There’s no shortage of web-based banner ads and commercials promising small businesses and entrepreneurs the chance to get government funds to pursue their dream. Some even tempt applicants with the possibility of getting money before your business has even gotten off the ground. These “free money” advertisements are almost always too good to be true, however; truly interest-free grants and programs are rare, and most of today’s businesses will find it hard to qualify for any type of cash gift that doesn’t have to be paid back. (These are generally limited to large institutions and major organizations doing massive-scale work to help the infrastructure of a city, for example.)
Startup loans for individuals pursuing a business idea, on the other hand, are real. The governments, and various affiliated non-profits and lending institutions have been providing qualified businesses and new startups with access to loans at an often-reduced interest rate with some of the same assurances and perks as a traditional business loan. Are you qualified? How can you access these programs? Here’s the basic rundown on government-backed startup loans.
Government Startup Loans
Qualifications for Businesses
While each loan has its own guidelines for business owners, those backed by the Small Business Administration require applicants to:
- Be a for-profit business that’s officially and legally registered in the jurisdiction of its operation
- Be physically located and in operation in the U.S. or its territories
- Have business owners who have invested their own money and energy into the company
- Have already tried other financing options and have been denied or lack the qualifications to get other financial products or service loans
If you meet the above, you may be a good match for one of these government-backed lending options:
A newer initiative of the SBA, this type of funding is the only one geared at newly launched companies and startups without much demonstrated growth or revenue history. The funds are available to for-profit businesses and some not-for-profit childcare centers. The money doesn’t come from the SBA, but rather some community groups who then disburse the funds according to their own terms in amounts of up to $50,000. (The SBA reports that most loans average $13,000, however.)
Personal collateral or the guarantee of the business owners may be needed to secure these loans that can be granted for up to six years. Interest rates will vary by lender and the creditworthiness of the business owners. To get started applying, see the SBA loan site.
7(a) Small Business Loans
These traditional loans are the most popular and are made in partnership with qualified lenders. The Small Business Administration works with banks to make sure that both the bank and the business meet certain requirements but doesn’t lend money itself. To qualify, you must meet the same requirements as those listed above and demonstrate the ability to pay the money back, either through assets, pending invoices, or sales projections.
These loans are small to large (up to $2 million) and last from 7 years for working capital to 25 years for tangible property. Each bank has its own internal guidelines – as well as special programs—so, check the fine print carefully before applying.
Equity Investment – Small Business Investment Company (SBIC) Loans
This program is a new branch of funding under the SBA’s regulation. A hybrid of traditional lending and venture capitalism, it gives small businesses the opportunity to meet with SBIC’s (small business investment companies) for loans, funds in exchange for equity, or a combo of both. The SBA helps by providing a list of SBIC’s for small businesses to reach out to, and they also match invested dollars. For every $1 that an SBIC gives to a qualified startup, the government will kick in $2.
Funding under this program is limited to profitable businesses that have a proven record of growth and maturation. They must have good cash flow to both repay the original loan, plus any interest. At a minimum, a qualified business:
- Be U.S.-based with 51% of workers and property located in the States
- Qualify as a small business according to the SBA standards
- Be in an approved industry (not agricultural, real estate, or financial – among others)
To get started, use the SBIC list provided by the SBA and start your plan of action.
Getting Ready to Apply
As you can see from this list of options, it’s possible and quite common to get a government loan. While the funds still come from individual banks and investors, the SBA oversees the lending to ensure it meets federal law and protects both the business and the lender from additional risk. These government-backed loans are not free; you’ll pay interest and sometimes have to put up your own money or property to ensure your commitment to paying the principal back. They can, however, be an additional source of liquidity for the new or existing small business that wants to expand, buy new equipment, or launch new services in the new year.
To possibly raise your chances of getting approved, make sure you are aware of both your personal and business credit scores and history. Clean up any bad marks as soon as possible, whether that’s paying down personal debt to create a better “debt to available” ratio or taking advantage of balance transfer offers to get your overall interest rate decreased – so you can pay that debt down faster.
Once you’ve done all you can to put yourself in a good position, know that the timing of a government-backed business loan may be much different than other loans. Unlike some P2P and small business loans you can apply for online, government loans may take up to several weeks for approval. If you need money right away (in a few days or less), it may be wise to shop around for the one financial service that best meets your current need. (It may not even be a traditional loan.)
While government loans are usually very secure, have generous repayment terms, and help to build your personal and business credit, they can come with additional regulatory burden that can make the application process a bit of a nuisance. Be sure you look at all your options before you start contacting banks and filling out paperwork; you could be waiting awhile for those funds.
This article was originally written on December 31, 2018 and updated on October 20, 2020.