Looking to grow your business? Not sure you’ll qualify for a traditional business bank loan?
Many new and established businesses may not qualify for credit in the form of traditional loans. That’s why the SBA has long operated a program of government-backed (or guaranteed) loans that make it possible for many small businesses to get the financing they need to grow their business without using working capital.
What is a Government-Backed Business Loan?
First, let’s dispel one myth – the government does not (generally) directly provide business owners with loans. Instead, it provides a guarantee to banks and other commercial lenders that covers the money they lend to small businesses owners (you can find information here on what the SBA officially considers “small”). This guarantee protects the lenders’ interests by promising to pay a portion (the percentage varies by the type of loan) if the business owner defaults on the loan.
Essentially, government-backed small business loans alleviate the risk associated with lending money to business owners and entrepreneurs who may not qualify for traditional loans in order to make the lender more willing to make the loan. Experts describe it as a “credit enhancement.”
What About Government Grants?
Now, let’s dispel a second myth.
SBA does not provide grants to small businesses to start or grow a business. However, certain grants do exist for very specific groups, organizations, or activities – such as businesses involved in scientific research and development. Read Government Grants for Small Business—Think you Qualify? to learn more.
What Types of SBA Loans are Available?
SBA administers a variety of different types of government-backed loans, each one developed to suit different business needs – whether you need start-up funds, export assistance funds, or funds to pay off debt or recover from a disaster. The most popular is the 7(a) loan program because it offers flexibility, longer terms and the smaller monthly payments those longer terms bring. Loans can be made for up to $5 million for working capital, refinancing, purchasing an existing business or other assets – almost any legitimate business purpose.
Pinpoint the Right Loan with the SBA Loans and Grants Search Tool
To help you find a loan program that fits your needs, a good place to start is the SBA Loans and Grants Tool. This online tool is easy to use and helps you build a picture of the financing options your small business might be eligible for in a few simple clicks. Simply enter basic information about your business profile, zip code and needs.
Who Determines Loan Eligibility?
While each loan has its own specific qualification criteria, you will need to talk to your bank or lender about your eligibility. Your local SBA District Office can also provide guidance and advice about loan eligibility and application requirements. SBA staff should also be able to point you to SBA lenders in your area. You may also want to consider approaching a bank or credit union that has been through this process before or one that is a Preferred SBA Lender – in other words, a lender who has a proven track record in processing and servicing SBA loans.
You might also want to read: Who’s Lending? How to Find Small Business-Friendly Banks.
The Loan Application Process
Preparing a SBA loan application differs from a traditional loan. Your bank should be able to help you understand what’s required, as does this SBA Loan Application Guide, which gives a step-by-step checklist of what’s needed.
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- What to Look For in Your Business Loan Agreement’s Fine Print
Written by: Caron Beesley