Government Small Business Loans: Here Are Your Options
In addition to traditional loans from banks, credit unions and online lenders, entrepreneurs can apply for government small business loans to get the funding they need. SBA loans are perhaps the most well-known — the U.S. Small Business Administration offers a wide range of options covering nearly every business use. But there are other government loan and grant programs available for businesses in specific industries or locations.
Why government small business loans?
Types of government small business loans
Government grants for small business
Why government small business loans?
Government small business loans provide funds businesses need at relatively low rates and reasonable terms. It’s important to note that the federal government does not typically issue the loans directly — approved lenders do. In return, the government promises to repay the lender in case of default, up to a set percentage.
That guaranty reduces the risk to the lender and makes it easier for it to say yes to a loan application. This can help businesses that may otherwise have difficulty getting approved for traditional small business loans. The tradeoff of government business loans might be a more complex application process, especially when compared with alternative lenders.
Types of government small business loans
There are a number of government small business loans available, most notably through the SBA and U.S. Department of Agriculture (USDA). If you’re interested in a loan from the Food and Drug Administration (FDA) or Federal Emergency Management Agency (FEMA), there aren’t any options available. However, both organizations do offer resources to help small businesses interested in working with them.
- Work with the FDA by visiting its Office of Acquisition and Grants Services.
- Work with FEMA by following the four steps it lays out here.
Government contracting set-asides
Federal agencies must set aside a certain portion of government contracts for all small businesses, in addition to businesses owned by disadvantaged groups, such as women or disabled veterans.
Government loans for businesses affected by COVID-19
If your business is in search of help due to COVID-19 losses, government loans — including forgivable loans — are available through the SBA as well as the Federal Reserve.
SBA loans
SBA loans are the primary way for small businesses to obtain government business loans. Here’s a closer look at some of its most popular programs. Each program has its own set of requirements.
SBA 7(a) loans
The SBA 7(a) loan program is the SBA’s flagship offering with several variations, including:
- Standard 7(a): Up to $5 million to purchase or renovate land or buildings, purchase equipment, make leasehold improvements, refinance debt or purchase inventory.
- 7(a) Small Loan: Similar to a standard loan, this loan is available for the same uses, up to $350,000.
- CAPLines: Loans and lines of credit up to $5 million that may be used for the fulfillment of a large contract, the building of a spec home or the purchase of inventory. There are four CAPLines:
- Working Capital CapLine
- Contract CapLine
- Seasonal CapLine
- Builder’s CapLine
- SBA Express A quick version of the standard 7(a) loan — decisions within 36 hours — SBA Express loans offer up to $500,000.
- Export Express: Businesses that have been in operation for more than 12 months can qualify for a loan up to $500,000 to enhance their export development.
- International Trade: Small businesses can be aided by up to $5 million to help them both expand into international markets and compete with importers.
- Export Working Capital: Export transactions, ranging from purchases to collections, can be funded up to $5 million.
SBA 504 loans
If you want to purchase fixed assets for your small business — like a building, land or machinery — SBA 504 loans are long term, fixed-rate loans with three parts:
- 10% down payment
- 40% certified development loan
- 50% bank loan
The maximum loan amount for SBA 504 loans is $5 million ($5.5 million for small manufacturers and green energy projects). The loan term is anywhere from 10 to 25 years, depending on the loan’s use.
SBA microloans
Businesses looking for a smaller loan may find the SBA microloan program to be a good fit. The microloan program offers amounts up to $50,000, though the average loan amount was $14,735 in 2019, according to the Congressional Research Service. The potential uses allowed for microloans include working capital, inventory, furniture and fixtures, machinery or equipment.
The maximum repayment term for a microloan is seven years and the interest rate is usually between 8% to 13%, though this will vary.
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
Perhaps best known for rural home loans, the U.S. Department of Agriculture (USDA) also offers loans to businesses in rural areas. Known formally as the USDA Business & Industry loan, USDA business loans offer up to $25 million for a maximum term of 30 years (15 years for equipment and seven for working capital). Similar to an SBA loan, the USDA guarantees a percentage of the loan, up to 80%. It’s worth noting that B&I loans will be consolidated in October 2020 under what’s known as the OneRD Guarantee Loan Initiative, along with these other USDA programs:
- Water and Waste Disposal Guaranteed Loan Program
- Community Facilities Guaranteed Loan Program
- Rural Energy for America Guaranteed Loan Program
USDA microentrepreneur loans
Businesses with 10 or fewer full-time employees could apply for up to $50,000 to be used for working capital, debt refinancing, purchasing equipment and supplies or improving real estate.
Government grants for small business
There are technically no direct federal government grants for small businesses, only for nonprofit and education institutions. The good news: It is possible for small businesses to ultimately receive funding through those same nonprofits or schools, plus city or state agencies. We’ve listed some of the grant options available below.
SBA grants
Aside from loans, the Small Business Administration has a number of associated grant programs to help small businesses, including the Service-Disabled Entrepreneurship Development Training Program. Qualified veterans won’t receive direct grants, but can take advantage of training programs that do.
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 based in STEM fields are especially good candidates for this program, though eligibility may hinge on the business partnering with a nonprofit research institution, typically a university or federal laboratory.
Grants for first-time applicants are generally no more than $150,000. If Phase I is successful, a company may be awarded a Phase II grant of up to $1 million to continue the work. The third and final phase isn’t accompanied by a grant from the SBIR or STTR.
SBIR participating agencies:
- Department of Agriculture
- Department of Commerce
- Department of Defense
- Department of Education
- Department of Energy
- Department of Health and Human Services
- Department of Homeland Security
- Department of Transportation
- Environmental Protection Agency
- National Aeronautics and Space Administration
- National Science Foundation
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 licensed and regulated by the SBA invests its own money in eligible small businesses. Those funds are matched by the SBA.
USDA grants
In addition to the business loans described earlier, the Department of Agriculture offers Rural Business Development Grants. As with other programs we’ve mentioned, 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 in their areas.
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, grant applications are open to private-public manufacturing partnerships able to create products in response to the coronavirus pandemic.