Are There Government Business Loans for Startups?

Are There Government Business Loans for Startups?

Are There Government Business Loans for Startups?

The government, despite what the cool kids are saying, is there to help you. From Pell Grants for students to various incentives for first-time home buyers, there are options to help you out. But what about your small business and funding options for your business needs? Starting your own venture is expensive, and access to venture capital or grant programs might not be available, especially if your business is just getting off the ground. A Nav survey found that 62% of business owners used their personal savings to fund their businesswhether it’s an established or new business. To reduce the hurt and the impact on your own wallet and preserve or kick off your cash flow, it’s wise to seek out financial assistance through grants, credit unions, or a business loan from the federal government for help.

So, then, are there options available from the government to help fund your startup? Let’s take a look.

The Short Answer

You’re here for a simple answer, and that answer is: probably. If you’re looking to the government for funding for your business, look no further (or anywhere else, really) than the U.S. Small Business Administration (SBA). The coronavirus showed us that the government is willing to step in to provide loan funds to businesses in hopes to increase economic development. There are a few loan products the SBA offers small business borrowers, each with their own requirements, for which your business may qualify.

Government Business Loan Types

The SBA offers three types of startup loans as financing options:

  1. SBA Microloan
  2. SBA Community Advantage Loan
  3. SBA 7(a) loan

What sets these apart from most other business loans is the lack of a requirement for time in business. Most lenders will require that you have at least two years in business before they can approve you, but these three loan types omit the requirement, giving you an advantage in getting business financing.

SBA Microloan

The SBA Microloan is, as the name suggests, a smaller-than-normal loan. Where traditional loans have a limit of up to $130,000, the SBA Microloan caps out at a $50,000 limit. The low dollar amount and relatively higher-than-normal interest rate (8-13%) are because of the fewer requirements and the subsequently higher risk for the lender. While $50,000 isn’t going to last you decades, it’s substantial for new entrepreneurs looking to get their operation off the ground.

You can use an SBA Microloan for working capital, buying inventory or machinery/equipment, or adding furniture or fixtures. It can’t be used for real estate or dealing with a preexisting date. You must have a credit score of at least 640, some collateral, and there may be a personal guarantee involved.

SBA Community Advantage Loan

A branch of the SBA Microloan program, the Community Advantage Loan program is designed to provide loans to businesses in an underserved community. It has a higher loan limit of $50,000-$250,000, and a lower interest rate of 7-9%.

Unlike the Microloan, requirements will vary from lender to lender, so it’s best to build a solid relationship with a lender who offers this product. Fulfilling the requirement of helping an underserved community is key, and your financial history and time in business likely won’t be as important as they would be with other financial institutions.

SBA 7(a) Loan

The 7(a) Loan is the bread and butter of the SBA. It’s easily the most popular SBA product among small businesses, but startups can qualify as well due to the lack of the time-in-business requirement. Still, then, it’s a tough loan to get.

Eligibility requirements state that you’ll need a credit score of at least 680, no recent derogatories such as bankruptcies, and collateral for any loan amount over $25,000. If you have a good credit score, the rest of the requirements aren’t too complicated to check off.

Local small business development centers (SBDC’s) can be found nationwide and can also help you navigate startup funding or technical assistance while also giving you the qualifying criteria. However, there’s a list of businesses that are automatically disqualified from applying for an SBA loan. If your startup business includes what’s mentioned below, you’re ineligible to apply:

  • Gambling
  • Investment and lending
  • Pyramid sales
  • Businesses where the owner is on parole

For the full list, you can head to the SBA website, which details more.

​​Comparing Government Loans With Bank Lenders

The Small Business Administration (SBA) backs SBA loans, but banks do not. Banks could recommend SBA loans to clients with a higher chance of default. In comparison to regular bank loans, SBA loans offer more flexible limitations, interest rates, and payment terms. Because the SBA does not make small business loans, it only guarantees loans from SBA-approved lenders like banks and online commercial lenders. These loans are guaranteed by the government, which means that an SBA-approved lender may provide them to small firms at cheap interest rates since the government has agreed to pay back 85 percent of the loan if it defaults. 

Small business loans originated by “traditional” banks for low-risk companies are available from several SBA-recommended lenders. These banks have been certified by the SBA and will examine a company’s credit history as well as its other characteristics in order to determine its risk level. An SBA loan, which is already backed by the federal government, maybe the better option if the bank feels the business is at greater financial risk.

Type of Small Business LoanGood ForEstimated APRRequired Credit Score
SBA LoansLow-interest working capital; refinancing debt, equipment1-15%155 FICO SBSS *some lenders may require higher
Traditional Bank LoansVersatile loans for a variety of purposes4-15%680+ FICO
Merchant Cash AdvanceQuick access to capital if you don’t have great credit10-350%550 FICO *sometimes no score is required
Business Lines of CreditAccess to funds when you need them10-90%500 – 680+ FICO
MicroloansBusinesses with thin credit profiles looking for small loan amounts12-18%Varies
Cash Flow LoansQuick access to cash without great credit11.0-90%600 FICO
Alternative Online LoansQuick access to cash without great credit11.0-90%600+ FICO
Business Credit CardsFast turnaround time with less required documentation7-30%650+ FICO
Equity CrowdfundingCapital without having to repay; experienced investors can act as mentorsFees often total 5% of amount raisedn/a
Reward CrowdfundingTesting out your idea; capital you don’t have to repayCrowdfunding platform: 0-5%
Payment processing: 3%+$.30 per transaction
Equipment FinancingCapital to buy equipment that doesn’t require asset (other then equipment)15-35%620+ FICO
Invoice FinancingLeveraging future accounts receivable15-25%n/a
Trade CreditBuilding credit5-25%May or may not be applicable
You can see the full comparison here.

How to Prepare to Apply for a Business Loan from the Government

Ultimately, it’s better to be well-prepared than underprepared when you’re looking to apply for a business loan from the government. Review your business plan and identify what’s the best course of action for the stage your business is currently in and the projection of where you see its growth. Without a solid, well-written, and well-planned business plan, you’ll have a hard time getting any loan or small business grant, let alone an SBA loan. 

Keeping an eye on your personal and business credit scores will be key as well (you can do so for free with Nav). Monitoring your credit will keep you in the know of which funding sources you can qualify for versus the ones you can’t. In addition, you never want to bite off more than you can chew and should be diligent with understanding your repayment terms so that you can stay in good standing with your credit and government agencies.

Final Thoughts

Remember, the government has an interest in the success of your (tax-paying) business, especially as it pertains to economic growth. Explore your options, get ready, and improve your chances of approval by following the steps and resources provided in this article. Also, don’t forget that Nav offers small business owners tools and resources to help improve their chances of getting approved for business credit cards, small business loans, and business startup loans through their commercialization process.

This article was originally written on July 16, 2018 and updated on February 8, 2023.

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12 responses to “Are There Government Business Loans for Startups?

  1. Need $6000+ for immediate expense. Have $300000+ in product to ship. Already have a buyer. $millions more ready to ship. Please help quickly.

  2. I have looked into starting my own Hotshot business I have my authorization and IME number I just need funding for the truck and trailer I was looking at the micro loan. What do I need to do to apply for that loan. My credit is low so is that a problem

  3. I would like to find a small loan for my small business Makeup by Rossi I am a Makeup artist . than you

  4. Helpful article, which broke down the three types of government based loans, however, a little short on the description of the 7(a) loan. Why is it the hardest but most desirable loan to acquire?

  5. Hello Nav,
    I often hear from individuals and businesses who offer to help me to establish Business Credit without using my Social Security Number for establishing a personal guarantee. The fees they charge are usually in the hundreds, even thousands of dollars. Are these Scams? Can I establish business credit on my own without the help of these individuals, at no cost, the same as establishing personal credit?