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The SBA and USDA offer loans to assist entrepreneurs and business owners who need funding.
Financing is an essential step for any company and may include finding business investors or applying for a business loan. Entrepreneurs seeking loans might turn to a bank automatically, but another significant capital funding source exists for businesses: The federal government.
Several loan programs are available to startups and growing businesses and understanding which ones suit your needs is vital to unlocking additional capital for your venture. We’ll examine popular federal loan programs and explain how they work, how to qualify and how to apply for them.
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Government loan programs are available through the federal Small Business Administration (SBA) and the United States Department of Agriculture (USDA) for qualifying businesses that intend to use the funds for specific purposes, such as purchasing equipment, expanding operations or boosting working capital.
Government loan programs are available through the federal Small Business Administration (SBA) and the United States Department of Agriculture (USDA) for qualifying businesses that intend to use the funds for specific purposes, such as purchasing equipment, expanding operations or boosting working capital.
SBA loans are provided by banks and other lenders, including community development organizations and microlenders. However, the federal government guarantees a portion of the loan, lowering lender risk. “The main benefit of these loans is they offer small businesses the opportunity to receive financing on terms more favorable than they would otherwise receive with the SBA guarantee,” Haverty explained.
Here’s an overview of the most popular SBS loan programs:
The SBA 7(a) loan is one of the most popular and flexible federal loan programs. It’s generally used to help minimize startup costs or assist growing businesses and can be used for the following purposes:
The SBA will guarantee up to $5 million for this type of loan. If you’re looking for a loan of $350,000 or more through this program, the SBA will require your lender to ask for the maximum possible amount of collateral to offset the risk of default. Note that borrowers must meet specific criteria, such as size standards and creditworthiness.
The 504 loan program is intended for businesses that will directly benefit their communities by creating jobs or filling a much-needed demand in the local market. These loans have a fixed rate and are intended for long-term financing. The maximum value is $5.5 million.
Typically, when a 504 loan is funded, the lender will initially cover 50 percent of the borrower’s costs, the SBA will cover 40 percent and the borrower will be responsible for the remaining 10 percent of financing the project. The borrower must personally guarantee at least 20 percent of the loan.
The SBA’s microloan program is often used for short-term financial needs, such as bolstering inventory or furnishing office space. The maximum amount for this type of loan is $50,000.
The SBA Express loan program is a good option for business owners who need a fast business loan. SBA Express applications are reviewed within 36 hours, although it may still take at least 30 days to receive funds.
Loans of up to $500,000 are available to SBA Express financing applicants, but collateral may be required for loans over $25,000. An SBA Express loan can be used as working capital (five- to 10-year term), as a line of credit (seven-year term) or as a commercial real estate loan (25-year term).
The federal government’s disaster assistance loan program extends low-interest, long-term financing to renters or property owners who seek to restore their properties to pre-disaster condition. This is extremely helpful for businesses that have been damaged by natural disasters.
To be eligible for SBA loans, businesses or individuals must meet the following criteria:
After determining the SBA loan you want and ensuring you qualify, applying is the next step. Borrowers do not apply directly to the SBA for loans. Instead, they work with SBA-approved lenders. Most borrowers start by applying for a conventional small business loan (that isn’t backed by the SBA). If they don’t qualify for a loan without SBA backing, the lender can request the SBA guarantee. However, you can also apply directly for an SBA loan through participating lenders.
Note that while the SBA guarantees these loans, they are administered by SBA-partnered lenders.
The USDA is highly focused on rural areas and the agricultural industry, which is often capital-intensive. Its loan programs focus on economic development and job creation in rural communities, primarily targeting small businesses and farmers.
The USDA’s grants and financial assistance programs can be used for:
Consider the following USDA loan programs:
To qualify for USDA business and industry loans, businesses or individuals must:
Some lenders may require that borrowers meet additional criteria to qualify for USDA business and industry loans.
The USDA’s Rural Business Services Program Discovery Tool can help you learn more about the available loan and grant programs and program eligibility requirements. Consult your state’s Rural Development Office to start the loan application process.
Federal loan programs do not usually directly provide financing. Generally, the federal government guarantees a portion of the debt, so conventional lending institutions feel more secure authorizing a loan to a business.
“The SBA and the USDA provide guarantees to banks on a portion of the loan balance with a corresponding underwriting guideline that opens up the borrowing opportunity to a larger group of businesses,” explained Bernie Dandridge, a sales and operations specialist at Seaside Bank and Trust.
Businesses applying for federal loan programs must engage the appropriate agency and undergo a potentially lengthy application process. This also means opening your financial recordkeeping to inspection and being prepared to divulge sensitive information to decision-makers within the program.
“[Entrepreneurs] should expect a careful financial review and be prepared with their financial documents, including a business plan,” Dandridge cautioned. “They should also understand that working capital and debt coverage are very important components in the evaluation.”
Government loan programs help businesses that would otherwise be denied funding — because of a lack of credit, an unproven business model or other reasons — secure financing because banks consider the federal government a reliable debtor. Consider the following benefits:
Entrepreneurs entering government loan programs must consider the following:
Planning properly and ensuring you can meet the obligations of a loan guaranteed by the federal government should be your primary consideration before accepting financing. However, if you can service your debt reliably, you should have little to worry about.
“As long as you meet your repayment obligations and provide periodic financial reports as required under your agreement, your banker will be your biggest advocate,” Haverty said. “But if you fall behind and your loan goes into default, the … process could end up being more unpleasant than an audit from the IRS.”
Mike Berner and Max Freedman contributed to this article. Source interviews were conducted for a previous version of this article.