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What Government Loans are Available to Entrepreneurs?

By Adam C. Uzialko
Business.com / Accounting / Last Modified: May 10, 2018
Image credit: OSABEE/Shutterstock

Business.com user Jenny Simon asked this question. We found the answer.

Financing is an essential component for any business, whether it's finding investors or taking out a loan. Entrepreneurs who are looking for a loan might automatically look to a bank, but there is another major source of capital for businesses: the federal government.

Several loan programs are available to startups and growing businesses, as we found when we went looking for an answer to Business.com user Jenny Simon's question. Understanding which ones you can take advantage of might be the key to unlocking additional capital for your business venture. Here's a look at some federal loan programs and how they work.

What government loans are available to entrepreneurs?

Government loan programs are available to assist entrepreneurs through the federal Small Business Administration (SBA) and the U.S. Department of Agriculture (USDA) for qualifying businesses that intend to use the funds for specific purposes.

"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," said Lou Haverty, CFA at Financial Analyst Insider. "In many cases, small businesses could struggle to find any financing for new and unproven businesses without a partial government guarantee."

Editor's Note: Looking for an alternative to a traditional bank loan? Fill out the below questionnaire to be connected with vendors that can help.

 

SBA Loan Programs

The U.S. SBA is a major source of financial assistance for entrepreneurs throughout the country. The SBA maintains district offices nationwide, which can easily be found with a search for the nearest office on the agency's website. Some of the most popular loan programs on offer from the SBA include:

  • 7(a) Loan Guarantee Program: This is one of the most popular federal loan programs. The 7(a) loan guarantee program is generally used to help finance startups or growing businesses. The SBA will guarantee up to $5 million for this type of loan.
  • Microloan Program: The SBA's microloan program is often used for short-term financial needs, like bolstering inventory or furnishing office space. The maximum amount for these types of loans is $50,000.
  • 504 Fixed Asset Program: The 504 Fixed Asset Program is intended for businesses that will benefit their communities directly, either through the creation of jobs or by filling a much-needed demand in the local market. These loans are fixed-rate and intended for long-term financing, and the maximum value is set at $5 million.
  • Disaster Assistance: The federal government's disaster assistance loan program extends low-interest, long-term financing to renters or property owners that seek to restore their properties to pre-disaster condition. This is useful for businesses that have been damaged as a result of natural disasters.

USDA loan programs

The USDA is highly focused on rural regions and the agricultural industry, which is often capital-intensive. The USDA maintains several business development grants and financial assistance programs for qualifying businesses. These programs include:

  • Business and Industry Loan Guarantees (B&I): Through the B&I program, the federal government acts as a guarantor of private loans for rural businesses, extending the private credit that is available to entrepreneurs in those regions.
    Intermediary Relending Program (IRP): The federal IRP provides low-interest rates to intermediaries that lend to businesses locally in a bid to help stimulate those economies and kickstart job creation in rural communities.
  • Rural Business Development Grants (RBDG): The USDA's RBDG program provides grants for technical assistance and training that help develop and expand small businesses in rural areas.
  • Rural Business Investment Program (RBIP): The RBIP supports investment companies based in rural areas to help meet the financial needs of communities in those regions.
  • Rural Economic Development Loan and Grant (REDLG): This program provides funding for infrastructure projects in rural areas through local utilities. Those loans are then passed on to local businesses in the community for projects that establish lasting jobs.
  • Rural Microentrepreneur Assistance Program (RMAP): Much like the SBA's micro-loans program, the USDA offers loans and grants to qualifying organizations to support their growth and offer training and technical assistance.
  • Value Added Producer Grants (VAPG): This program extends grants to agricultural producers to assist them in the production and marketing of new agricultural products. New or disadvantaged producers receive priority in this program.

How do these loans work?

In most cases, these federal loan programs do not provide financing directly. Generally, the federal government serves as a guarantor of a portion of the debt, so that conventional lending institutions such as banks feel more secure authorizing a loan to a business.

Through programs like these, businesses that would otherwise be denied funding – either because of a lack of credit, an unproven business model or for other reasons – are more likely to secure it because banks consider the federal government a reliable debtor.

"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," said Bernie Dandridge, SBA/USDA Business Development Specialist at Florida Capital Bank.

Businesses applying for the support of a federal loan program will have to engage the appropriate agency and go through the process of applying, which sometimes can take a while. It also means opening your financial record keeping 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 said. "They should also understand that working capital and debt coverage are very important components in the evaluation."

Additional conditions

Entrepreneurs entering these programs have some responsibilities to bear in mind. First, they must accurately and entirely complete the application process, verifying that all submitted information is true to the best of their knowledge.

In addition, according to Dandridge, there are three limitations these programs present to entrepreneurs:

  • There are additional fees, which could be as much as 3.75 percent of the guaranteed loan amount. Businesses that qualify for a standard conventional commercial loan would not have that fee. 
  • The loans are government guaranteed and that means there are a lot of documents and guidelines to follow. 
  • USDA loans have geographic limitations, which are population driven.

Proper planning and ensuring you can meet the obligations of a loan guaranteed by the federal government should always be a primary consideration before accepting financing. However, if you can reliably service your debt, Haverty said, 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," said Haverty. "But if you fall behind and your loan goes in to default, the … process could end up being more unpleasant than an audit from the IRS." 

 

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