An Introduction to Government Small Business Loans
Are you an entrepreneur looking for funding for a new business venture? Perhaps you're an existing business owner in need of financing for expansion and growth. In either case, finding the money you need in the current economic environment can be a challenge. Banks are much more picky about whom they loan to, venture capitalists have less cash on hand, and alternative sources of funding that were once plentiful are now scarcer than ever. If you're having trouble with your financing, and you're hoping to get help from the government, you need to be aware of how government small business loans work before you go any further.
When we talk of government small business loans we typically think of the U.S. Small Business Administration (SBA). The SBA is the main federal agency targeted with encouraging business development in the United States. In addition, each of the 50 states has its own agency doing much the same thing. The question is, do these agencies make loans?
Where Government Loans Come From
Despite what you may have heard to the contrary, the federal government does not offer small business loans of any type.
"But wait," you might say, "I've seen some loan programs available on the SBA website!"
That may very well be true, but if you dig a little deeper and read the fine print, you'll discover that the loan money for these programs is not coming from the government. The loans come from banks who have signed up to participate in the program. Their only tie to the federal government comes by way of guarantees offered by the SBA and other agencies. These guarantees protect the bank in the case of borrower default. So, in the simplest terms possible, the SBA is simply backing the loan with a guarantee. Yet it is still the bank that is providing the money and taking the initial risk.
The reason the federal government does not provide small business loans is because they are prevented by law from doing so. The same cannot be said for the states. It is not uncommon for the states to receive money from block grants provided by the federal government. The states may then turn around and offer small business loans as a means of targeting certain industries, helping specific localities with depressed economies, and so on. With these types of loans the block grant money goes from Washington to the individual states, and then on to the banks that actually administer the loans.
On a smaller scale, states, counties, and cities sometimes offer small business loan programs through their own funding. These types of loans are hard to find because they are typically limited in number. But if something should become available in your state or local region, your local SBA office should have information about how to apply.
Applying for a Government Small Business Loan
With the understanding that government loans are simply bank loans backed by the government, you'll need to make application through a participating bank or other lender. If you live in a major metropolitan region you should have no trouble finding participating banks. Those who live in more rural areas might have to do a little more digging.
Once you do find a bank you'll need to inquire as to what you'll need to provide with the application. Typical requirements include:
- a business plan
- a copy of your organizational papers
- information regarding any other funding sources you already have
- any other information they might deem pertinent to your application
Keep in mind that your credit score and history will be checked even if you're applying for a loan on behalf of a corporation or a limited liability corporation. If you're applying as a sole proprietor or part of a limited partnership, your personal credit score is extremely important. If it is lower than 650 you may have trouble securing a business loan without providing further assurance that you can repay the debt.
Thinking Outside the Box
Whether you are approved for a government small business loan or not, be prepared to think outside the box in order to fulfill all your funding needs. We say that because it's very rare for someone starting a new business to procure all his funding from a single source. You may have to apply for several loans as well as write some grant proposals, seek help from a venture capitalist or two, and even enlist investments from your friends and family members. The more willing you are to think outside the box, the more likely it is you will be able to secure all of your funding commitments up front.
If you're looking for funding for an already existing business, your task is much easier. It stands to reason that the better your business is doing financially, the easier it will be for you to secure a loan. Regardless, don't ever assume one certain type of funding source will not work for you. Explore all of your options at every turn. You might be surprised to find out where some of your funding will come from.