Government-Backed Business Loans: What Are They?

Government-backed business loans are small business loans guaranteed by the US government and granted through qualified lending institutions. The most common type of government-backed loan is a U.S. Small Business Administration (SBA) loan. The SBA has many programs and financing options for small business owners to suit diverse business needs, offering low-interest rate loans (such as term loans, microloan program and refinance loans) depending on loan amount. Like other traditional bank loans such as bank loans and loans from credit unions, SBA loans have requirements such as down payment, credit report, an active bank account, minimum credit score and cash flow requirements. Almost all of the loans backed by the SBA are fixed-rate loans.

The United States Government has several financial programs (government-backed business loans) in addition to the SBA, available to business owners of all types. There are loan programs catering to a wide variety of funding options. Many of them are targeted at small businesses specifically, but others exist that are in place to promote economic growth and stability in certain areas or parts of the population. The loans don’t come from the government, they’re made by banks and other lenders. Unlike like other traditional bank loans, the lender that issues a loan as part of a government program has at least partial assurance that their funds will be recovered if the borrower defaults on their commitments.

Knowing all of this, how would a business owner (or potential business owner) go about applying for and receiving a government-backed loan? How can you decide if you qualify, or if a loan program from the federal government is even the right choice for your business? In this article, we’ll outline some of the loan programs offered by the government and the requirements business owners have to meet to apply for them. Unfortunately, government-backed loans are not a good option for business owners with bad credit.

Government-Backed Business Loan Types

There are a lot of types of loans out there for small businesses – it can be overwhelming to deal with. The most comprehensive overview of these loan programs can be seen at GovLoans.gov. Even with this resource, it can be unclear which programs are covered or what the difference is between the various government agencies that are involved.

The Small Business Administration (SBA) is by far the most well-known government agency involved in loans and lending assistance. Some of the programs offered by the SBA Loan program include:

  • SBA 7(a): This loan is the most popular and least restrictive program offered by the SBA. It provides funding to small businesses that need working capital up to a limit of $5 million.
  • SBA Microloan: As the name suggests, these loans are very small compared to their SBA counterparts. Businesses seeking funding up to $50,000 can apply for a Microloan.
  • SBA Disaster Loan: In areas that have been affected by a natural disaster (declared by the government), businesses can apply for an SBA Disaster Loan, which can provide funding to rebuild and help get the company back on its feet.
  • SBA 504 Loans: Provided specifically to help purchase commercial real estate.

Even though the SBA is the most prominent government agency when it comes to business loans, there are several others that offer backing for business loans relating to economic development and support of the communities and places that agency was set up to serve. Great examples of this are:

  • Indian Loan Guaranty, Insurance, and Interest Subsidy Program: Managed by the Bureau of Indian Affairs this program aims to help businesses owned by Native Americans to obtain financing.
  • Business and Industrial Loans: Designed to improve economic health in rural areas, generate employment, and finance a new or existing business’ growth and improvement.

Who Qualifies for Government-Backed Business Loans?

As you can imagine, loans backed by a government agency can have very exacting standards for who can qualify for a loan and what the money can be used to do. There are several questions to ask before you can determine if a government-backed loan is an option for you:

    • What type of business do you run or plan to run? SBA loans specifically exclude businesses engaged in lending, life insurance, lobbying, gambling, and some forms of investment (speculation and passive income). Certain lenders for both SBA and other government-backed loans may have their own subset of requirements, so it’s important to understand your business before applying.
    • How big is your business? The Small Business Administration helps small businesses, right? Depending on the industry you’re in, small business could mean a variety of things. The SBA defines small business in a few ways, again determined by industry:
      • Number of employees: ranges from under 100 to under 1,500 employees
      • Revenues: ranges from $750,000 to $38.5 million annually
      • Net worth: $15 million and under or less than $5 million net annual income
    • How strong is your business plan? Great ideas are incredible, but without a business plan they’re just dreams in someone’s head. Both the lender and the agency backing the loan will require a business plan to show that the money they’re issuing is going to someone that has a roadmap for their company and that will use the funds appropriately.
    • Check your background. Nearly all government-backed loans have personal credit standards, criminal background restrictions, business credit requirements, and many have some degree of interest in the professional backgrounds of the people running the business. This ensures that the person getting the loan is qualified, trustworthy, and not in legal trouble!
    • Bring your paper trail. In addition to all of the above, you’ll need to gather tax returns, bank statements, and other related business records to apply for a government-backed loan. Existing businesses will be asked to prove that they are not already in significant debt and show that their administrative house is in order.
  • Where to Get a Government-Backed Loan

You’ve decided that you qualify for a government-backed loan. Now, the question is where to get one! Several banks and alternative lenders provide these kinds of loans, many of which were set up specifically to work with government-backed loans. That said, not all lenders are equal, and some have better track records than others. It’s important to carefully read the disclosures and take note of any reviews that exist about the lender you’re considering. The SBA and other government agencies will generally provide their “stamp of approval” for a lender, meaning that there is an agreement in place for that entity to provide funding for government-backed loans and that the lender’s staff has been trained in the requirements and structure of lending programs.

Government-backed loans can be very helpful to businesses that are in need of growth or founding capital but can also be difficult to obtain, as we’ve seen in this article. As we always advise, doing your research is extremely important, especially when considering a major financial commitment. A major advantage of government loan programs is that there is extensive documentation and official pages to conduct research and make sure you’re getting into the loan program that is right for your business.

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