Government Small Business Loans: Here Are Your Options

The government partners with lenders to offer affordable finance options for small business owners. You can get small business loans from the SBA, the USDA and other government agencies.

Here’s what you need to know about government loans for businesses, government grant programs and alternative funding options.

Government business loans vs. traditional business loans

While government loans and traditional loans share many similarities, the main difference is the government’s guarantee. With government business loans, there’s less risk for lenders, since the government promises to cover a set percentage of the loan if the borrower can’t repay the debt.

The government guarantee – and the regulation that comes with it – allows lenders to impose less strict qualifications while offering competitive interest rates and flexible terms. Small business owners who don’t qualify for traditional small business loans might have better luck with a government small business loan.

Note that the federal government doesn’t issue government business loans directly — you’ll need to find an approved lender offering government-backed business loans. But while government business loans may have a more complex and lengthy application process, they aren’t all slow. For example, SBA Express Loans have a 36 hour turnaround time.

Types of government small business loans

The Small Business Administration (SBA) and U.S. Department of Agriculture (USDA) both offer a range of government loans for small businesses.

SBA loans

SBA business loans are the primary way for small businesses to obtain government loans. While all SBA loans come with a government guarantee and interest rate cap, each program has its own set of requirements.

SBA 7(a) loans

The SBA 7(a) loan program is the SBA’s most popular loan. You could use SBA 7(a) funds as working capital to cover seasonal expenses or to purchase inventory, furniture or equipment. You could also use a 7(a) loan to cover construction or remodeling costs. Further, if you want something more flexible or short-term, you could look into getting an SBA Line of Credit.

*Expires Sept. 30, 2024

SBA 504 loans

SBA 504 loans provide long-term, fixed-rate funds to purchase fixed assets for your small business, like a building, land or machines.

The following three parts are required to secure an SBA 504 loan:

• 10% down payment: You must pay at least 10% (sometimes more) on the loan.
• 40% certified development loan: A certified development company (CDC) finances up to 40% of the loan, which is guaranteed by the SBA.
• 50% bank loan: An SBA-approved bank or a credit union provides the remaining amount, which must be at least 50% of the total loan.

The maximum loan amount for SBA 504 loans is $5 million ($5.5 million for small manufacturers and green energy projects). Loan terms range from 10 to 25 years, depending on the loan’s use.

SBA microloans

Businesses interested in smaller loan amounts might benefit from the SBA microloan. While you can apply for up to $50,000 with a microloan, the average loan amount is around $13,000. You can use microloans for working capital, inventory, furniture and fixtures, machinery or equipment.

The maximum repayment term for a microloan is six years, and the interest rate is usually between 8% and 13%, though it’ll vary by lender.

Businesses apply for this loan with an SBA-approved intermediary lender. All SBA microloan lenders are nonprofit community-based organizations or lenders.

USDA business loans

The U.S. Department of Agriculture (USDA) offers a partial guarantee to lenders issuing small business loans in rural areas. Business owners can use funds for development, equipment, real estate and debt refinancing.

OneRD Guarantee Loan Initiative

The USDA has four flagship loan guarantee programs under the OneRD Guarantee Loan Initiative:

• Water and Waste Disposal Guaranteed Loan Program
• Community Facilities Guaranteed Loan Program
• Rural Energy for America Guaranteed Loan Program
• Business & Industry Guaranteed Loan

Rural Microentrepreneur Assistance Program

Businesses with 10 or fewer full-time employees could apply for up to $50,000 with the USDA’s Rural Microentrepreneur Assistance Program. The loan comes with a fixed interest rate and is limited to 75% of the project cost, with terms of up to 20 years.

Government grants for small business

The federal government issues grant money to a variety of institutions including nonprofit and education institutions, local governments, and rural cooperatives. These organizations often distribute the funds to eligible small businesses. Unlike loans, you usually won’t need to repay small business grants.

SBA grants

In addition to loans, the Small Business Administration provides small business grants and training programs to help promote entrepreneurship. For instance, the Service-Disabled Veteran Entrepreneurship Training Program (SDVETP) offers a training program to veterans who are or want to be business owners.

SBIR/STTR

Powered by the SBA, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs make a portion of federal research and development budgets available to eligible businesses. Companies must have 500 or fewer employees and be primarily U.S. owned to qualify. Both SBIR and STTR encourage participation in entrepreneurship by all types of business owners, including women, minorities and people with disabilities.

There are three phases for the SBIR/STTR awards. Phase I awards are typically $50,000 to $250,000 for six months (SBIR) or one year (STTR). Phase II awards are usually $750,000 for two years. There’s no funding from the SBIR or STTR for the third and final phase.

SBIR participating agencies:

• Small Business Administration
• Department of Agriculture
• Department of Commerce
• Department of Education
• Department of Homeland Security
• Department of Transportation
• Environmental Protection Agency

SBIR and STTR participating agencies:

• Department of Defense
• Department of Energy
• Department of Health and Human Services
• National Aeronautics and Space Administration
• National Science Foundation

SBIC

There’s one more SBA-supported way for entrepreneurs to get needed funding: A Small Business Investment Company (SBIC) licensed and regulated by the SBA invests its own money in eligible small businesses. The SBA matches the investors’ funds $2 to $1.

USDA grants

In addition to business loans, the Department of Agriculture offers Rural Business Development Grants. These grants go to universities, nonprofits and other agencies, as well as towns and tribal communities. Those agencies and entities may then award funds to businesses or projects in the area.

National Institute of Standards and Technology

The National Institute of Standards and Technology (NIST), part of the U.S. Department of Commerce, is one of the oldest physical science laboratories in the country.

NIST works in part to develop new technologies and standards, as well as improve the measurement system in the U.S. For example, the Office of Advanced Manufacturing (OAM) offers financial support to pursue innovative technology and boost energy efficiency in the manufacturing sector.

How to qualify for a government business loan

Follow each organization’s instructions for application details. While the government guarantees its loan programs, you’ll need to apply directly with a lender and meet their specific business loan requirements to receive funding.

Here are the general SBA loan requirements you must meet to qualify:

• Meet the SBA’s size standards. Understanding the SBA’s small business definition can ensure your business would be considered a “small business.”
• Be a for-profit business registered and operating in the U.S. The SBA typically only funds for-profit companies physically located and operating within the U.S. or U.S. territories.
• Have invested equity in the business. Lenders want to know you’re invested in your business’s success. It helps if you can provide a down payment or show your previous investments to the company.
• Not eligible for traditional financing. Government-backed loans are typically reserved for business owners unable to secure funding through a traditional bank or credit union. Be sure to exhaust other financing opportunities before turning to SBA loans.
• Able to repay the debt based on your business’s projected operating cash flow. As with other loans, you’ll likely need to show your annual revenue and projected cash flow to reassure the lender that you can successfully repay this debt.
• Know how you plan to use the funds. Be prepared to show the lender, in detail, why you need financing and how you plan to use the funds. You’ll most likely need to provide a business plan as well.

Read the SBA’s full terms, conditions and eligibility requirements before you apply.

How to get a government business loan

While every lender will have a slightly different application process, here are the general steps of how to get a small business loan.

1. Decide how much you want to borrow

Consider your business goals and the total costs of a small business loan, including fees and interest. Use our business loan calculator to estimate your monthly payment and ensure it’s within your budget.

2. Check the lender’s requirements

Small business lenders typically look at your personal and business credit scores, time in business, personal financial history and business income.

3. Research SBA-approved lenders

The SBA’s Lender Match tool can help you find SBA-approved lenders who fit your criteria. You can also inquire about SBA lending programs at traditional banks and credit unions. Having an existing relationship with a lender could help increase your likelihood of gaining approval.

4. Gather required documents

Help speed up the application process by gathering necessary paperwork in advance, like a business plan, business licenses, personal and business tax returns and building leases (if applicable).

5. Submit application and review

Follow the lender’s instructions and submit all required forms. Your lender will review your application and let you know if more material is needed.

Government business loans typically have a longer approval timeline than traditional business loans. For example, the overall process for SBA loans can take around two months though it might go faster depending on your circumstances.

Be sure to review the loan agreement and confirm that the monthly payment will be within your means.

Alternatives to government loans

Government loans for small businesses can help secure the funding you need at a low price. However, another type of small business loan might better suit your company’s qualifications and financial needs.

Here are some options depending on your situation and financial need:

• You need money quickly: Government business loans typically take longer to gain approval than traditional loans. For fast funding times, consider an online loan or business line of credit with an alternative lender. Keep in mind that these loans often come with higher interest rates and shorter repayment terms.
• Your business is established: Consider a small business term loan with a traditional bank if you’ve been in business for at least two years, easily make a profit and have excellent business or personal credit credit. Banks generally offer low business loan interest rates with favorable terms.
• You have a newly-established business: You might have difficulty securing government funding if your business hasn’t been running for at least two years with good financials. While there are some startup business loans, you might need to consider business credit cards or personal loans for business if your company is brand-new.
• You have poor credit: Generally, a personal FICO Score of 680 or higher can increase your chances of approval for an SBA government loan. To see where you stand, check your credit score before applying. If you can postpone applying for a business loan, first boost your credit score to get the most competitive rates.