term will be 10 years. All 504 interest rates are fixed, so you’ll never have to worry about a balloon payment, but keep in mind that you’ll need to prove that the projected cash flow from your business will be sufficient to repay the loan within the term.

To qualify for a 504, your business must be worth less than $15 million, with an after-tax net income of no more than $5 million.

SBA Export Loan

If you’ve been in business for at least a year and you need some extra funds to start exporting goods or to develop your exporting program, then an SBA Export Loan might be right for you. There are three different programs under the Export Loan umbrella:

1. Export Express Loan

An Export Express Loan offers a faster approval process for export loans up to $500,000.

2. Export Working Capital Loan

An Export Working Capital Loan can get you up to $5 million in working capital to fund transactions for suppliers, inventory, and production.

3. International Trade Loan

An International Trade Loan gets you up to $5 million to develop or expand export markets, especially if you’ve been negatively impacted by import competition and can demonstrate how the funds will help you become more competitive. You can also put the money toward acquiring and upgrading facilities and equipment used for international export.

SBA MicroLoan

Get an SBA Loan
SBA 7(a) Loan
CDC SBA 504 Loan
SBA CAPLine Program
SBA Export Loan
SBA Microloan
SBA Disaster Loan

Unlike other loans that the SBA guarantees for the duration of the term, a MicroLoan has involvement from the SBA only at the beginning. The SBA matches non-profit lenders with businesses that have smaller financing needs, like home-based businesses and other non-profit organizations. This loan is designed to be of particular assistance to low-to-moderate income business owners, veteran-owned businesses, minority-owned businesses, and women entrepreneurs.

The maximum term on a MicroLoan is six years, and the maximum amount is $50,000, though the average MicroLoan is around $14,000. You’ll pay a higher interest rate with a MicroLoan, but it also comes with some bonuses in the form of small-business training. MicroLoan programs offer educational opportunities in small-business management, marketing, and technical skills.

SBA Disaster Loan

There are three different types of SBA Disaster Loans, each for different potential disaster scenarios. Fortunately, since these scenarios often occur in tandem, you can access all three Disaster Loans simultaneously if needed. Keep in mind that to qualify for these low-interest loans, your business must be located in a declared disaster area, and you should apply directly through the SBA.

1. SBA Economic Injury

The Economic Injury Loan gives you a short-term loan of working capital to help your business stay open during an economic slump caused by a disaster, even if your business didn’t suffer physical damage.

2. SBA Military Reservists Economic Injury

The Military Reservists Economic Injury Disaster Loan (MREIDL) is for when you lose an employee because they’re called up to active military duty. It’s also a short-term loan.

3. SBA Business Physical Disaster

If your business gets hit by severe weather—or even a runaway car—then a Business Physical Disaster Loan can help. These loans offer long-term financing and low rates to reduce the economic impact on your business after a damaging event.

Researching different types of SBA business loans can help you choose which option is best for you.

USDA Loans

The USDA offers loans similar to—but separate from—those offered by the Small Business Administration. If you operate your business in a rural area, you may qualify for a Business and Industry (B&I) Loan through the USDA. These loans are designed to encourage regional growth by bolstering any businesses that save or create jobs in areas that are typically lacking in employment opportunities. Wholesale, retail, manufacturing, and service industries are all eligible, but there are some restrictions based on the size of businesses in certain industries.

B&I Loans are administered through local loan specialists. Because they’re guaranteed through the USDA, lenders can actually lend higher amounts, since the portion that’s guaranteed by the USDA doesn’t count against their lending limits.

Like SBA loans, USDA loans have better pricing and terms than conventional loans: they’re fully amortized with no big balloon payments at the end, and the interest rates can be either variable or fixed. The loan term for working capital is 7 years; for machinery and equipment, it’s 15 years or its useful life (whichever is less); and for real estate, it’s 30 years.

Hint

To qualify for a B&I Loan, you have to conduct business in a qualified area.

The Takeaway

If you’ve exhausted all other financial resources and you need an affordable loan, applying for a government small-business loan is a smart next move. With such a wide variety of loan options, you’re bound to find one—or more—that might fit your business goals, whether you have a business start-up or an established entity. But remember, as they say, “Terms and conditions apply,” and federal government loans are no exception (in fact, they probably invented that phrase). Check over eligibility requirements carefully, watch your credit score, and prepare a strong business plan to present your case. With careful preparation you could be one of the millions of small business owners reaping the benefits of a government-backed small-business loan.

 

Disclaimer

Terms, conditions, rates, and limits were all accurate at the time of the writing of this article. To ensure you’re getting the most current information, please visit government agency websites for any recent updates.

Sources

  1. U.S. Small Business Administration, “What’s New with Small Business?