Where should you go to apply for a business loan to get the lowest rate and longest payback period? Could government loans for small businesses be the solution? The answer is yes: many entrepreneurs find the solution in government small business loans. These are also referred to as SBA loans, backed by the US Small Business Administration.
This government entity provides financial assistance to small businesses through different credit programs adapted to every entrepreneur’s needs. Thus, you can access a loan to buy equipment and supplies, refinance your debts, or establish a line of credit.
How Do Government Loans for Small Business or SBA Loans Work?
The SBA offers these small business government loans through banks and cooperatives. When a loan is authorized, the SBA guarantees these lenders that, if the borrower can’t repay the loan, they will cover the debt.
For small business owners, these loans are a great option: in many cases, this type of credit is the only alternative to get the money they need to finance their businesses.
To access an SBA loan, you must have a good credit score and show that your company generates enough cash flow to pay your debt, among other requirements.
Government Loan Requirements
How can you qualify for a small business government loan? The truth is, government loans for small businesses are not easy to get.
The SBA has strict requirements to access these programs. This is due to the guarantee offered by the agency to the banks to pay the debt in the case of noncompliance.
So, how do I get a government loan for small businesses? These are the main requirements you must meet to access a government loan for small businesses:
- Your business must be based and operate in the U.S.
- Your business must comply with the definition of small business according to the agency’s parameters, which regulate the number of employees, annual income, and net worth of the company.
- You need a minimum credit score of 680. Also, personal and business credit reports are taken into account.
- In many cases, you need to put up collateral. If a loan cannot be backed up with business assets, you can use real estate properties and personal assets as a guarantee.
- You must show that you have tried, without success, to obtain a loan through other forms of financing such as traditional banks.
- Your business should have been operating for over two years and has to be profitable.
What do You Need in Your Application for an SBA Loan?
Applying for any of these government loans takes time, mainly due to the amount of paperwork required. But if you are determined and believe that one of these loans is the right choice for your business, these are the documents you should gather:
Previous addresses, full name, criminal records, educational level, and the state of your finances are some of the information you must provide.
You must submit your resume to the SBA and show your experience in the industry.
Regardless of what type of loan you apply for, you must attach a well-structured business plan to your application and describe the financial projections and business goals in the medium term.
Personal and business tax reports
To apply for most of these loans, you must submit your personal and business tax returns for the last three years.
The status of your finances is one of the most critical requirements of your application. For lenders, it is essential to know your profit and loss statements, as well as the status of your bank accounts.
It is not always necessary, but if you show that you have valuable personal or commercial assets that serve as a credit guarantee, your application will earn points.
To prove that your business operates legally, you have to provide documents such as the certificate of incorporation (for corporations), proof of legal structure (for limited liability companies or LLCs), and copies of your business license.
Applying for an SBA loan takes time and a lot of work. Remember that if you are a minority small business owner, you are an entrepreneur woman, or are a veteran entrepreneur, there is a variety of alternative lenders and specialized resources available for you. And, luckily for any small business owner, there are still other options.
Don’t qualify for an SBA Business Loan? Check out the Top 10 Minority Business Loans
The Most Popular Small Business Government Loans
The SBA has different credit programs depending on the size of the loan and the needs of each business. These are the most popular government loans or SBA loans:
Loan Program 7 (a)
It’s one of the Government’s most popular small business loans. And for a reason: loans in the program can sum up to $5 million. Also, terms are up to 10 years, and it’s flexible as to how the funds can be used.
You can use the money from a 7 (a) loan if you need to:
- Buy a business or a franchise.
- Buy equipment, real estate, or use the money as working capital.
- Refinance existing debts.
The interest rates are very competitive, with a maximum limit of 4.75% on the base rate. It takes between 2 to 4 weeks to be approved for one of these loans.
With all these benefits, it’s not surprising that the 7 (a) loan program is the favorite choice for small business owners.
CDC / 504 Loan Program
CDC / 504 government loans are mainly used to invest in business expansion. This program offers long-term loans at a fixed rate to finance assets such as equipment or real estate.
These loans are made through Certified Development Companies (CDC), which are non-profit intermediaries that work with the SBA, banks, and companies seeking financing.
With this loan program, you can access funds of up to $5 million. It’s the most suitable for those looking to buy or remodel a building or purchase machinery.
CDC / 504 loans are financed as follows: 50% by the bank, 40% by the Development Companies or CDC, and 10% by the business.
One of the conditions of the SBA to access this type of financing is that small businesses meet specific public policy objectives, such as benefiting their communities by creating new jobs, helping minority groups, or contributing to rural development.
The terms to pay these credits vary between 10 and 20 years, while the interest rate is set according to that established by the United States Department of the Treasury.
This line of credit from the SBA involves certain costs since you have to pay a service fee to the CDC, a guarantee fee, and fees to third parties, although most of these expenses are included in the interest rate or cost of the loan.
Finally, this type of credit requires that a guarantee or collateral, which can be real estate or equipment. It is also necessary to pay a down payment between 10% and 30%.
The SBA microcredit program funds small businesses with government loans of up to $50,000. The funds can be used to buy machinery, office equipment, furniture, supplies, inventory or can be invested in working capital. These credits can not be used to pay debts or buy real estate.
These microcredits are designed to help small business owners who usually do not meet the requirements of traditional lenders. They are offered through non-profit intermediaries, who receive loans from the SBA, and in turn, offer lines of credit to companies.
Interest rates vary depending on the lender but are generally between 8% and 13%. The maximum term to cancel the debt is six years. In some cases, you have to pay specific fees and offer collateral, but this also depends on the lender.
Other Government Loans for Small Businesses
Although 7 (a), CDC / 504, and microcredit loans are the best known, there are other SBA credit programs much more specific, that may serve the purposes of your business:
- Disaster assistance: the disaster assistance loan program offers long-term, low-interest financing to tenants or owners seeking to restore their property after a natural disaster.
- Import and export loans: with these loans, you can buy materials, inventory, or the production of export goods. The SBA offers these loans in conjunction with specialized commercial credit centers.
- CAPLines Program: the SBA offers other lines of credit known as CAPLines. These are divided into four categories, depending on the use given to the funds. The loans can be up to $5 million, and the maximum term to pay the debt is ten years. The interest rate is 4.75 percent on the base rate.
COVID-19 Government Relief Programs
If the coronavirus pandemic has economically impacted your business, don’t worry, you’re not alone. The U.S. Federal Government has passed the CARES Act, which will ensure that business owners have the financial resources they need to weather the storm.
The two most important programs are:
The Payment Protection Program is just an extension of the 7(a) loan program by the SBA and, as such, is dispersed by SBA-approved lenders. Small business owners can access a forgivable loan to help cover costs like payroll, mortgage interest, rent, and utility. You can learn more about the PPP here.
The Emergency Injury Disaster Loans offers loans to businesses that could prove that they’ve been economically affected by COVID-19. The loan can be used to cover things like operating expenses and employee salaries. This loan is dispersed directly by the SBA. You can learn more about the EIDL here.
But that’s not it; there are many more financial aid business owners can access.
Camino Financial: a fast and reliable alternative
As you can see, getting a small business government loan can be difficult. If you meet the SBA requirements and have the time and patience to do the paperwork, this may be a good option to finance your venture. But if you have a business opportunity that can not wait and you need fast financing, there are other reliable alternatives to make your business dreams come true.
Traditional banks and the SBA are not the only ones that can help you fulfill your dreams as an entrepreneur. At Camino Financial, we can help you finance your venture with our two loan programs: small business loans and microloans: you can get from $5,000 to $400,000 for your business needs.
There are many advantages to our business loan compared to others available in the market:
- You can pay at any time without receiving additional penalties or fees.
- You don’t need collateral.
- You receive an instant prequalification that doesn’t affect your credit score.
- Your loan can be financed as subordinated debt over an existing one.
- You don’t need an SSN, only an Individual Tax Identification Number (ITIN)
- You can receive the capital in as fast as 2 days.
If you want to receive a quote for one of our loans, simply submit an online application. It will only take you a few minutes, and you’ll prequalify instantly.