Federal Government Loans for Small Business & Startups

A woman holding $100 bills

When it comes to getting a loan for your startup or small business, you really only have two options: private loans or government loans. Getting a loan from a private lender before you have an established business isn’t easy— they are typically reluctant to take large risks. On the other hand, federal government loans were made specifically to help startups and small businesses get started here in the US.

As a result, you’ll likely find it much easier to secure a loan from the federal government than it is from a private lender. We’ve gathered all of the information your startup or small business needs to help you get the best federal government loan.

Related: Small Business Grants Guide

SBA Loans for Small Businesses and Startups

Most federal government business loans go through the Small Business Association (or SBA). These association partners with certain lending institutions that distribute money to small businesses and startups.

These loans are much less risky for lenders because they are backed by the government; if you and your business default on them, the government pays off the balance. Credit unions and banks are much more likely to issue this type of loan to businesses that are just starting out.

A small business loan from the SBA is a loan backed by the federal government. The SBA, which is a federal government program, was founded in 1953 to provide support for small business owners by offering workshops, mentorship programs, counseling, small business loans, etc.

And while the SBA backs these small business loans, the funds don’t come from the association. To fund your small business or startup with an SBA loan, you’ll have to work with a local lender that offers it.

There are three federal government loans offered to small businesses and startups through the SBA:

The 7(a) SBA Loan Program

The 7(a) loan is the most popular option for small businesses and startups. With them, you can purchase fixed assets or existing businesses, repay debt, or use the funds as working capital. To qualify, your startup or small business must meet the organization’s size standards. SBA loans are designed specifically for startups and small businesses, and the association has created a tool that founders and owners can use to determine if they qualify.

If your company qualifies according to the size standards, there are a few remaining requirements that it must meet:

  • Your startup or small business must be for-profit.
  • Your startup or small business must operate in the US.
  • You must prove that you can pay back the loan.
  • You must prove that you can successfully manage your businesses.
    • Startup founders must show experience in the industry and demonstrate management experience.
  • Startup founders must have one dollar in business assets or cash for every three dollars of the SBA loan.
  • Established small business owners must not have more than four dollars of debt for each dollar of their business’s net worth.

Related: Valuation Methods for Startups

7(a) Pros

  • The equity requirements are low.
  • It’s backed by the federal government.
  • Groups without access to traditional financing can apply.
  • The interest rate is tied to the Prime Rate.

7(a) Cons

  • The loans have an upper limit of $5,000,000
  • They require more paperwork and documents than traditional loans.
  • Founders with poor credit likely won’t qualify.
A startup group excited about getting an SBA loan

The 504 SBA Loan Program

The second most common federal government loan for small businesses is the 504 Loan Program. These loans are focused on helping expand your business rather than starting a new one. With a 504 loan, which is fixed-rate and long-term, small businesses can purchase or improve the assets necessary for operation, including equipment, land, and real estate. However, unlike 7(a) loans, you cannot use the funds for inventory, working capital, refinancing, or repaying debt.

Like with the 7(a) loan, your small business must meet the size standards requirements, operate in the US, and be a for-profit business.

Businesses are not eligible for a 504 SBA loan if they:

  • Don’t meet the size standards for small businesses.
  • Have access to funds in another way, including the founder’s wealth or qualifying for a loan without SBA assistance.
  • Plan to use the funds to pay off unsecured creditors
  • Are involved in lending, investment, speculation, or real estate
  • Are a non-profit

504 Pros

  • The lender covers 50% of costs, and the SBA covers 40%, leaving founders and owners responsible for covering only 10% of costs.
  • The interest rates are fixed.
  • Many businesses and startups can qualify.
  • They have long repayment terms (up to 25 years).

504 Cons

  • Approval can take a long time.
  • Like other SBA loans, there are a lot of requirements.
  • Some lenders charge higher interest rates than traditional loans.
  • You must create or retain one job for every $65,000 you borrow or meet a public policy or community development goal.

The 7(m) SBA Microloan Program

Unlike 7(a) and 504 loans, 7(m) Microloans are financed by the SBA through community-based, non-profit intermediaries. These loans, as the name suggests, are quite small; the upper limit is $50,000, and the average amount is $13,000. The SBA created this program specifically to help low-income women, minorities, and veteran entrepreneurs; however, any qualifying small business that needs a small amount of assistance can apply for a 7(m) Microloan.

Related: How Startup Equity Works

Other than meeting the size standards mentioned above, there are additional requirements for securing a 7(m) loan, including:

  • Your business must be newly established, a startup, or currently growing.
  • Your business must be for-profit unless it’s a non-profit child care center.
  • If you apply for $20,000 or more, you must not be able to get that financing from another source.
  • You must have a documented business plan.
A small business's business plan

7(m) Pros

  • Microloans are easier to qualify for when a business doesn’t have access to other capital.
  • First-time founders are required to participate in a free business development program to receive the microloan, which many find helpful.

7(m) Cons

  • The loan amounts are relatively small, with a $50,000 maximum.

Does your startup or small business perform R&D? You might qualify for significant R&D tax credits from the IRS—Talk to our TaxRobot experts to see if you’re missing out!

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