Introduction: Finding the Best Government Business Loans and Government Startup Loans
Starting up your own business is part of the American Dream, and entrepreneurship is one of the foundations of the American economy.
While Wall Street may capture the headlines, it is the businesses on Main Street that keep our families strong and our nation profitable. Starting up a business, however, is no easy venture, and government startup loans are a great way to help small businesses get a foothold.
The cost of starting up even a small business with just a few employees will easily be well over $100,000. A business loan by the government’s Small Business Administration usually offers the best terms for the borrower while also guaranteeing the loan given out by the lending institution.
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In this brief article, AdvisoryHQ will explain what government-backed loans are as well as the myriad of benefits that come with government small business startup loans.
We will also explain the four types of government loans for small businesses before offering the five top tips to help you successfully apply for government loans to start a business.
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What Are Government Small Business Loans?
Though government small business loans may sound like the U.S. government is actually doling out money to help people start up small businesses, government business loans are nothing more than a loan program that sets guidelines for a diverse array of lending institutions that cooperate with the U.S. government.
These lending institutions for government loans include banks, credit unions, microlending institutions, and community development organizations.
The benefit for the lending institution is that the U.S. government fully backs the money loaned out under business loans by the government. The Small Business Administration guarantees that the loans will be repaid, thus substantially reducing the risk for lenders of government startup loans.
While the government-backed loans may allow many entrepreneurs to access credit that otherwise may have been out of their reach, there is a substantial amount of paperwork that needs to be filled out.
According to Business News Daily, “Businesses have a variety of SBA loan types to choose from, each of which comes with its own parameters and stipulations on how the money can be used and when it must be repaid.” We will cover some of the different types of government small business loans below.
Benefits of Government Loans for Small Businesses
Since small business government loans are backed by a U.S. government guarantee that usually covers between 75% and 90% of the loan principle, many banks and other types of lending institutions may fund government-backed loans that otherwise would have been rejected.
The majority of big banks prefer to finance business growth. A firmly established business with a proven track record tends to offer more confidence than a startup.
Plus, an established business can be used as collateral for a business growth loan. Since many banks are reluctant to finance startup businesses, government start up loans are often the only way for entrepreneurs to get their business ideas implemented.
Furthermore, the government guarantee on government loans to start a business usually allow for a more favorable interest rate for borrowers.
Even if you have a borderline credit score, most banks will approve you for government loans as long as you have a solid business idea. While the approval process can take quite a bit longer on government small business startup loans, it is usually well worth the wait.
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Four Types of Small Business Government Loans
While each individual bank, credit union or other lending institution will have its own guidelines for government loans for businesses, there are generally four different types of government business loans that you can apply for. We will briefly cover these four government loans for small businesses below.
7A Loans:
The 7A Loan Program is the most basic type of business loan by the government. The flexibility in these government startup loans allow entrepreneurs and small business owners to invest the loan in everything from working capital to equipment to refinancing debt from a previous loan.
The maximum amount for these small business government loans is $25 million dollars, and the loan term ranges from 10 to 25 years. 7A Loans are by far the most common type of government small business startup loans.
Microloans:
The microloan program is another type of government business loan that is geared towards small startup businesses or existing businesses that need a boost to their working capital.
While these government start up loans may not allow you to borrow hundreds of thousands of dollars, you can get important capital to help you purchase inventory or increase your working capital.
This type of government loan for businesses is usually offered through community development organizations and nonprofits that can also offer technical assistance to small businesses. The maximum loan amount is $50,000.
Real Estate and Equipment Loans:
These government loans are more focused towards the purchase of real estate or major machinery needed for your business venture. The real estate and equipment government small business loans require you to put up 10% of the total cost and can be either 10 or 20-year loans.
Disaster Loans:
Lastly, we have disaster loans which are a type of government loan for businesses that have suffered a serious setback from some sort of declared disaster. If your business locale was destroyed by a flood, a tornado or any other sort of natural disaster, government business loans for disasters can get you the money you need to repair your business quickly and efficiently.
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Five Tips to Apply for the Best Government Loans for Your Business Idea
When you decide to apply for a government small business loan, there are a number of things that can help make the process smoother and thus avoid having your loan rejected. We’ll look at five tips to help you navigate the process of applying for government loans to start a business.
- Create Your Business Plan Ahead of Time
Before you set foot in the bank, credit union or other type of lending agency to ask about government loans, make sure that you have your business idea well worked out. Even though government business loans are guaranteed by the Small Business Administration, the banks will want to know if you have done your homework.
Smallbusiness.com advises that you should “make sure that your business plan provides well-researched information about your business, as you will be required to provide the information during the application process.
Review your plan for accuracy and make sure to include supporting documents in the appendix, such as tax statements, business referrals, insurance policies.”
Be certain that you have a solid business plan that will convince the lending institution that you will be able to pay back your government small business loan.
- Get Your Paperwork in Order Before Applying for Government Startup Loans
Before you apply for government loans, you will have to have your paperwork in order. As we mentioned above, government business loans do come with a number of perks, but you will have to bear the brunt of what can seem like an excessive amount of paperwork.
While the bank will probably ask you for a number of more specific documents regarding your individual business venture, you will definitely need the following before applying for government loans:
- Employee Identification Number
- DUNS Number
- Personal financial statements
- Business financial statements
- Past tax returns
- Projected profit and loss statement
- Ownership and affiliation
- Resume
- Cash flow projections
- Business license
- Business lease
Image Source: Top Government Loans for Small Businesses
- Build up Your Collateral and Personal Equity in the Business Venture
All government small business loans will require you to have some sort of collateral. There are no “unsecured” government business loans.
According to the Small Business Administration’s blog, in order to qualify for government small business loans, “reasonable to strong collateral (personal and business assets) is very important.
SBA expects the loan to be fully secured, but we will not decline a request to guarantee a loan if the only unfavorable factor is insufficient collateral. And of course, owners must have personal equity investment in the business/skin in the game.”
Government loans aren’t handouts that anyone with a spurious business idea can quickly apply for. You will need to show that your business idea is sound and well thought out and that you have a personal stake in the business before even being considered for government business loans.
- Register Your Business with Grants.gov as an Alternative to Government Loans
While government loans are one way to successfully fund your business idea, free money through grants would almost universally be preferred by all entrepreneurs and small business owners.
Although navigating the grant process is much more difficult and time-consuming than applying for government small business loans, if your business qualifies, the startup capital or working capital provided by a grant is a fantastic way to get your business idea on the ground and running without having to worry about debt.
As soon as you have an Employee Identification Number and a DUNS Number, you should register your business with grants.gov. Once you have your paperwork in order, you can begin your application process here.
While the majority of startup businesses prefer the ease of applying for government small business loans, if your business idea is located in an economically challenged area or if your business idea has a social cause to it, you may be able to take advantage of government-backed grants.
Businesses that specialize in health care, mental health, economic development or education have a better opportunity to be accepted for grants.
- Seek out Help from Small Business Development Centers
There are over 900 small business development centers located throughout the country in all of the major cities and most large towns. These small business development centers can offer useful assistance as you begin searching for government loans to help your business.
According to the SBA, apart from helping you apply for government business loans, small business development centers can also “provide aspiring and current small business owners a variety of free business consulting and low-cost training services including: business plan development, manufacturing assistance, financial packaging and lending assistance, exporting and importing support, disaster recovery assistance, procurement and contracting aid, market research help, 8(a) program support, and healthcare guidance.
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How Government Loans for Small Businesses Can Help You Get Your Company Started
Whatever type of business you are planning on starting up, government small business loans are one of the best ways to help your business succeed in an increasingly competitive market. If you have dreamed of starting up your own business, these government-backed loans may very well be your only option for financing as most banks simply avoid offering credit for unestablished business.
Furthermore, by offering you a reduced interest rate and more favorable terms for your business loan by the government, you can successfully use your loan to make your business profitable in the short term.
As long as you have a solid and well-thought-out business idea and a decent credit history, small business government loans are the best option to help you become a proud business owner.
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